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 larger domestic firms than the smaller ones. These results imply that corporate income tax cuts can increase investment in developing countries and large domestic firms benefit more than small firms from a tax cut.

 

Keywords: Investment, Corporate tax, Indian manufacturing firms.

JEL Codes: G31, H25, H71