The fear of losing volume has gripped the top commodity exchanges in the country after finance minister P Chidambaram, in his Budget speech, announced introduction of Commodity Transaction Tax (CTT) in step with Securities Transaction Tax in the stock markets.

The commodity bourses say the move might make them inefficient in price discovery. In fact, they have been trying to impress upon the government to withdraw such a tax immediately. Their argument is that the commodity derivatives market is only 4 years old, thus it?s premature to levy such a tax as it may increase cost of transaction by 800%, which would eventually make the market ?inefficient?.

The Union Budget has proposed a tax of 0.017% on the seller of a contract and 0.125% on the buyer. Besides, a service tax of 12% on the exchange levy and an education cess on the tax are also planned.

According to commodity exchanges officials, by levying Rs 17 as CTT for every Rs 1 lakh trading, the transaction cost would go up to Rs 21 from Rs 3 currently.

?The cost of transaction is sensitive in derivative trading and, therefore, the fear that CTT would force their business to shift towards global markets and dabba (illegal) market,? Commodity Exchange of India (MCX) MD Jignesh Shah told FE.

?The step to impose CTT would result in distortion in pricing mechanism & would result in inefficiency in the commodity exchanges,? Joseph Massey, deputy managing director of MCX said.

Massey said commodities trade is already subject to series of taxes such as sales tax, VAT, mandi tax, octroi etc. ?The additional provision of tax would result distortion in the pricing which is not sustainable. The global prices would be become more competitive in comparison to Indian exchanges if CTT is imposed,? he added.

An official of National Commodity Exchange of India (NMCE) said there was contradiction between the Economic Survey and the Budget proposal, both prepared by the finance ministry. The Survey has noted that high membership fee is hindering farmers? participation in the market. On the contrary, the government is burdening them with CTT, the official said.

According to a comparative analysis of various kinds of transaction costs prevailing across globe in various exchanges complied by MCX, in US-based Chicago Board of

Trade (CBT), the cost of transaction is between Rs 0.71 and Rs 2 per Rs 1 lakh, while in European exchanges such as London Metal Exchange (LME) and London Institutional Financial Futures Exchange (LIFFE) it ranges between 5 paise to Rs 1.12. Only in China, the transaction cost is between Rs 5 and Rs 7.50 per lakh. ?Not only this tax is high but also is not prevalent in any other exchanges across the world,? PH Ravikumar, MD & CEO of National Commodity & Derivatives Exchange (NCDEX) said.

?If an investor has to buy or sell stocks or shares, he has to trade on Indian stock exchanges, but if a trader has to trade in gold futures, he can go to MCX & international exchanges such as LME and CBT,? Shah pointed out.

Significantly, the Forward Market Commission (FMC), the regulator for the commodities market, has come out against CTT. ?CTT will have an adverse impact on the futures markets. It would virtually kill the growth story of 23 commodity exchanges in the country,? FMC chairman

BP Khatua said.

The government is expected to generate about Rs 680 crore by levying CTT at the current turnover level of all the commodity exchanges in the country. The total turnover of these exchanges for 2007-08 is estimated at Rs 40 lakh crore.

The exchanges point out that STT was imposed after 15 years after Securities and Exchange Board of India came into existence, the government must allow the baby (commodity market) to grow. Watch out for the next few weeks on CTT.