Tax Policy and Corporate Investment: Evidence from Indian Firm-level Panel Data

Abstract:-
India has introduced several corporate tax reforms in recent decades to encourage corporate investment. However, there is limited evidence on how resulting changes in the effective tax rate may be associated with the investment intensity in the country. To estimate this relationship, we use an unbalanced panel of Indian firms from 2000 to 2024, and apply the System Generalized Method of Moments (System GMM) and the Dynamic Fixed Effects (DFE) error-correction model to identify both short- and long-term dynamics. The findings show a significant negative elasticity of investment with respect to the effective tax rate. While the elasticity strength varies somewhat across the two estimation methods, the overall results are largely consistent. We also have some evidence that firm age may moderate the association between effective tax rates and investment behaviour. Overall, the findings provide empirical support for lower tax rates and a simpler tax structure to broaden the tax base and boost investments in the Indian manufacturing sector.

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