Column: If commodity taxes are introduced…

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Summary…then the tax treatment for gains on commodity exchanges have to be same as those on stock exchanges

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 crore—much 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 profit—which 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 don’t see any benefit of foregoing R5,000-R7,000 crore revenue … It may boost sentiments in stock market temporarily. But I don’t 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

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