Do companies financially withstand sweeping tax reform?

Abstract

Tax reform aims to transform how a nation collects or manages taxes. It is frequently conducted to enhance tax administration or to bring economic advantages. Goods and Service Tax (GST) is an indirect tax that replaced many indirect taxes in several nations in the world. Likewise, GST implementation in India was considered positive for the government and the economy. However, its impact on the corporate sector needs to be investigated more. In this study, we investigated the impact of GST on the financials of Indian companies, especially profitability, liquidity, and their relationship. Financial data from 123 companies for ten years (2013 to 2017 — pre-GST; 2018 to 2022 — post-GST) were analyzed using panel regression methods. The parameters examined are operating profit, return on assets, and working capital. The analysis shows that the companies’ operating profit increased after GST implementation, whereas the return on assets decreased. Further, working capital requirements increased after the GST implementation. The impact of GST on operating profits did not significantly differ across sectors. Nevertheless, sectors like metals and mining, information technology (IT), oil and gas, and reality significantly improved return on assets and decreased working capital after GST implementation. The results are helpful to researchers and policymakers considering the differential impact of GST across sectors and thereby ascertain the ability of corporations to financially withstand tax reforms.