Less than a week after the Union Budget was presented, Reserve Bank of India (RBI) Governor Urjit Patel expressed concern over the government’s move to reintroduce long-term capital gains tax on equities. India’s investment-to-GDP ratio was not adequate, he observed, given the fact that capital in the country was taxed at five different stages, hindering investments.
‘Five taxes’
The Budget had brought back long-term capital gains tax, disappointing investors. “We need to keep in mind the taxation on capital in India is from several sources and I think, at the marginal rate, it adds up … so from back of the envelope you have a corporate tax rate, you have a dividend distribution tax rate, for dividend income above ₹10 lakh you have the marginal tax rate, you have a securities transaction tax and a capital gains tax. So, you have five taxes on capital. And you know that would have an impact on investment and savings decisions,” Dr. Patel said during the post monetary policy media interaction, when asked why the investment-to-GDP ratio had remained subdued.
The Budget has proposed that long-term gains of more than ₹1 lakh from investments in stocks, would attract long-term capital gains tax at 10%.
The Economic Survey, released last week, also pointed out that the overall savings and investment rate scenario in the economy was not ‘heartening’. According to the Survey, while investment rate as a share of GDP in the economy declined by almost 5.6 percentage points between 2011-12 and 2015-16, savings rate declined by two and half percentage points between 2011-12 and 2013-14 and remained rangebound thereafter. “India’s investment, savings slowdown is unusual, never happened like this before,” said Arvind Subramanian, chief economic adviser.
The ratio of gross fixed capital formation to GDP rose from 26.5% in 2003, reached a peak of 35.6% in 2007, and then slid to 26.4% in 2017. Dr. Patel said the country should expect its investment-to-GDP ratio to improve as there were early signs that credit growth was picking up. Year-on-year credit growth was 10.6% in January as compared with 4.7% a year earlier.
“I think we should expect the investment-to-GDP ratio to improve and there are the first discernible signs of that when existing capacity utilisation reaches a certain level. The reason I say that there are incipient signs is that the credit offtake is at double digit after a long time, albeit at low double digits. I think the movement in both these is likely to result in an investment-to-GDP ratio that may go up,” the RBI Governor added.
Less than a week after the Budget, Reserve Bank of India (RBI) governor Urjit Patel has indicated his displeasure at the government’s move to impose long term capital gains tax on equities, stressing that India’s investment to GDP ratio is not adequate and the fact that capital in the country is taxed at five different stages, hindering investments.
The budget has brought back the long term capital gains tax which has disappointed investors.
“...We need to keep in mind the taxation on capital in India is from several sources and I think at them at the marginal rate it adds up … so from back of the envelop, 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, you have a securities transaction tax and a capital gains tax. So you have five taxes on capital. And you know that would have an impact on investment and savings decision,” Mr Patel said in the post monetary policy media interaction when asked in why investment to GDP ratio of the country has remained subdued.
The budget proposed that all long term investment gains of over Rs 1 lakh, beginning February 1, 2018 will attract a long term capital gains tax at the rate of 10 per cent.
The Economic Survey released last week also pointed that the story on overall savings and investment rate in the economy is not ‘heartening’. According to the survey, while the investment rate as a share of GDP in the economy declined by nearly 5.6 percentage points between 2011-12 and 2015-16, savings rate declined by two and half percentage points between 2011-12 and 2013-14 and has remained range bound thereafter.
Arvind Subramanian, chief economic adviser had said “India’s investment, savings slowdown is unusual, never happened like this before.” The ratio of gross fixed capital formation to GDP climbed from 26.5% in 2003, reached a peak of 35.6% in 2007, and then slid back to 26.4% in 2017.
Dr Patel said the country should expect its investment to GDP ratio to improve as there are early signs that credit growth is picking up. Year-on-year credit growth was 10.6% in January as compared 4.7% a year ago.
“I think we should expect the investment to GDP ratio to improve and there are first discernible signs of that when existing capacity utilisation reaches a certain level. The reason I say that there are incipient signs is that the credit offtake is at double digit after a long time, albeit at low double digits. I think the movement in both these likely to result investment to GDP ratio that may go up,” Mr Patel added.
