India is expected to oppose the UK government?s proposal of imposing a tax on financial transactions to recover costs of future bailouts, according to two senior government officials. The proposal has already created frictions among the G-20 countries, with the US opposing tax on financial trading.

Prime Minister Manmohan Singh?s honorary economic advisor Raghuram Rajan said levying such a tax will not be a ?sensible proposal?. ?I don?t think it?s a (wise idea). I think at very small levels it (taxation of financial transactions) already exists. You want to take it to a serious level; I don?t think it is a ?sensible proposal?,? he said on the sidelines of the India Economic Summit, organised by the World Economic Forum and CII.?I think there are other ways in which you can control a financial sector than putting a huge financial tax, which is the idea behind the proposal,? Rajan added.

At a meeting of G-20 finance ministers and central banks in Scotland on Saturday, the UK Prime Minister Gordon Brown alluded to imposing Tobin tax in order to achieve ?a just distribution of risks and rewards? between financial institutions and the public.

Conceptualised by economist James Tobin in the 1970s, it is a tax on foreign currency transactions and can vary between 0.1% and 0.25%. Tobin tax is actually aimed at curbing speculative capital flows, but the UK proposal has a political overtone as it is being put up as a means to recover costs of future bailouts.

The UK has so far spent over $500 billion to bailout banks and financial institutions during the global financial crisis. The US Treasury secretary Timothy Geithner has rejected the idea saying taxpayers cannot be made to absorb costs of a future crisis. Finance minister Pranab Mukherjee, who attended the meeting in Scotland, though, has so far remained tight-lipped on the proposal.

According to a senior government official, the Indian political establishment is unlikely to favour this proposal as the entire focus is to attract foreign investment. India is widely expected to be a favoured destination for foreign investors. ?I don?t think India will have to compete very hard to attract foreign capital. The growth potential will drive inflows,? Kevan V Watts, head (India), Bank of America Merrill Lynch said at the summit.

A transaction tax has the potential to lower capital flows, especially on the portfolio side, into the country. Foreign institutional investors have pumped in $14.37 billion into the Indian stocks so far this fiscal, as compared to an outflow of $11.45 billion in the same period last year, as per the Securities and Exchange Board of India (Sebi) data.

?Even in the past, when capital inflows jumped to $110 billion (in 2007-08), the government has clearly refrained from taxation of financial flows,? the government official said. India has never experimented with a transaction tax on foreign exchange transactions as a means to manage capital flows, he said, adding that this position was unlikely to change.

Brazil has recently imposed a 2% financial transactions tax on foreign investment flows to its stock market and local fixed-income securities in order to stem appreciation of the Brazilian real.