The removal of Commodities Transaction Tax (CTT) in the Budget 2009-10 is likely to impact securities trade as investors may divert focus to commodities market, SMC Capitals said in a report.
Taking a comparative view of trading volumes in commodities and stock markets, the report said that volume of trading in commodities is on rise even otherwise over the last couple of years with a corresponding fall in volumes in equities.
In 2007, equities accounted for 82% trading and remaining 18% came from commodities, whereas, in 2008, share of equities declined to 77%. In the first five months of 2009, volume in equities was 63% with commodities accounting for 37%.
“The Budget proposal of abolishing CTT and continuing Securities Transaction Tax (STT) can have a huge impact with traders and arbitrageurs shifting their focus from equity to commodity markets,” SMC Capitals equity head Jagannadham Thunuguntla said in the report.
Such a shift would lead to further increase in volumes in commodities at the cost of volumes in equities, the report observed.
The Budget 2009-10, abolished the implementation of commodities transaction tax, proposed to be implemented in last finance bill.
Many experts believed that although the tax was never levied ? there was no formal notification signaling the implementation of the tax, but its significance should not be ruled out because if implemented it would have drastically reduced volumes in the nascent commodities exchanges.
The total cost of transaction would have risen to Rs 19.25 per lakh, from the existing Rs 3 per lakh if the tax was implemented, severely hampering the growth and participation in the nascent trade.
In July 2008, a study done by economic think-tank, ICRIER showed that the proposed CTT would kill the nascent commodity exchanges as commodities are already subject to many other taxes like mandi fee, VAT, CST, excise and octroi duties.
The country?s commodity futures market, comprising of three national exchanges and more than 20 regional bourses, has long been under the scanner of policy makers, on the grounds that futures trading in farm commodities fuels speculative activity, leading to price rise.
Since 2003, when the Forward Markets Commission (FMC) was asked to regulate commodity futures, volumes have increased from a mere Rs 1.29 lakh crore to a whopping Rs 53 lakh crore of which more than 95% contributed by the three national exchanges, MCX, NCDEX and NMCE.