Economists bat for Tobin tax

A day after India Inc called for tax breaks in the coming Budget, leading economists on Thursday urged Finance Minister P Chidambaram to rationalise indirect taxes and impose a Tobin tax on certain types of foreign inflows to check the appreciation of the rupee.

The Tobin tax, first proposed by Nobel laureate James Tobin in 1972, is a sales tax on cross-border currency trades aimed at discouraging speculation.

The economists also urged the government not to reduce direct taxes, given the imminent fiscal stresses on account of the increasing value of the bonds issued to oil marketing companies, the market stabilisation scheme and the forthcoming recommendations of the Sixth Pay Commission.

Around 15 economists, including Suman Bery, Director General, National Council of Applied Economic Research and M Govinda Rao, Director, National Institute of Public Finance and Policy, met Chidambaram as part of the customary meetings the finance minister holds for inputs for the Budget.

"There is a lot of tax buoyancy. However, given that there are a number of fiscal stress points in the offing, like oil bonds, the MSS, the pay commission, it is not prudent to start thinking of reducing tax rates," Standard & Poor's Chief Economist (Asia-Pacific) Subir Gokarn told reporters after the meeting.

Gokarn added the increase in the tax-to GDP-ratio should not be taken as permanent.

"There is no great evidence that further reduction in direct taxes will boost tax collections. If you have tax buoyancy, either use it to finance infrastructure or rationalise indirect taxes as the incidence of indirect taxes is very high on industry," said Rajiv Kumar, Director and Chief Executive, ICRIER.

Kumar advocated that the tax component on oil should be brought down. "You can also look at the tax composition of oil prices which is 57 per cent at present. By cutting taxes you can give relief to customers and downstream oil companies," he added.

With the appreciation of the rupee, which is making imports cheaper, Kumar suggested that the Customs duty rates should be left untouched. He advised the finance minister to impose a Tobin tax on foreign inflows to check the rise of the Indian currency.

Kumar suggested such a tax should be imposed only on inflows into equity markets and real estate, but not on foreign direct investments.

Besides, steps should be taken to enhance the absorptive capacity of the economy so that the inflow of funds could be utilised, he said.