This paper investigates the eﬀect of electronic payments technology on ﬁrms’ tax compliance in a large developing economy. The paper considers India’s demonetization policy which, by limiting the availability of cash, led to a large increase in the use of electronic forms of payments. Using administrative data on ﬁrms’ tax returns and variation in the strength of the demonetization shock across local areas, the paper ﬁnds that greater use of electronic payments leads to ﬁrms reporting more sales to the tax authorities. This eﬀect is strong enough to explain roughly half of the large (11%) increase in reported sales observed during demonetization.
Published on: 11th January 2022