Industry opposes commodity transaction tax

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SummaryAmid speculations that the finance ministry could propose a transaction tax on commodity derivatives again in the next Budget, industry chambers have asked the government to not make such a move, saying it would hurt turnovers of exchanges and abet illegal trading.

Chambers ask govt to desist from imposing CTT in next Budget on concerns of fall in exchanges’ turnovers and illegal trading

Amid speculations that the finance ministry could propose a transaction tax on commodity derivatives again in the next Budget, industry chambers have asked the government to not make such a move, saying it would hurt turnovers of exchanges and abet illegal trading.

In the 2008-09 Budget, finance minister P Chidambaram had proposed a commodity transaction tax (CTT) of 0.017%. However, the proposal was kept in abeyance following apprehensions aired by then consumer affairs minister Sharad Pawar as well as Prime Minister's Economic Advisory Council chairman C Rangarajan.

In a recent letter to revenue secretary Sumit Bose, CII director general Chandrajit Banerjee said: “...we believe that the imposition of any transaction tax will not only increase the transaction cost of trading, adding to the cost of risk management and dissuade genuine hedgers, but may shift commodity derivatives trading to unofficial and illegal dabba trading, which are outside the purview of the regulatory control.”

Commodity market players are also opposing any such proposal, saying commodities are already taxed to the tune of almost 12% in the form of mandi tax, VAT, excise, cess, handling costs and warehousing charges before they are placed on the trading platform. Moreover, futures trading also requires security deposits and high initial and special margin requirements.

The turnover of commodity exchanges dropped 5% to R116.26 lakh crore during the April-November period from a year before, after rising at a fast pace since the introduction of futures trading in India in 2003, official data showed. So, a tax on commodity derivatives, along the lines of the one for the stock market, could drag down the transaction level, they add.

They also argue that while stock market participants solely stress profits from soaring share value, commodity market players operate with the twin-objectives of risk managements at a micro level and price discovery at a macro level.

In a letter to finance minister, Assocham secretary general DS Rawat said: “You would appreciate that commodity and capital markets have vast functional differentiations. Unlike the stock market, the raison d’etre of commodity derivatives markets is risk management... As commodity derivatives are important hedging instruments affecting a large segment of the populace, none of the major economies of the world, barring Taiwan, has transaction tax on exchange-traded commodity derivatives.”

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