New Delhi, Jan. 14 -- India faces a paradox today. Its GDP growth is among the fastest in the world, public capital expenditure has surged and corporate balance sheets are healthier than they have been in years. Yet, private investment, especially in manufacturing capacity, machinery and factory expansion, has not responded with comparable vigour.

There are several reasons for this, including the cost of capital and still-muted animal spirits. But one underappreciated reason lies in the design of the goods and services tax (GST), particularly its treatment of capital goods.

One powerful reform in the forthcoming budget to revive private investment would be to place capital goods squarely and cleanly within the GST framework, with full, ...