"Domestic tax reform and plants’ sourcing decisions : Evidence from India"

Abstract :
Do plants in developing economies respond to greater domestic market integration by sourcing more inputs domestically ? In 2017, India implemented a Goods and Services Tax (GST) which subsumed many existing local taxes and created a harmonized transaction tax system. I make the hypothesis that the reform reduced internal barriers to trade and increased plants’ incentives to engage in domestic rather than international sourcing of inputs. First, to answer this question, I exploit a panel of manufacturing plants over the period 2012-2020, and compute a plant-level measure of exposure to the reform based on plants’ initial input mix and the existence of multiple tax rates. The results of the difference-in-differences analysis show that plants with a lower input-weighted GST rate import relatively less after the reform. The effects are stronger for plants located in districts bordering other states. Second, I discuss the quantitative implications of the reform.