Can value-added tax incentives of new energy industry increase firm's profitability? Evidence from financial data of China's listed companies

Abstract

Tax incentives for new energy industry have been adopted at various stages of an emerging economy. However, there is little evidence on the effectiveness of tax incentives from the perspective of firm's profitability. We compare value-added tax (VAT) incentives in different kinds of new energy enterprises in China and study the effect of VAT incentives on new energy listed companies through the Difference-In-Difference (DID) approach empirically. The results show that VAT refunds of new energy industry could decrease the return on equity (ROE) of the experiment group, which is lower than the control group by 4.7%. This is mainly due to the distorted industrial chain, overcapacity and insufficient innovation motivation caused by the tax incentives. We also find out that the policy impact has a time lag and varies considerably across time by examining the dynamic effects of VAT incentives. This study provides some new evidence on the efficiency of tax incentives toward new energy industry by firm-level data.