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One of the government initiatives to facilitate desired growth in economy is to continue providing tax incentives. Tax incentives will reduce overall tax burden and the excess of the cash flows can be used to finance the growth in capital expenditures and many other investments. Unfortunately, determining a tax incentive-s costs and benefits is inherently difficult because it is unknown if the firm would make the investment without the incentives. Review of recent studies has made progress measuring the tax incentive effectiveness, however, the findings are inconclusive. This suggests that another explanation is needed for the firm-s decisions to take up the tax incentive, i.e., the willingness to ay higher tax instead. This study aims to fill the gap by investigating if the utilization of tax incentive by SMEs within manufacturing sector reduces the overall tax burden measured by effective tax rate (ETR) and significantly reduces earnings management exercise related to tax avoidance practices. Further, this study will also investigate factors associated to the firms with higher tax paid (ETR) to understand is these firms refuse to take up the tax incentives available and willing to pay higher tax instead