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Research and Development Intensity and Effective Tax Rate: Empirical Evidence from India

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  • M. Shanmugam

Abstract

This article examines the link between research and development (R&D) intensity and effective tax rates (ETRs) in India. We added a new perspective to the current base erosion and profit shifting debate in two ways. First, the study extends the literature on base erosion and profit shifting by providing empirical evidence on the link between R&D intensity and ETR in the context of emerging economy of India. Second, we investigate the R&D intensity and ETR relationship in a dynamic context using Bias Corrected Least Square Dummy Variable Model. We find that R&D intensity has a significant and negative effect on both average and current ETR. The results show that the effect of R&D intensity on current effective tax was more than average ETRs. We also find that larger firms are associated with lower ETR. A significant negative association was also observed between ETR and capital intensity. The dynamic analysis confirms the habit persistence in the ETR that current period ETR is highly dependent on its previous year ETR.

Suggested Citation

  • M. Shanmugam, 2020. "Research and Development Intensity and Effective Tax Rate: Empirical Evidence from India," Emerging Economy Studies, International Management Institute, vol. 6(2), pages 223-234, November.
    • Handle: RePEc:sae:emecst:v:6:y:2020:i:2:p:223-234
    DOI: 10.1177/2394901520977460
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