India on Thursday proposed imposing a transaction tax on futures contracts of non-agricultural commodities like gold, silver and base metals -- a move that could pull down the turnover of commodity exchanges, and mainly that of market leader Multi Commodity Exchange (MCX).
In his budget for the next financial year that begins April 1, Finance Minister Palaniappan Chidambaram proposed to levy a commodities transaction tax (CTT) of 0.01 percent of the price of every trade.
Futures trade in non-agricultural commodities accounted for nearly 88 percent of the total turnover on Indian commodity exchanges in 2011/12, with MCX cornering much of the share.
Other bourses like the National Commodity and Derivatives Exchange, National Multi Commodity Exchange and Ace Derivatives and Commodity Exchange are likely to see minimal impact of the propsed tax as they derive most of their volume from agri commodities.
"Many in non-agriculture commodities have been bogged down by weak international prices and some have even shifted to equities on the hope that returns will be higher there," said Gnanasekar Thiagarajan, director of Commtrendz Research.
"This will only deter them further from dabbling in non-agriculture commodity futures."
The government had proposed the CTT in the 2008/09 budget, in a bid to bring the commodities market on par with the stock market where trades attract a securities transaction tax. But then the tax proposal was withdrawn after an outcry from market participants.
"It will be a detrimental step for the growing popularity of commodity futures as a hedging instrument," said D.K. Aggarwal, chairman of SMC Investments & Advisors Ltd.