Revisiting the effects of tax structures on economic growth: empirical evidence from India using the NARDL approach

Purpose The most effective tax system design varies between nations and depends on several criteria. Numerous studies suggest that stimulating economic growth can be achieved by decreasing income tax rates and increasing corporate tax rates simultaneously. However, some studies indicate that the effects of tax burden and tax structure on economic activity may differ depending on the country, time period and specific conditions. In this regard, the primary aim of this study is to examine the impact of different tax structures on economic growth and to provide key empirical evidence that can assist policymakers in designing tax systems that promote sustainable economic growth. The study analyses the impact of tax structure shares on economic growth in India from 1990–91 to 2022–23. Design/methodology/approach The research adopts a quantitative approach using econometric models. For data series estimation, the study employs the Non-linear Autoregressive Distributed Lag (NARDL) model, which is suitable for examining potential asymmetric relationships among variables. The BDS independence test was used to check the non-linearity. The study compares the effects of direct taxes (income tax and corporate tax) with those of indirect taxes (customs duties and excise duty). Findings The conclusion is that a tax structure based on income taxes on personal income and corporate profit is not supportive of economic growth, while the tax revenue from customs duties is supportive of economic growth in India. Research limitations/implications The findings suggest that policymakers should consider the differing impacts of tax structures when designing tax policies. Direct taxes, despite their potential short-term drawbacks, are essential for long-term economic development, while indirect taxes can provide short-term economic stimulus but require careful implementation to ensure sustained benefits. The present study examines the effects of tax structures on economic growth in India. We have not taken Goods and Services Tax (GST) as a variable in the study due to the unavailability of data. GST exclusion can be a possible limitation of the study. This analysis could be expanded in future studies by including GST to look at its unique effects on economic growth. Practical implications The findings suggest that policymakers should consider the differing impacts of tax structures when designing tax policies. Direct taxes, despite their potential short-term drawbacks, are essential for long-term economic development, while indirect taxes can provide short-term economic stimulus but require careful implementation to ensure sustained benefits. Originality/value This study contributes to the existing literature by highlighting the asymmetric effects of tax structures on economic growth in India, providing valuable insights for policymakers and researchers interested in tax policy and economic development.