The Securities Transaction Tax (STT), much disliked by India’s investing community, is on its way out. This is not a rumour and nor is it a leak. It’s based on a statement by no less an authority than the Prime Minister Manmohan Singh, at no less an occasion than the just-concluded G-20 summit at Cannes in France. At the summit, he said clearly and unambiguously that a financial transaction tax would increase the cost of capital. There’s no denying this—he has been quoted as saying so by dozens of newspapers and websites.
Moreover, his statement has nothing to do with the specific tax that was under discussion. It’s a general statement, aimed squarely at the concept itself, pointing out the damage that a transaction tax would cause by increasing the cost of capital. Coming from an economist of Singh’s stature, the statement must carry an enormous force, one which can be expected to penetrate to the deepest heart of India’s finance ministry.
So one can safely assume that come February, when the time for the next Union Budget comes around, no one in the finance ministry will dare cock a snook at Singh, now that he has made public his abhorrence of transaction taxes. And that means that the STT is doomed.
Of course, Singh was speaking in the context of the global financial transaction tax that has now been talked about for a while, but the reason he has given is clearly generalisable and applicable to all transaction taxes. Actually, given that the cost of capital is now an increasingly serious issue in India, there’s no point waiting for the next budget. In fact, it would be foolhardy to wait even for a day—it would only be logical to abolish the STT by tomorrow morning.