Kicking off a fresh debate, Reserve Bank governor Urjit Patel on Wednesday said it is the taxation regime, not high interest rates, that is impinging a pick-up in private investment.
Patel’s remark that came within a week of budget proposal to reintroduce long-term capital gain tax on equities deals a severe blow to the Modi government, which is facing all-round criticism for its poor show on employment generation, among others. The proposal has also sent the stock market on a tailspin.
Patel said there are five different levies on capital which impact investments and savings decisions. He listed them as corporate tax on companies, dividend distribution tax, a tax for dividend income above Rs 10 lakh, a securities transaction tax and also capital gains tax. The governor was fielding media queries on why India’s investment to GDP ratio was subdued. He also said that he expects the investment-GDP ratio to improve going forward.
“The other thing we need to keep in mind is that the taxation on capital in India is from several sources and I think at the marginal rate it adds up. So, from the back of the envelope there is corporate tax rate, you have dividend distribution tax rate for dividend income above Rs 10lakh, you have marginal tax rate, you have a securities transaction tax, capital gains tax. So you have five taxes and that would obviously have an impact on investments and savings,” he told reporters.
“We should expect the GDP to investment ratio to improve and I think there are the first discernible signs of that when existing capacity utilisation which is at a certain level and secondly there are recipient signs that credit offtake after a long time is now in low double digits. So, the movement in both these will result in the investment-GDP ratio going up,” the governor added.
The hard macro truth about India’s investment story is that in 2011-12 the economy had a gross investment-to-GDP ratio of 34.5 per cent and this has dramatically fallen to 26.6 per cent of GDP in 2017-18.