As differences are likely to resurface over the proposed bank tax at the forthcoming G-20 Summit in Toronto, the Finance Ministry has said tighter regulation will enable the domestic banks escape any such levy, unlike most other countries in the bloc.
After a recent meeting in South Korea, a G-20 communique did not talk of bank tax. However, the European Union on Thursday decided to press for the same at the June 26-27 Toronto Summit.
Even as not calling for bank tax, the G-20 finance ministers had agreed not to burden the taxpayers for bailouts, and asked financial institutions to chip in to governmental efforts in this regard.
"We (G-20) have agreed in principle not to burden the taxpayers for the bailout of failing banks," a finance ministry official had said on the consensus reached by the G-20 fiance ministers at Busan, South Korea, early this month.
But this does not mean every country will have to impose a bank tax for future bailouts, since regulations also serve the same purpose and impose a cost on banks, he clarified.
"There is no contradiction here. The consensus is that cost should not be borne by the taxpayers. There are other ways than taxing banks. Even tight regulation is a cost on banks as it raises the cost of capital," the official added.
At the Busan meeting, New Delhi has objected to the bank tax proposal and had instead suggested strengthening the regulatory mechanism to avoid any bank failures in future.
Finance Minister Pranab Mukherjee had also said G-20 had "by and large accepted" not to tax banks. "We are not in favour of having taxation on banks. We suggested that ultimately you please take it up through the regulatory route. By and large, it was accepted," Mukherjee had said.
Explaining, the official said there can be different ways in which financial institutions can contribute towards governments efforts. A tighter regulation on banks, as is in our country, is in itself a cost to the banks, he pointed out.
"In comparison, the cost of capital is much less in most Western countries as there is very less regulation. So, in those countries their governments can ask for a bank levy," he added pointing to different ways within the consensus.
However, the 27-nation European Union said in a joint communique on Friday that the EU representatives in the G-20 will seek the support of other nations for "further developing and exploring" possibilities of introducing a financial transaction tax.
The EU should lead the efforts to arrive on a global agreement "for introducing systems for levies and taxes on financial institutions", the communique said. Besides the EU, the US favours bank tax, while India, Australia and Canada are opposed to the idea.
