Abstract:
The paper examines the effects of a value-added tax (VAT) withholding regime implemented in Uganda using administrative data from the Uganda Revenue Authority. By using modern two-way fixed effects models, the research estimates the dynamic effects and finds that firms increase their reported outputs by approximately 17.8 per cent and that the estimated value added increases by around 35 per cent. The study finds no effect on reported inputs and offers suggestive evidence that the positive effect found in outputs and value added might not be persistent across time. The implementation of VAT withholding shifts the responsibility for VAT remittance from suppliers to designated withholding agents, which functions on the assumption of higher compliance rates of large firms, financial institutions, and government bodies to address systemic challenges in VAT collection. This study addresses the broader question of how developing countries can enhance compliance in contexts characterized by weak enforcement and high levels of informality.