The one proposal in the Union Budget for 2008-09 that was unanimously opposed by the commodities business the Commodity Transaction Tax (CTT) looks destined to be abandoned by its proponents.
The uncertainty over the implementation of the new tax continues as the Finance Bill has not been passed by the Parliament. Finance minister P Chidambaram had announced in his Budget proposal that the levy would come into effect from April 1.
The uncertainty over the implementation of the new tax continues as the Finance Bill has not been passed by the Parliament. Finance minister P Chidambaram had announced in his Budget proposal that the levy would come into effect from April 1.
In the Budget, Chidambaram had proposed CTT at 0.17 per cent of the transaction value in commodity Futures.
This was opposed on the ground that it would make commodity transactions costlier and lead to lesser trading volumes in the exchanges.
The price discovery function would also be affected in Futures markets. The Federal of Indian Commodity Exchanges, an apex national body of India's major commodity bourses, in a memorandum submitted to the finance minister had called for an immediate withdrawal of CTT in the larger and long-term interest of Futures markets.
Even within the Union Cabinet, there was opposition to the implementation of the new tax. The consumer affairs ministry has made a strong pitch for an immediate withdrawal of the CTT proposed in the Budget.
Union agriculture minister Sharad Pawar had written to Chidambaram that CTT would escalate transaction costs on the technology-driven national exchanges vis-à-vis the manually operated regional exchanges, the physical commodity market and the international commodities derivatives market.
According to FICE, commodity derivatives market (CDM) is at a nascent stage. It is a market having single product (only Futures. No option, no index Futures, no intangible Futures) and single user (only traders and corporates. No banks, mutual funds, FIs, FIIs), while stock market is multi-product (cash, Futures, options, indices, debt, interest rate, ETFs) and multi-user (FIIs, mutual funds, banks, traders) platform.
Stock and commodity markets are fundamentally different. Stock market is meant for capital formation and appreciation, while CDM is for insurance against price volatility and price discovery. An insurance product is attractive, only if it is reasonably priced. Beyond a point, people may prefer to remain uninsured or un-hedged. SDM is based on local underlying assets, while commodity derivatives are based on global asset class, e.g. gold, soy, cotton, etc.
For buying Indian stocks, one has to trade on Indian stock exchanges, but for trading in gold Futures and soy Futures he can choose from MCX, NCDEX, NMCE, or NYMEX (New York ), CBOT (Chicago) TOCOM (Tokyo) or SFE (Shanghai). Therefore, Indian commodity exchanges have to match the transaction costs applicable at their international peers. Any increase beyond such level will drive the volume to international exchanges or unofficial dabbas. Hence, applying CTT means exporting our market to other global exchanges as CTT is not levied anywhere else.
The Economic Survey 2008 has observed that farmers find it difficult to access Futures market because of high costs. CTT will further increase the cost of accessing Futures market. Besides, as per APMC Act, no tax, cess or mandi fee is payable by the farmers. But, the CTT is proposed to be levied on sellers. It implies that a farmer, who sells a Futures contract to protect himself against price risk, will be required to pay CTT. This seems to be a regulatory inconsistency. The rationale for levying CTT, as reported in the media, and the FICE's point of view relating thereto are:
(A) Generating revenue
Government estimates may be based on current turnover figures, but since the turnover will substantially decline due to imposition of CTT, the