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Effect of Corporate Income Tax on Investment Decisions of Indian Manufacturing Firms

Author

Listed:
  • K. Sankarganesh

    (Ph.D. Research Scholar, Madras School of Economics, Chennai)

  • K. R. Shanmugam

    (Director and Professor, Madras School of Economics)

Abstract

This study is an attempt to empirically analyse the effect of corporate income tax on investment of manufacturing firms in India during 2005-2019, using the standard panel two way fixed effects model estimation techniques. It is found that the effective corporate tax has a negative and significant impact on the corporate investment. Moreover, the estimated effective tax elasticity is relatively low as compared to the magnitude found in other countries. Our analysis also indicates that the deduction rate has a positive impact on investment while interest-debt ratio and leverage ratio have a negative impact. The effective rate increases with age and size of firms. It is our hope that these results will be useful to policymakers and other stakeholders to take appropriate strategies to design the corporate tax policy such that it will not hinder business investment in India.

Suggested Citation

  • K. Sankarganesh & K. R. Shanmugam, 2022. "Effect of Corporate Income Tax on Investment Decisions of Indian Manufacturing Firms," Working Papers 2022-233, Madras School of Economics,Chennai,India.
    • Handle: RePEc:mad:wpaper:2022-233
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    References listed on IDEAS

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    More about this item

    Keywords

    Investment; Effect tax rate; Corporation income tax; panel data methods;
    All these keywords.

    JEL classification:

    • D21 - Microeconomics - - Production and Organizations - - - Firm Behavior: Theory
    • E22 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Investment; Capital; Intangible Capital; Capacity
    • E51 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Money Supply; Credit; Money Multipliers
    • H25 - Public Economics - - Taxation, Subsidies, and Revenue - - - Business Taxes and Subsidies
    • C23 - Mathematical and Quantitative Methods - - Single Equation Models; Single Variables - - - Models with Panel Data; Spatio-temporal Models

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