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 actual realization by imposition of CTT would be very insignificant.
(B) Theoryof neutrality
CTT should not be levied, just because there is STT, applying the principle of neutrality. If that is the case, then STT should be levied on bonds (on which STT was withdrawn considering the domain realities), currency forwards, gold ETFs, Call money market, etc. which apparently are also traded on electronic platform.
(C) Tracking information for better tax compliance
All national commodity exchanges have world class surveillance systems. They maintain complete audit trail. All trade statistics are available with the regulator (FMC) by end of the day, which can be accessed by any government agency. Hence, tracking is always possible even without imposition of CTT.
In stock market, both spot and Futures are traded electronically. In commodities, physical market exists outside the exchanges. Hence, imposing CTT on Futures, while spot continuing outside its purview will create distortion in prices, divergence of spot and Futures at maturity and wrong price signals.
Commodities are subject to so many taxes, such as mandi fee, sales tax/VAT, CST, excise, custom, octroi, etc, but stocks are not subject to any of such taxes. Any additional tax burden will impact the consumer paid price and lead to inflation, which is a concern for the government.
CDM and SDM have completely different DNA and they perform totally different economic function one for investment and the other for insurance against price volatility. 800% increase in the cost of transaction will kill the Indian CDM. Cost of transaction must be in line with global peers as commodity is a global asset class unlike equity, which is a local asset class.
Any new taxes on commodity Futures are met with opposition anywhere in the world. In most countries transaction costs in commodity exchanges are lower when compared to securities derivatives. In 1995, the Clinton administration had proposed a 10-cent transaction tax to pay for the Commodity Futures Trading Commission, whose budget would be increased from $49.2 million to $59.7 million.
Clinton administration asked Congress to enact a 10-cent transaction fee on commodity Futures and options trading on the 11 United States exchanges "to cover the cost of the commission's regulatory activities", generating about $59 million in fees. Fee levels would be adjusted to match the agency's annual appropriation. Major exchanges, including Chicago Board of Trade, vehemently opposed the proposal.
According to a recent study by Dr Jinesh Panchali and Venkat Giridhar, commodity market experts, the introduction of CTT could affect the competitiveness of the Indian commodity markets. The study has been submitted to Union finance ministry. The Nikkei 225 Futures contracts are listed and traded on three different markets Singapore International Monetary Exchange (SIMEX), Osaka Securities Exchange (OSE) and Chicago Mercantile Exchange (CME).
Because trading on SIMEX is relatively cheaper than OSE, due to differences in brokerage, margin and interest on margin and exchange fees, traders deserted OSE for SIMEX, according to the study. The Indian markets deal in commodities like gold, silver, base metals and energy, also traded in global markets.
Commodity Online and Commodity Market had also argued from the day the new tax was announced that it could affect the competitiveness of India's commodity exchanges. (How to Beat FM on CTT).
The future of CTT
The future of CTT looks uncertain at this point of time. The rising inflation rate in the country seems to have scared the Union government to reconsider levying the CTT as announced in the Budget. Concerned that the tax could push up prices on commodity exchanges, the Prime Minister's Office has asked its Economic Advisory Council, chaired by C Rangarajan, to review the proposal.
