Finmin turns down proposal to tax commodity derivatives

Written by SunnyVerma | Banikinkar Pattanayak | New Delhi | Updated: Jan 15 2013, 05:40am hrs
The finance ministry is learnt to have turned down a proposal to impose transaction tax on commodity derivatives in the next Budget fearing industry and political backlash.

"There is a lot of political opposition to the CTT (commodity transaction tax) since it would be imposed on trade and will also impact farm commodities. It's a tougher tax to impose in our political setting compared to the taxing transaction in the stock market through the STT (securities transaction tax)," a senior official told FE.

In the 2008-09 Budget, finance minister P Chidambaram had proposed a CTT of 0.017%. However, the proposal was put on hold after the then consumer affairs minister Sharad Pawar and Prime Minister's Economic Advisory Council chairman C Rangarajan raised objections.

Some stock market experts recently pitched for the imposition of the CTT, arguing that funds which would otherwise come to the market, are flowing into commodity derivatives due to the imposition of the STT on equity trading. The demand gathered pace after a panel headed by Parthasarthy Shome, which reviewed the General Anti-Avoidance Rules, recommended the removal of the short-term capital gains tax on sale of listed securities while simultaneously raising the STT to compensate for lost revenue. Currently on a delivery-based transaction of R1,00,000, stock investors pay R100 as the STT at 0.1% while 0.025% tax is levied on non-deliverable transactions.

However, industry chambers and commodity exchanges pitched for a differential treatment, saying stock market participants solely stress profits from soaring share value, while commodity market players operate with the twin-objective of risk management at micro and price discovery at macro level.

They also argued that commodities are already taxed to the tune of almost 12% in the form of mandi tax, value-added tax, excise duty, cess, handling costs and warehousing charges before they are placed on the trading platform.

Moreover, commodity futures trading also requires security deposits and high initial and special margin requirements. In a joint statement, five national commodity exchanges, including MCX and NCDEX, have opposed the CTT.

At this stage, when the commodity trading is yet to realise its potential, we need to review the kind of taxes that is applied on such thin-margin businesses, before imposing the CTT. The introduction of CTT would adversely affect volumes in commodity trading," said Sunil Jain, partner & head of direct tax practice, J Sagar Associates.

Compounding their worries, the turnover of commodity exchanges declined nearly 6% to R123.15 lakh crore between April 1 and December 15 from a year before, the first drop ofmore than a half-yearly basis since the introduction of futures trading in India in 2003.

So, a tax on commodity derivatives along the lines of the one for the stock market could potentially drag down the transaction level, commodity market players fear.

When a market is in a developing stage, any tax adds to the cost and stifles its growth. The Indian commodity futures market is barely 10 years old and therefore, policy measures should be accommodative of further growth prospects," said Tanushree Mazumdar, senior economist at the National Commodity and Derivatives Exchange.

In a letter to finance minister P Chidambaram, Assocham secretary general D S Rawat said: "Unlike the stock market, the raison d'etre of commodity derivatives markets is risk management... Since commodity derivatives are important hedging instruments affecting a large segment of the populace, none of the major economies of the world, barring Taiwan, have transaction tax on exchange-traded commodity derivatives."

CII director general Chandrajit Banerjee has also written his objections on the CTT to revenue secretary Sumit Bose.

We believe the imposition of any transaction tax will not only increase the transaction cost of trading, it will add to the cost of risk management and dissuade genuine hedgers. It may shift commodity derivatives trading to unofficial and illegal dabba trading, which are outside the purview of the regulatory control."