Tobin-type tax on capital flow not off the table: RBI

Reserve Bank of India governor Duvvuri Subbarao has said that India is not contemplating imposing Tobin Tax on capital inflows now, but did not rule out introducing it later.

Reserve Bank of India governor Duvvuri Subbarao has said that India is not contemplating imposing Tobin Tax on capital inflows now, but did not rule out introducing it later.

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"Depending on what flows come in, we would employ measures, including if necessary something like Tobin tax (tax on foreign currency transactions to discourage destabilising short-term international capital into a country)," Subbarao said in response to a question after giving a speech at the Peterson Institute for International Economics.

Critics of Tobin tax contend that the tax is ineffective, difficult to implement, easy to evade, and that its costs far exceed the potential benefits, and all this because financial markets always outsmart policymakers.

Earlier in his remarks, the RBI governor said: "The surge in capital flows into some emerging market economies (EMEs) even as the crisis is not yet fully behind us has seen the return of the familiar question — the advisability of imposing a Tobin type tax on capital flows."

Supporters of the tax argue that if designed and implemented well, the tax can be effective in smoothing flows and that evading controls is not such a straight forward option as efforts to evade require incurring additional costs to move funds in and out of a country, which is precisely what the tax aims to achieve, he said.