Commodity transaction tax not a prudent idea

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Surender Kumar: Feb 22 2013, 03:56 IST

argued that future trading creates inflationary pressure in the economy as the speculators use liquid markets to manipulate prices, and, in this way, harm both producers and consumers. The ICRIER study finds that futures trading does not cause inflation, rather it brings efficiency in these markets.

A study by the IIMB observes that the causes of commodity inflation in India were supply side factors, combined with the government policies. Similar views were expressed by the Abhijit Sen Committee in 2008. The committee was of the view that future markets, rather than creating inflationary pressure in the economy, help discover prices and integrate markets spatially and temporally.

The second argument is that CTT can work as an anti-tax evasion measure. It can help in tracking information for better tax compliance. It should be noted that all national commodity exchanges have world-class surveillance systems with proper auditing. Therefore, for suppressing fictitious trading, the need is to give teeth to the FMC rather than imposing CTT. Transparency in commodity future markets depends on information symmetry and level of infrastructure.

Increase in transaction costs due to increase in taxation leads to decrease in trading volume in the security exchanges also. Evidences from the Tokyo, Shanghai and Shenzhen markets validate this finding. A study examining the impact of increase in security transaction tax from 0.1% to 0.125% in India finds that as a result of this increase in taxation the traded volume declined by 25%, though the impact on the volatility of returns remains inconclusive. No

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