Limits to VAT Self-Enforcement: Role of Network Frictions in Compliance

The Value-Added Tax incentivizes taxpayers to self-enforce compliance within a supply chain. Combining administrative tax data and a randomized experiment in New Delhi nudging on-time payment, we show that the same incentives that create positive compliance spillovers can constrain enforcement when suppliers are delinquent, because influencing supplier behavior is costly. While nudges increase compliance by 8 percent on average, only taxpayers with high compliance in their supplier network respond. Taxpayers file on time, yet lower net tax payments and continue buying from delinquent suppliers. Our findings highlight how the effectiveness and distributional burden of enforcement depends on production networks.