Tax Payment as a Social Responsibility

Firms can avoid taxes legally, even though it is well understood that tax payment is a fundamental and measurable behaviour towards society. In this paper, we elucidate such legal provisions in the Indian tax law and analyse tax payments with corporate social responsibility spending and find that firms spending more on CSR pay lower taxes. By employing fixed effects and quantile regression models to ascertain the impact of firm size on the effective tax rate using panel data for 1995–2017, we find that large firms’ effective tax rates are lower as compared to small firms. Moreover, the effective tax rate decreases with firm size. Large firms adopt more tax-aggressive policies and use various tax incentives to minimise their tax liability.

The author expresses his sincere gratitude to Subrata Sarkar, IGIDR for providing him with conceptual foundations, guidance and invaluable advice.

The views expressed in this article are strictly personal.

A company’s responsibility towards society is unique and completely distinct from their business; however, it is the most important for the nation. Companies should be accountable for social and environmental concerns and integrate them into their business. Emerging economies are in the process of bringing such activities under the ambit of law, whereas most of the developed economies have already brought them under the legal purview. However, such activities are silent on tax payments. Corporate taxes are the primary source to finance goods and welfare activities by the government, and a firm’s behaviour towards society can be understood by its tax payments. With the enactment of Section 135 of the Companies Act, 2013, all eligible companies in India should mandatorily spend on corporate social responsibility (CSR) activities. At this juncture, we analyse the extent of tax payment with that of CSR spending. We also establish a relationship of effective tax rates (ETRs) with firm size.

Social welfare describes how business takes account of its economic, social and environmental impacts. Two distinct features of social welfare—benefits to society and non-obligation to law—broadly differentiate them from normal business activities. Companies motives to engage in welfare activities are broadly classified as intrinsic and extrinsic (Lee 2008). Intrinsic motives are moral and ethical and generally have the desire to help others and refer to a sense of moral duty. Extrinsic motives refer to those from which companies expect financial or other benefits. Welfare involvement, whether intrinsic or extrinsic, leads to competitive advantage to firms (Desai and Dharmapala 2009). They get a positive image, reputation, consumer loyalty and increased purchase intentions among consumers. Investors also believe that these firms are less risky and, hence, an additional advantage to raise capital. They also get free publicity and attractiveness as an employer. Therefore, engaging in social welfare activities is seen as a benefit to the company itself, in addition to society.