Informality and tax refund in Peru’s intercity passenger ground transport market: An empirical appraisal

This paper studies whether Peru’s excise tax refund of 30% for fuel purchases has had the effect of increasing formalization in the intercity passenger ground transport market and whether the resulting tax expenditure has been fruitful in increasing investment in vehicles. Based on a partial equilibrium market framework, transport operators are segmented among formal, informal and illegal operators, and a new methodology to measure how the tax refund makes these operators change their market shares is perfected. Evidence shows that the tax refund has worked by augmenting the market share of formal but not informal operators, thus increasing the overall formalization of the passenger transport market. This contradicts the Ministry of Finance impact evaluation asserting that market formalization has not occurred because informal operators did not take advantage of the tax refund and did not convert into formal operators. An epilogue challenges a 2020 government decree establishing a new tax refund no longer intended to reduce informality but rather to reduce accident rates.