Determinants and Shareholder Valuation of Indirect Tax Avoidance: Evidence from a Quasi-Natural Experiment

Posted: 20 Apr 2021

See all articles by Shail Pandit

Shail Pandit

University of Illinois at Chicago

Mehul Ashok Raithatha

Indian Institute of Management (IIM), Indore

Stephanie Sikes

University of Illinois at Chicago - College of Business Administration

Date Written: April 16, 2021

Abstract

We take advantage of recent indirect tax reforms in India to study the incentives to engage in indirect tax avoidance and shareholder valuation of such avoidance. Our results suggest that size of the product portfolio, geographical proximity of manufacturing facilities to headquarters, ownership concentration and membership in business groups are positively associated with the propensity to avoid indirect taxes and that the extent of international operations and a company’s financial health are negatively associated with the propensity. We also find evidence of a positive relation between direct tax avoidance and indirect tax avoidance. Firms that avoid indirect taxes suffer shareholder value loss when their privileged position comes under risk due to tax reforms, as suggested by the stock price reaction surrounding the tax legislation. However, greater product market power mitigates the negative reaction.

Keywords: Indirect taxes; ad valorem taxes; sales tax; goods and services tax; tax reform; tax avoidance; capital market effects.

JEL Classification: H25, H26, G14, K34, M41, M48

Suggested Citation

Pandit, Shailendra and Raithatha, Mehul Ashok and Sikes, Stephanie, Determinants and Shareholder Valuation of Indirect Tax Avoidance: Evidence from a Quasi-Natural Experiment (April 16, 2021). Available at SSRN: https://ssrn.com/abstract=3828321

Shailendra Pandit (Contact Author)

University of Illinois at Chicago ( email )

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University Hall, Room 2303
Chicago, IL 60607
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(312) 355-1331 (Phone)
(312) 996-4520 (Fax)

HOME PAGE: http://business.uic.edu/faculty/shailendra-shail-pandit

Mehul Ashok Raithatha

Indian Institute of Management (IIM), Indore ( email )

Prabandh Sikhar
Rau-Pithampur Road
Indore, Madhya Pradesh 453331
India

Stephanie Sikes

University of Illinois at Chicago - College of Business Administration ( email )

601 South Morgan Street
11th Floor
Chicago, IL 60607
United States

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