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Effect of Tax Cut on Investment: Evidence from Indian Manufacturing firms

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  • Hussain, Adam

    (National Institute of Public Finance and Policy)

Abstract

Does a reduction in the corporate income tax rate trigger investments in developing countries? This paper answers this question in a difference in differences framework. Using firm-level data on Indian manufacturing firms. I study the effect of the 2019 and 2020 Indian tax reform that reduced the corporate income tax rate for domestic firms by 5%. I find that the reduction in corporate income tax led to a significant increase in the investments of domestic firms. The magnitude of the effect is found to be stronger for large domestic firms than the smaller ones. These results imply that the corporate income tax cuts can increase investment in developing countries and large domestic firms benefit more than small firms from a tax cut.

Suggested Citation

  • Hussain, Adam, 2023. "Effect of Tax Cut on Investment: Evidence from Indian Manufacturing firms," Working Papers 23/390, National Institute of Public Finance and Policy.
    • Handle: RePEc:npf:wpaper:23/390
    Note: Working Paper 390, 2023
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    Cited by:

    1. Yadav, Jitesh & Chakraborty, Lekha, 2023. "Public Financial Management and Crime Against Children: A State level Analysis in India," Working Papers 23/391, National Institute of Public Finance and Policy.

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    More about this item

    Keywords

    Investment ; Corporate tax ; Indian manufacturing firms;
    All these keywords.

    JEL classification:

    • G31 - Financial Economics - - Corporate Finance and Governance - - - Capital Budgeting; Fixed Investment and Inventory Studies
    • H25 - Public Economics - - Taxation, Subsidies, and Revenue - - - Business Taxes and Subsidies
    • H71 - Public Economics - - State and Local Government; Intergovernmental Relations - - - State and Local Taxation, Subsidies, and Revenue

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