Column: If commodity taxes are introduced

Written by PH Ravikumar | Updated: Feb 2 2013, 08:11am hrs
The securities transaction tax (STT), akin to the globally popular Tobin Tax on foreign exchange transactions to curb foreign exchange price fluctuations, was introduced in July 2004 as a part of the Finance Bill by the finance minister. The purpose of the introduction of STT was to have an efficient means of collecting capital gains taxes at the point of transaction itself by the stock exchanges for the department of revenue, given the capabilities of the department to track trades and locating those who were to pay the taxes. As part of the imposition of STT, long-term capital gains were abolished and short-term capital gains were sharply reduced.

While the purpose of the imposition of STT has been achieved almost entirely (annual taxes collected are R7,000 croremuch more than the capital gains taxes collected before the introduction of the taxes), the tax has been criticised as being at a transaction level where all are required to pay the tax irrespective of whether one makes money or not and irrespective of how much profit is made. It is a flat tax for some one who makes either R1 profit or R1 crore profitwhich again, on principle, is being criticised as inequitable.

STT is currently levied on almost all capital market transactions, including cash market transactions and futures and options markets. Recent press reports suggest the ministry of finance is looking at the abolition of STT and reverting to the earlier (and what is considered more equitable) capital gains taxes. The department of revenue itself has opposed the abolition.

STT helps in overall regulation and keep a check on costs involved. I dont see any benefit of foregoing R5,000-R7,000 crore revenue It may boost sentiments in stock market temporarily. But I dont see any benefit, said a senior revenue department official PTI reported quoting a revenue official on November 30, 2011.

Stock exchanges have been also seeking the abolition of STT pleading that, in the current environment, abolition of STT would improve the investment climate and flow of international funds.

Separately, there have been reports of imposition of a similar tax on transactions on commodities trading on commodities exchanges. Those who have been seeking the tax on commodities trading have been saying that the extension of STT to cover commodities derivatives would level the field between stocks and commodities. They have also been arguing that the tax would reduce inflationary impact of speculative trading on commodity exchanges.

Within this group advocating extension of STT to commodities, there are two different argumentsthose seeking STT on financial like commodities being covered and agro commodities being excluded from the STT purview; this group seeks extension of STT to cover commodities like gold, silver and petroleum, which have globally become quasi-financial transactions and are no longer commodities. Guar, which has become an energy commodity during the last three years, would come under this category. The other group seeks the imposition of STT on even agro commodities.

In 2007, when there was indeed a move to extend STT to all commodities traded on commodity exchanges, the commodity exchanges, which are otherwise a fractious lot, for the first time joined hands and opposed the imposition of the tax.

Clearly, on a fundamental basis, the rationale for STT does not exist. There is no doubt that it has rid the government of the effort of collection and building an elaborate mechanism to track market trades, which would come under the taxation purview. If this logic were to be accepted then all financial transactions including interest payments by banks to individual investors have to be taxed. Obviously, the merit from a jurisprudence angle is to revert to taxation of profits/gains and not transactions. However, if indeed there is a delay in abolition of STT, there is a strong rationale to extend the tax to cover commodity-trading transactions. Of these, in any case, over 75% of trading volumes come from just gold, silver and petroleum trading. Therefore, if indeed STT is unlikely to be abolished, there seems to be a good ground to extend the tax to cover these three commodities. In fact, cash market transactions are also covered in case of stock exchanges. If STT is not abolished and extended to cover commodity trading, the same should cover all trades in mandis as well, which are, after all, the cash markets for (agro) commodities.

However, one of the commodity exchanges could be somewhat more severely impacted by such an impositionthough the stock exchange volumes have not been impacted by the imposition of STT. Clearly, however, if STT is indeed imposed on commodities derivatives trading, the same benefits that today exist for long-term capital gains and short-term gains for stocks should also be extended to commodities.

In an era where we are talking of simplicity of taxation code and the introduction of a direct taxes code, the structure of other taxes is important as well. From this point of view, only either of these alternatives should be consideredabolish STT or extend STT to commodities but with all benefits relating to capital gains.

The author, former MD & CEO of NCDEX, is non-executive chairperson, SKS Microfinance. Views are personal