Temporary VAT exemption in Colombia: How did household consumption respond?

Borradores de Economia
Number: 
1281
DOI: 
https://doi.org/10.32468/be.1281
Published: 
Authors:
Luis E. Arangoa,
Luz Adriana Flóreza,
N. Johana Maríne,
Carlos Esteban Posadae
Classification JEL: 
D12, D15, D61
Keywords: 
VAT exemption, household consumption, intertemporal substitution, intratemporal substitution, cost–benefit
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Abstract

This paper analyzes whether the policy of VAT exemption days, implemented in Colombia between 2020 and 2022 for some products and merchandise lines, had a positive effect on the consumption of such exempted goods. The evidence show an intertemporal substitution in consumption of the items that benefited from the VAT exemption policy around the months when the policy came into effect; that is, purchases of these goods decreased in the months before and after the month of the VAT-free day, on which purchases increased. Moreover, we find that the VAT exemption days have a transitory positive effect on the items covered by the policy compared with those not covered. In terms of prices, we also find evidence of a transitory reduction in prices.