Tax Policy at the Threshold: A Network Perspective on Uganda’s 2015 VAT Reform

This paper studies how firms reallocate sourcing in response to a VAT deregistration shock. In 2015, a reform that raised the VAT registration threshold in Uganda forced many small firms to exit the VAT system, disrupting existing buyer-supplier relationships. Using monthly buyer-seller data and Poisson pseudo-maximum likelihood with fixed effects, we relate outcomes to firms’ pre-reform exposure to eventual deregistrants in the year leading up to the reform. Our findings show that buyers more exposed to deregistered suppliers reallocate input purchases away from deregistrants and towards the registered VAT network, adjusting at the intensive margin in the short run by increasing purchases per supplier, and at the extensive margin in the longer run by bringing on new registered suppliers. Quantitatively, exposed buyers increase purchases from registered suppliers by up to 59% within two years of the reform. At the intensive margin, they raise average inputs from pre-treatment partners by up to 52% and purchases per supplier by up to 108% within the first year. At the extensive margin, they expand their stock of registered suppliers by about 18% and the monthly inflow of new registered suppliers by roughly 44% from the second year onward. This reallocation of inputs from deregistered to more formal firms illustrates how VAT-induced shocks propagate through supplier linkages, reshaping the structure of production networks.