Examining the Effect of Tax Reform Determinants, Firms’ Characteristics and Demographic Factors on the Financial Performance of Small and Micro Enterprises

Abstract

Taxation is a powerful tool to achieve sustainable development goals (SDG) as tax policies help strengthen economic growth and improve revenue capacity. So, after tax reform, it is vital to analyze their impact on the performance of enterprises. Keeping in mind the SDG, the present study was conducted in India after the major tax overhaul—Goods and Service Tax (GST) on 1 July 2017, to measure the impact on Return on Equity (ROE) and Return on Investment (ROI) as they are the barometers to measure performance (DuPont Analysis). We opted for tax reform determinants, the characteristics of firms, demographic variables, and drivers from DuPont analysis to conduct the research, as all these variables can help identify the different causes of factors impacting ROI and ROE among different types of firms and demographics across countries. An econometric analysis of 546 registered SMEs (small and micro enterprises) was conducted using the regression model, structured equation modeling, and exploratory and confirmatory factor analysis to achieve the objectives. The empirical findings highlighted that a firm’s size, turnover, and DuPont analysis drivers (earnings × asset to sales × asset turnover) positively enhanced the ROI and ROE. Further, the change in the tax system after the tax reforms has enabled the detection of tax fraud and wrong invoices, reducing the missing insolvent traders and increasing the working capital flow of the firms, which in turn has augmented financial performance.