We take advantage of recent indirect tax reforms in India to study the incentives to engage in indirect tax avoidance and shareholder valuation of such avoidance. Our results suggest that size of the product portfolio, geographical proximity of manufacturing facilities to headquarters, ownership concentration and membership in business groups are positively associated with the propensity to avoid indirect taxes and that the extent of international operations and a company’s financial health are negatively associated with the propensity. We also find evidence of a positive relation between direct tax avoidance and indirect tax avoidance. Firms that avoid indirect taxes suffer shareholder value loss when their privileged position comes under risk due to tax reforms, as suggested by the stock price reaction surrounding the tax legislation. However, greater product market power mitigates the negative reaction.
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