Door handles move along a conveyor in an infrared oven at a factory in Aligarh, Uttar Pradesh. (Photographer: Udit Kulshrestha/Bloomberg)

RBI Monetary Policy: Taxes On Capital Impact Investment Decisions, Says RBI Governor

Multiple taxes on capital are impacting the investment to GDP ratio in India, said Reserve Bank of India Governor Urjit Patel in what is probably the strongest such statement made by a RBI Governor on taxation policy.

When asked by a reporter about why the investment to GDP ratio was still subdued, Urjit Patel, governor of the RBI, said he expects it to improve on account of rising capacity utilisation in industry and double digit growth in credit offtake.

Patel then went on to list the many taxes on capital and said these taxes “also have an impact on investment and savings decisions”.

“I think that we should expect the investment/GDP ratio to improve and I think there are the first discernible signs of that when existing capacity utilisation reaches a certain level. And secondly, the reason I say there are incipient signs is that the credit offtake after a long time is now in the double digit, albeit a low double digit. So I think the movement in both these are likely to result in an investment to GDP ratio that may go up.

The other thing we need to keep in mind is that the taxation on capital in India is from several sources and I think that then at the marginal rate it adds up. So on the back of the envelope - you have a corporate tax rate, you have a dividend distribution tax rate, for dividend income above Rs 10 lakh you have the marginal tax rate, which is whatever bracket people come in - that would be at the highest level, you have a securities transaction tax and you have a capital gains tax. So there are five taxes on capital and that would obviously also have an impact on investment and savings decisions.”

The Economic Survey 2018 data shows that the ratio of gross fixed capital formation to GDP climbed from 26.5 percent in 2003, reached a peak of 35.6 percent in 2007, and then slid back to 26.4 percent in 2017.

The ratio of domestic saving to GDP rose from 29.2 percent in 2003 to a peak of 38.3 percent in 2007, before falling back to 29 percent in 2016.