Internal Tobin Tax

A fisc in search of revenues and ideas

The union finance ministry is reportedly considering the idea of imposing a modest tax on share market transactions. Dubbed the “share transaction tax” the proposal entails a 0.25 per cent tax on dealers’ earnings from shares transacted by them and a 0.1 per cent tax on direct sales of shares by investors. The essential idea draws from a three decades-old idea first proposed by the Nobel prize winning economist, James Tobin. The so-called Tobin Tax, as it has come to be known, however, was meant to be on cross-border foreign exchange transactions. The idea was to reduce volatility in such transactions, and to empower national governments to derive some revenue benefit from flows on which they had otherwise very little control. What is now being proposed by the finance ministry is an internal Tobin Tax of sorts on share transactions to garner an estimated Rs 5,000 crore. Faced with low growth of incomes and inelastic expenditures which cannot be realistically reduced, especially at a time when the government is being expected to “pump prime” the economy by injecting more liquidity and purchasing power in the system, the government is understandably looking around for new sources of revenue.

The urgency of revenue mobilisation was underscored by the Reserve Bank of India in its annual report where it drew pointed attention to the task of what it called “fiscal empowerment” of the government. There is no denying that the government should urgently increase the tax to GDP ratio and take it back to at least the 1980s level of 11 to 12 per cent from the current nine per cent level. While a share transactions tax makes sense, it may be a better idea to impose it partially, exempting from its purview digital transactions. The government can then use the measure to encourage demat and increase the popularity of electronic trading. Critics will, of course, say that this would hurt an already depressed market. On the other hand, it can be argued that this is the best time to impose such a tax. If the rest of the budget strategy is aimed at boosting market sentiment, then, imposing a tax when the market may have bottomed out and can only go up rather than down may not be bad timing. The government is in search of ideas and this is kite-flying time.