Informality, Incidence, and Pass-through of VAT Exemptions

In this study, we analyse the pass-through and incidence of Value Added Tax (VAT) exemptions on food in a low-income setting with very high levels of informality. We draw on detailed administrative data, a panel of nationally representative phone surveys, data scraped from supermarket websites, and direct observation of food prices across all supermarkets in the largest city. To identify the extent of pass-through from a recent, unanticipated removal of VAT, we conduct a difference-in-differences analysis comparing price changes between food items that became exempt with those that did not. We examine the incidence of VAT exemptions across the income distribution and the role of informality, using the phone survey data that captures the price and volume of food purchases at formal and informal stores. We also examine variation in pass-through rates between different types of supermarkets in urban areas.