CTT could drive volumes to other avenues

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The Union Budget 2008-09 has rightly laid its focus on the social sectors mainly education and health for delivering services at the rural areas particularly to the deprived classes to make economic growth an inclusive process. Last year, the budget started with banning of commodities and this year, we are happy to see the approval of Forward Contracts (Regulation) Act and Foreign Direct Investment (FDI)/Foreign Institutional Investor (FII) investment in commodities sector. We hope there is a large allocation done in this budget to achieve the main objective of giving autonomy to Forward Markets Commission (FMC) and to institutionalise the development of market mechanism, support institutions, capacity building and development of strong forward and backward linkages between markets, producers, traders and consumers.

As expected, the agriculture sector attracted the most intense thrust along with a large debt relief package i.e. the single largest scheme-based expenditure announced by the Finance Minister in this budget. While this measure is good, but we only wish there are additional market-based and institutional intervention so as to provide the benefits to the farmers on a sustainable basis. Further greater farm lending, greater investment in Bharat Nirman Yojana, rural electrification and setting up of nation wide 'common service centers' would create rural investment and employment besides, strengthening the access of the farmers to the information and develop better forward and backward linkages for an inclusive growth.

Rationalisation measures such as increasing short-term capital gains tax from 10% to 15% will eventually make some of the risk management transactions costlier for groups of assets from which returns are already lower in a differential interest rate and currency regime currently in India vis-à-vis global markets. Particularly, the trading class in the commodity exchanges would find it less attractive to manage their risks through domestic commodity exchanges with the proposal to introduce Commodity Transaction Tax (CTT) especially at this nascent stage of the market (compared to the large size of the physical market). CTT could probably push volumes to illegal trading or other avenues such as participating in global exchanges to the extent allowed by the central bank. This measure may have an effect on the efforts of exchanges to bring the market on a more transparent and well-regulated platform.

Considering critical economic functions that commodity exchanges play in terms of providing price signals for allocating resources efficiently and help manage their risk besides stabilising the markets, it is sad to note that the triple whammy of Service Tax, CTT and non-availability of benefit of treating profit or loss from futures trading as normal business income or loss as in securities market, unless reconsidered, would make the exchanges non-usable in their crucial economic function of risk management and price discovery. These costs will also distort our price vis-à-vis the global prices as the impact cost of trading will increase because of this element of 250% increase in cost of trading.