It?s end of story for commodity transaction tax

The government has no plans to revisit the commodity transaction tax (CTT) in the coming Budget, even with respect to transactions involving non-farm goods, sources told FE. The CTT was proposed in Budget 2008-09, but could not be implemented amid protests from exchanges and in recognition of the fact it could potentially undermine the futures segment that helps in price discovery for the benefit of all producers including farmers.

Even the securities transaction tax (STT) will be calibrated (diluted) in the Direct Taxes Code regime likely to kick off in April 2013, although the revised DTC Bill proposes to retain this tax.

STT fetches the government about R7,500 crore a year and all exchanges argue that this impost adversely affects trading volume. The sources said the ministry finds no logic in levying CTT, while STT itself might be on its way out eventually. The capital market division in the finance ministry has long been pitching for the removal of STT as it adds to the cost of transactions (buying and selling of shares) along with sundry other charges like stamp duty, service tax and regulatory fees.

Currently, STT is levied at 0.125% on both buyers and sellers in case of delivery-based trades and at 0.025% on sellers for day trades. The proposal in Budget 2008-09 was to impose CTT at 0.017% of the value of transaction, and if implemented, this could have increased the transaction cost of commodity traders by almost 800%. It was, however, not implemented and the provision itself was withdrawn in the fiance bill 2009-10.

The decision against implementing the CTT was taken because it has the potential to drive commodity futures business overseas as domestic exchanges become expensive to traders. Also, it is reckoned that such a levy in the intervening period before DTC will be an irritant as it is anyway inconsistent with the code.

?There are no talks to impose a tax on commodity derivatives. CTT on commodities derivatives, it is felt, will hamper the growth of organised commodity trading,? said a government official dealing with the issue, requesting anonymity.

STT is a tax levied on transactions in equity-related instruments. It is now applicable to the purchase or sale of equity shares, derivatives, units of equity-oriented funds through a recognised stock exchange in India or the sale of a unit of an equity-oriented fund to a mutual fund.

CTT is a proposal to levy similar tax on commodity trading that is undertaken mainly for hedging price risks and not for investment gains as in case of equities.

The CTT issue has already sparked a big debate between traders, exchanges and government ministries. Earlier, food and consumer affairs minister KV Thomas had written to finance minister Pranab Mukherjee saying CTT would distort the nascent market.

Thomas’s objection came after the issue was raised by the media that the finance ministry was planning to reopen the old proposal made by then finance minister P Chidambaram in the 2008-09 Budget to levy a 0.017% tax on commodity derivatives trade (Rs 17 on Rs 1 lakh worth transaction). There was speculation that the same level of levy would make a return in this year’s Budget. It was said that initially, the transaction tax may be levied only on non-agriculture commodities (read metals) that constitute almost 75% of the total trade on commodity exchanges.

Thomas referred to the views of then consumer affairs minister Sharad Pawar and Prime Minister’s Economic Advisory Council (PMEAC) chairman C Rangarajan, who had opposed CTT when it was announced in the 2008 Budget.

The ministry of consumer affairs regulates the commodities market through the Forward Markets Commission. Currently, there are five national and 18 regional commodity exchanges. Non-agri commodities account for over 80% of the entire trade on commodity exchanges.

The proposal to introduce CTT was floated on account of the huge growth in turnover of commodity exchanges, which surged 63% to Rs 144.31 lakh crore until January 15 of the current fiscal year. This was aided by robust trading in bullion, crude and agricultural items such as guarseed. It was felt that STT led to a fall in equity futures market with volumes shifting to commodity futures. However, a look at the average daily turnover on equity and commodity exchanges shows that the bulk of trade has shifted from equity futures to equity options where STT is not levied if options are not exercised.

According to exchange data, while equity futures (daily turnover) has grown from Rs 37,417 crore in 2009-10 to Rs 38,789 crore, during the same period, equity options has grown from Rs 34,976 crore to Rs 76,361 crore. In the last two years, average daily turnover of commodity futures has only grown from Rs 25,542 crore to Rs 38,922 crore.

Meanwhile, commodities players are also opposed to the introduction of CTT as they fear it would divert hedgers and speculators to rampant illegal trading. The tax would also impact the volume and liquidity of commodity exchanges. They said while the stock markets are to channelise investments for capital formation, commodity markets are price discovery and risk management platforms.

The commodity, before it comes for trading on the exchange platforms, is already taxed to the tune of almost 12%, with taxes such as mandi tax, cess, handling costs and warehousing charges.