Article review: Effects of high corporate tax on the profitability of the SMEs

in India

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 Table of Contents

Comparison between corporate tax structure of India and other countries ................................................... 3
Impact of GST on Indian SMEs.................................................................................................................... 3
Relation between responsible tax and business profitability in India ........................................................... 3
Issue of Tax avoidance in Indian SMEs........................................................................................................ 4
Perception of Indian taxpayers towards GST ............................................................................................... 4
Capital structure and business profitability in India ..................................................................................... 5
Tax-related challenges faced by Indian business start-ups ........................................................................... 5
Corporate tax evasion by small firms ........................................................................................................... 6
Capital structure and relation with business profitability in SMEs............................................................... 6
Reference ...................................................................................................................................................... 8

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Comparison between corporate tax structure of India and other countries
The authors in this article have attempted to compare the corporate tax structure in India. Here,
five countries have been selected and a comparison has been made between their tax structures
and the Indian tax structure. According to Ghuge and Katdare (2016), the primary objective of
the authors was to compare different tax structures, identify the key indicators such as Total Tax
Rate, No. of Tax payments, and most importantly Tax to GDP ratio. The authors have identified
the ranking of India with other countries. It has been found that in comparison to countries like
Mexico, China, USA and UK, the Indian tax structure lies way behind. Among 189 countries,
India secured a rank of 130. On a different note, it has been found that Indian tax structure that
consist of parameters like tax rate, tax payment, ease of using the tax structure and many such
related elements lag behind when compared to other developed and developing nations (Singh,
2018).

Impact of GST on Indian SMEs

According to Thomas et al., (2017), Goods and services tax has an impact on small and medium-
sized Indian organizations. It has been found that 14.5 Lakh Crore is the total collection of tax in
India. Apart from direct taxes, indirect taxes compose of 34%. Indirect taxes mainly include
customs duty, service tax and VAT as well. Hence, small businesses face difficulties due to the
rigid GST structure in India. Further, it has been suggested that the present Indian tax rate is
narrow. In this article, the authors suggested that the Indian government that can positively
influence small businesses has started tax reforms. As argued in this context by Rai (2018) the
corporate income tax rate has been reduced and concessions are given as well. Due to GST, it
has been possible for small businesses to enter into new markets. Hence, the accessibility has
been increased due to less complexity of tax structure according to the authors. Transformation
and growth has been possible in India due to reformed corporate tax rules.

Relation between responsible tax and business profitability in India

As opined by Muller and Kolk (2015), corporate tax has been effective in improving the
profitability of Indian businesses. The authors have particularly emphasized upon CSR tax and
ways by which businesses can gain profits. It is the moral duty of Indian MNCs to pay taxes,

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which in turn is quite effective and centrality SMEs do not have to worry about CSR.
Profitability and business are interconnected and local firms need to view taxation as an effective
way of developing a nation and implementing the CSR activities. Again, the authors in this
article have questioned the relation between business profitability and responsible tax systems.
However, Bodhanwala and Bodhanwala (2018) argued that a positive relationship exists between
business sustainability and CSR. Hence, the authors concluded that more firms focus on
sustainable business practices as this, in turn, should ensure a higher return on investments,
assets, and equity. Hence, in a developing economy like India, CSR should be taken seriously by
firms to ensure long-term growth.

Issue of Tax avoidance in Indian SMEs

As per the views of Elbabon and Farooq (2019), small firms or SMEs usually faces financial
obstacles. This, in turn, increases the likelihood of tax avoidance. Profitability is one of the
essential mottos of firms of all sizes and in order to deal with financial obstacles, it has become
natural for SMEs to avoid government taxes. The study has been conducted on Indian SMEs and
the findings suggest that firms can be categorised into two types. One that pays taxes despite
financial obstacles and the other hat does not pay corporate taxes due to financial difficulties.
Lastly, it was found that Indian SMEs located in provinces possess good infrastructure, however,
tax avoidance is common among small businesses because they are solely focussed on
profitability. In this context, it had also been understood that tax avoidance in Indian SMEs is
connected to concentrated ownership of SMEs (Wellalage et al. 2019). A negative correlation
exists and again the view is supported that SMEs with stronger institutional structures are likely
to keep away from taxes.

Perception of Indian taxpayers towards GST

It has been observed that the launch of the multistage tax system or new GST in India in 2017
changed perceptions of business owners and taxpayers drastically. Both positive and negative
perceptions prevail. According to the authors Mehta and Kaur (2018), people are less aware
about the fruitful outcome of paying taxes. The findings suggest that adequate education
regarding GST should be available to Indian taxpayers. Further, it is essential to regulations are

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set clearly and the concept of GST should be simplified so that small business owners face less
difficulty. After analysing the article, it was understood that Indian taxpayers in the Udaipur
district are positively satisfied with the E-filing technology implemented by the Indian
government. The study further argued the point that individual taxpayers find it comfortable
paying taxes by using online platforms (Jain and Jain 2017). Most importantly, the E-filing
feature is gaining recognition among the Indian business owners due to its ease of use. Using this
feature, data accuracy is maintained as well.

Capital structure and business profitability in India

The paper has been developed by Chada and Sharma (2015), and the authors suggested that
within the manufacturing sector, a range of factors like asset, size, tangibility, business risk and
ownership structure is correlated with profitability rate. Again, the authors suggested that factors
like liquidity, ratio of interest coverage and CFCR are also responsible for determining the
structure of capital. Particularly, within the manufacturing sector, it is essential to have an
understanding of these factors as it plays a vital role in leveraging the financial condition of the
business. The views and opinions of the authors in this article emphasised upon the fact that a
relationship exists between financial advantage and risk-taking. On the contrary, Chakraborty
(2015) had categorised multiple risks and it has been noted that capital structure and risks
associated with businesses should not be generalised. It is crucial to state that the relationship
tends to fluctuate.

Tax-related challenges faced by Indian business start-ups

Indian SMEs face challenges and the budding entrepreneurs have to deal with the tax burden,
which in turn leads to loss in businesses. Further, it has been understood that in order to operate
in the market, entrepreneurs should have financial backup system. For this purpose this study
acknowledges the article of Venkataramany et al. (2016), the increasing market competitiveness
and taxes is a disadvantage for entrepreneurs. Again, the chosen article sheds light upon the
challenges faced by small business owners and entrepreneurs while starting a business and one of
the key areas is tax-related issues. On the other hand, Agarwal (2016) argued that SMEs require
capital and in order to raise money, businesses need to comply with government regulations.

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Here taxes related to services and goods can often become a nightmare. Moreover, SMEs face
hurdles while complying with accounting and legal matters before setting the business. Hence, it
can conclude from the article that setting and operating a new venture can be difficult for
entrepreneurs in today’s market.

Corporate tax evasion by small firms

This part of the study focuses on various institutions and suggested that businesses within the
formal sector face competition and this, in turn, leverages firms to take evasion decisions related
to taxes. As per the article of Gopalk et al. (2017), the competition has a dark side and businesses
tend to use unfair means in order to increase profitability and sustenance of firms. Particularly,
the informal sector in India is involved in tax evasion as a means of survival. The authors in this
article partially support the idea presented above. However, small firms are likely to evade taxes
and in return pay bribes to the government as compensation. According to the authors, there is a
direct co-relation between bribe payment and well-known tax-evading firms in the country
(Sharma and Mitra, 2015). However, the authors concluded that bribing and firm’s productivity
holds a positive relation. A small firm’s performance and profitability is influenced by tax
evasion. Nevertheless, tax compliance should be the primary motto of organizations of all shapes
and sizes.

Capital structure and relation with business profitability in SMEs

The study is focussed upon Indian non-financial firms and the authors have emphasized the
factors that leverage the decision-making process of SMEs. Apart from growth, liquidity, size,
tangibility, and cash flow ratio, it is essential for Indian SMEs to consider the impact of taxes. As
opined by the authors, the mentioned factors form the basis of capital structure in case of small
businesses. A “non-debt tax shield” is one of the crucial components that determine business
profitability (Rao et al. 2019). Lastly, the authors suggested that application of GMM or
Generalised method of moments would be affecting the small firms while making decisions. In
the chosen study, the authors have considered the capital structure of Indian sugar companies and
suggested that there are certain firm-specific factors that determine the decisions related to the
capital structure of a business (Bhattarcharya and Das, 2015). The authors support the review

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presented above and in a capital-intensive industry like sugar, profitability can be affected by
financial determinants.

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Reference
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Growth of Indian Economy (With special reference to start-ups). International Journal of
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Bhattacharjee, A. and Dash, M., 2015. Determinants of capital structure in the Indian sugar
sector. Sky Journal of Business Administration and Management, 3(6), pp.63-69.

Bodhanwala, S. and Bodhanwala, R., 2018. Does corporate sustainability impact firm
profitability? Evidence from India. Management Decision, 56(8), pp.1734-1747.

Chadha, S. and Sharma, A.K., 2015. Determinants of capital structure: An empirical evaluation
from India. Journal of Advances in Management Research, 12(1), pp.3-14.

Chakraborty, I., 2015. The effect of business risk on capital structure of Indian Corporate Firms:
Business groups vs. stand-alone firms. Global Economic Review, 44(2), pp.237-268.

Elbannan, M.A. and Farooq, O., 2019. Do more financing obstacles trigger tax avoidance
behavior? Evidence from Indian SMEs. Journal of Economics and Finance, pp.1-18.

Ghuge, N.R. and Katdare, V.V., 2016. A Comparative Study of Tax Structure of India with
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Gokalp, O.N., Lee, S.H. and Peng, M.W., 2017. Competition and corporate tax evasion: An
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