Column: Beware, CTT is round the corner

Feb 09 2013, 00:55 IST
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SummaryThere are at least three compelling reasons for introducing the commodity transaction tax this year.

While markets may be better off if commodity tax is held back, the revenue possibilities make it inevitable

There are at least three compelling reasons for introducing the commodity transaction tax (CTT) this year. The first is that the government requires money, and any amount is welcome as the effort is to look at all options. The second is that if the stock markets are subject to the securities transaction tax (STT), why not the commodity market? The third is that the market is now mature, or has reached whatever level of maturity that is possible given the constraints of absence of movement in policy, and is almost a decade old. In fact, as a corollary, once done, the government can also start looking at the forex derivative market.

The crux of the debate really is how many layers of taxation there should be in any market. There is already a service tax being imposed as well as a capital gains taxes. The rationalisation of the latter led to the creation of STT. The idea was that such a tax makes collection easy and normalises the payment across all participants. Also, it helps to reduce volatility in the market as speculative activity gets more affected and, to this extent, the unwanted ‘noise’ is eliminated. The securities market did not want to have this tax and, when the commodity market started picking up, made an appeal to have the same across this segment too.

The securities market clocks around R1,00,000-1,20,000 crore a day, while the commodity market does around R70,000 crore. The forex derivative market does another R40,000 crore a day. Clearly, such a turnover does, prima facie, show some level of maturity and merits the transaction tax, once it is accepted that we want to tax transactions in any market. The raison d’ętre is that all transactions that are carried out in the market that are based on an investor-gain motive need to be taxed. Therefore, bank transactions are not taxed, but stock market transactions are. If this is accepted, then one can extend the logic to other segments too.

The mathematics of such a tax is compelling. Of the R70,000 crore being traded on a daily basis, not more than 10% comes from farm products. The rest comes from bullion and energy products, which are non-delivery based. The participation is more from traders rather than hedgers, which strengthens the case for the tax.

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