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Do more financing obstacles trigger tax avoidance behavior? Evidence from Indian SMEs

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Listed:
  • Mohamed A. Elbannan

    (Minnesota State University
    Cairo University)

  • Omar Farooq

    (ADA University)

Abstract

Using the data from Enterprise Survey, this paper documents the following findings in India. Firstly, we show that firms experiencing higher obstacles in accessing finance are more likely to avoid taxes. We argue that firms try to overcome the cash shortage that results from higher obstacles in accessing finance by reducing taxes paid to the government. Our results are robust across various sub-samples and after controlling for endogeneity problem. Secondly, we show that, for any two firms with similar levels of obstacles in accessing finance, the firm that avoids taxes is more likely to invest than the firm that does not avoid taxes. Lastly, firms headquartered in states/provinces with better institutional infrastructure have weaker relationship between access to finance and tax avoidance.

Suggested Citation

  • Mohamed A. Elbannan & Omar Farooq, 2020. "Do more financing obstacles trigger tax avoidance behavior? Evidence from Indian SMEs," Journal of Economics and Finance, Springer;Academy of Economics and Finance, vol. 44(1), pages 161-178, January.
    • Handle: RePEc:spr:jecfin:v:44:y:2020:i:1:d:10.1007_s12197-019-09481-9
    DOI: 10.1007/s12197-019-09481-9
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    2. Teodora Roman & Nicu Marcu & Valentina Diana Rusu & Erika Maria Doacă & Adelina Andreea Siriteanu, 2023. "Tax Payment and the Performance of SMEs: A Longitudinal Analysis on EU Countries," Sustainability, MDPI, vol. 15(2), pages 1-15, January.

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    More about this item

    Keywords

    Tax avoidance; Access to finance; SMEs; World bank enterprise survey; Emerging markets;
    All these keywords.

    JEL classification:

    • H26 - Public Economics - - Taxation, Subsidies, and Revenue - - - Tax Evasion and Avoidance
    • G30 - Financial Economics - - Corporate Finance and Governance - - - General
    • O16 - Economic Development, Innovation, Technological Change, and Growth - - Economic Development - - - Financial Markets; Saving and Capital Investment; Corporate Finance and Governance

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