Firm's tax aggressiveness under mandatory CSR regime: Evidence after mandatory CSR regulation of India

• Published date: 01 March 2022
• Author: Mehul Raithatha,Tara Shankar Shaw
• Date: 01 March 2022
• DOI: http://doi.org/10.1111/irfi.12348

SHORT REPORT

Firm's tax aggressiveness under mandatory CSR

regime: Evidence after mandatory CSR regulation

of India

Mehul Raithatha

1

| Tara Shankar Shaw

2

1

Indian Institute of Management Indore,

Indore, Madhya Pradesh, India

2

Department of Humanities and Social

Sciences, Indian Institute of Technology

Bombay, Mumbai, Maharashtra, India

Correspondence

Mehul Raithatha, Indian Institute of

Management Indore, Prabandh Shikhar, Rau-

Pithampur Road, Indore 453556, Madhya

Pradesh, India.

Email: mehulr@iimidr.ac.in; mehular83@

gmail.com

Abstract

In this study, we use the mandatory CSR spending regulation

implemented by India in 2015to examine whether firms that

comply with the regulation change their tax aggressiveness.

We document that firms that comply with CSR regulation

end up having less tax aggression which supports the argu-

ment that enhanced visibility and firm-level reputational con-

cerns play a vital role in shaping up the relationship between

CSR and taxation policy. Our results are consistent with the

number of robustness checks.

KEYWORDS

CSR, tax aggressiveness, visibility

1|INTRODUCTION

Increasingly,asdifferenteconomiesandvariousmultilateral i nstitutions are becoming concerned about an organization's

corporate social responsibility (CSR), a topical question that arises is how firms would pan out their taxation policy in the

wakeofsuchincreaseddemandforCSR.Forafirm,bothtaxation and CSR are the usage of its resources for societal

development, which has both organizational and societal implications. Corporate taxes are direct payments by the firms to

the government that is ultimately used for the procurement of public goods for the society. Whereas, CSR is a comprehen-

sive set of policies on business ethics, community, and environment, etc. that are integrated into the firm's activities

(Carroll, 1991). On the one hand, firm's taxation policy can be considered as part of its CSR activities and therefore firms

with proactive CSR policy are less likely to engage in aggressive tax practices (Sikka, 2010). On the other hand, since both

CSR and tax expenditure are not related to its core business activities, firms with higher CSR expenditure are likely to have

an aggressive taxation policy to economize on cost. The literature that tries to disentangle the causal relationship between

CSR and taxation is scant and mostly concentrated in developed economies where CSR expenditure is voluntary. However,

in a mandatory CSR regime, the relationship between CSR and taxation would be more complex. On the one hand, compliance

Received: 20 February 2020 Revised: 14 January 2021 Accepted: 18 February 2021

DOI: 10.1111/irfi.12348

© 2021 International Review of Finance Ltd.

286 International Review of Finance. 2022;22:286–294.wileyonlinelibrary.com/journal/irfi