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The Increasing Trend in Effective Tax Rates in India: Role of Macroeconomic Factors, Tax Policy Changes and Firm Characteristics

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  • A. Athira
  • P. J. Jijo Lukose

Abstract

We show that over the last two decades, India’s effective tax rates (ETRs) have increased by 7.8 percent, which contrasts with the downward trend in ETRs for US firms documented by Dyreng et al. (2017). After controlling for changes in firm characteristics, macroeconomic factors, and tax policy changes, our findings show that ETRs increased by 0.37 percent per year during the sample period. Further, we examine the proposition that public firms are more likely to engage in non-conforming tax management than private firms. We observe a stronger upward trend in ETRs among private firms than public firms, consistent with the capital market pressure hypothesis. The permanent book-tax difference is the primary driver of the ETR trend for both private and public firms. Our findings contribute to the recent debate about the trend in ETRs by undermining concerns regarding rising corporate tax avoidance and reinforcing the argument that improved tax efficiency and economies of agglomeration in countries with large domestic markets contribute to higher ETRs. JEL Codes: G38, H25, H26, H32

Suggested Citation

  • A. Athira & P. J. Jijo Lukose, 2024. "The Increasing Trend in Effective Tax Rates in India: Role of Macroeconomic Factors, Tax Policy Changes and Firm Characteristics," Journal of Emerging Market Finance, Institute for Financial Management and Research, vol. 23(3), pages 279-305, September.
    • Handle: RePEc:sae:emffin:v:23:y:2024:i:3:p:279-305
    DOI: 10.1177/09726527231214075
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    References listed on IDEAS

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    1. Ajmal, T.K. & Singhal, Ankit & Kumar, Vinod & Atawnah, Nader, 2026. "Family firms and tax avoidance preferences: Evidence from India," Emerging Markets Review, Elsevier, vol. 70(C).

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    Keywords

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    JEL classification:

    • G38 - Financial Economics - - Corporate Finance and Governance - - - Government Policy and Regulation
    • H25 - Public Economics - - Taxation, Subsidies, and Revenue - - - Business Taxes and Subsidies
    • H26 - Public Economics - - Taxation, Subsidies, and Revenue - - - Tax Evasion and Avoidance
    • H32 - Public Economics - - Fiscal Policies and Behavior of Economic Agents - - - Firm

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