3.3 Distribution of Output, Formal and Informal Firms, West Bengal, 2015

FIGURE 3.3 Distribution of Output, Formal and Informal Firms, West Bengal, 2015

Source: based on data of the Annual Survey of industries and the unorganized manufacturing Enterprises Survey.

Combining transaction-level data with firm-level data, the study calculates the share of input from formal sector suppliers and the share of output to formal sector clients. (For details on the calculation procedure, see annex 3B).

Figure 3.4 illustrates the segmented trade structure. Formal firms purchase 80 percent of their inputs from formal sector suppliers, while informal firms purchase 29 percent of their inputs from formal sector suppliers. In addition, formal firms sell 48 percent of their total output to formal sector buyers, while informal firms sell 16 percent of their total output to formal sector buyers.

DESCRIPTIVE EVIDENCE

This subsection provides a descriptive analysis of the effect of the adoption of VAT on informality. Since 2003, Indian states have gradually adopted the VAT to replace the existing sales tax; 10 states or union territories did so before 2005, 19 did so in 2005, and 4 more did so between 2006 and 2008.6 Annex 3C supplies a detailed description of the VAT reform. The variations in the timing of VAT adoption provide a natural experiment to study the effect of VAT reforms across Indian states and union territories.

First, the firm-level sample is aggregated into a state-level sample and a stateindustry-level sample. The data on the state-level sample includes the number of formal (informal) firms; the formal (informal) sector output measured by total revenue; and the number of workers employed in the formal (informal) sector in 2000, 2005, 2010, and 2015.