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

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. © 2019, Academy of Economics and Finance.