Tax Incentives for Green Industries: Determinants of Performance between Green Building Index (GBI) and Non-Green Building Index Firms in Malaysia

Abstract

Industrialization, urbanization, and economic growth are among the major causes of environmental degradation. These factors are closely related to the construction sector. To curb the issue, the government has initiated tax incentives to encourage developers embracing green technology. Developers who entitled to these tax incentives should enjoy a considerable amount of tax savings, which can be employed for capital reinvestment. Consequently, this study aims to determine whether firms that specifically involve with the construction of green buildings and have received the tax incentives are more likely to achieve relatively better financial performance, as a result of tax benefits gained from the government assistance. For the empirical analyses, secondary data was employed. A total of 138 firm-year observations from 2015 until 2017 used to measure the firm’s characteristic of board size, asset tangibility, deferred tax balances, and leverage against financial performance. The Theory of the Growth of the Firm was used to interpret the relationship between the financial characteristics and firm performance. We obtain evidence that indicates there is no significant difference in the financial performance between the GBI and non-GBI firms. The deferred tax balance, a proxy of the investment tax allowances granted by the Malaysian government to the GBI firms, is shown to be ineffective in improving the financial performances of these firms. The finding of this study suggests that any form of tax assistance from the government for the construction sector has not benefitted its recipients and requires remodeling.