These are taxing times for the country?s commodity exchanges. The turnover of top two bourses has slumped in July following the government’s imposition of a 0.01% commodity transaction tax (CTT) on the futures trading of several items.
The average daily turnover at Multi-Commodity Exchange (MCX) in the first three sessions in July has dropped by a whopping 41.7% to R35,427 crore, compared with that in February ? before the CTT was proposed to be levied during the Budget announcements for the 2013-14 fiscal, showed the exchange data. Interestingly, the average daily turnover at National Commodity and Derivatives Exchange (NCDEX), the country’s largest farm commodity bourse, has witnessed a sharper decline in percentage terms ? by 43.5% to R3,321 crore in July, compared with the average daily turnover in February. The two exchanges account for 80% of the country’s commodity futures trading.
Importantly, although the CTT was perceived to hurt mainly MCX when it was announced during the Budget, as the exchange primarily dealt in metals and energy products, NCDEX, too, had to bear the brunt after the decision was implemented on July 1. This is because the finance ministry exempted only 23 items from the CTT net, declaring them farm commodities, but brought in processed farm and food items into the tax ambit. So while guar seed and soyabean are out of the CTT grip, guar gum and soyaoil are not. Similarly, sugar and jaggery ? byproducts of cane ? will also attract the CTT.
A senior executive at an exchange said that although CTT has driven away investors from the structured to the illegal dabba market, the drop in turnover value was also influenced by a fall in commodity prices from the February levels. The drop in turnover value at NCDEX was driven by volatility in farm commodity prices, which dropped at a faster pace over the past 4-5 months than those of metal and energy products, he added.
Although some executives said it’s too early to gauge the specific impact of the CTT on trade, they concurred that the tax would definitely bring down turnover over the medium-to-long-term. This is because with the imposition of the tax on the seller, the cost of trading on the MCX platform would rise to R6.60 from the current R1.60 on a transaction value of R1,00,000. Similarly, costs on other national-level exchanges have also trebled in July from the June level.
NCDEX will soon approach the finance ministry to abolish the CTT on processed farm and food items, including guar gum and sugar, arguing that the notification isn’t in sync with the intent of the Finance Bill. Presenting the Budget, finance minister P Chidambaram had said: “There is no distinction between derivatives trading in the securities market and derivatives trading in the commodities market, only the underlying asset is different… Hence, I propose to levy CTT on non-agricultural commodity futures contracts at the same rate as on equity futures, that is at 0.01% of the price of the trade.”
Although the finance minister had said in his Budget speech that trading in commodity derivatives will not be considered as a ?speculative transaction? and “the CTT shall be allowed as deduction if the income from such transaction forms part of business income”, it barely enthused the exchanges.
Significantly, in the 2008-09 Budget, Chidambaram had proposed a CTT of 0.017% across segments. However, the proposal was kept in abeyance following apprehensions aired by the then consumer affairs minister Sharad Pawar as well as Prime Minister’s Economic Advisory Council chairman C Rangarajan.
Exchanges have been opposing the CTT, saying commodities were already taxed up to 12% in the form of mandi tax, value-added tax, excise duty, cess, handling costs and warehousing charges before they were placed on the trading platform. Moreover, futures trading also requires security deposits and high initial and special margin requirements.
Adding to their concerns, the turnover of commodity exchanges dropped 6% to R170.46 lakh crore in the last fiscal from a year before, the first annual decline since the introduction of futures trading in India in 2003, official data showed. The turnover also dropped ? albeit marginally by 0.2% ? during the April1-June 15 period of the current fiscal, the data showed.
