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

Abstract : I study how commodity taxation shapes manufacturing plants’ sourcing and production decisions. Exploiting the introduction of the Goods and Services Tax (GST) in India in 2017, which removed input taxes for most sectors, I implement a difference-in-differences design using plant-level panel data from 2010 to 2022. I find that eligible plants faced a 43% reduction in their effective tax burden, increased both the quantity and variety of inputs sourced, and shifted production towards goods qualifying for input tax credits. The effects are strongest in regions with lower input tariffs and further away from major ports, highlighting complementarities between tax and trade policy. These results shed light on the way sectoral exemptions, meant to reduce the administrative burden of production plants, also impact the efficiency of domestic input markets.