Thursday, June 5, 2008

Concern over commodities transaction tax

by Jo Black

The incidence of the proposed Commodities Transaction Tax (CTT) will increase the cost of transactions on Indian organised commodities markets, increase arbitrage, due to high cost of transactions in organised commodities markets, and also render Indian Commodities Markets uncompetitive globally, thus driving away Indian commodities trading business to global markets under the open global commodities risk hedging policy of the reserve bank of India, said Confederation of Indian Industry (CII).

The commodities derivatives market, being only 4 years old, is currently at a nascent stage in India.

Participation of banks, mutual funds, Financial Institutions (FIs), Foreign Institutional Investors (FIIs) is still not allowed.

Options contracts, index futures and futures based on intangibles are still to come.

Therefore, CII feels that the commodities market first needs organized growth and deepening in terms of types of instruments and participants, to attain its full potential before it should be taxed.

Also since commodities derivative contracts are based on physical deliveries, unlike stock F&0 contracts which are cash settled contracts, existence of STT does not justify imposition of CTT.

The Union Budget 2008-9 proposes to levy Commodities Transaction Tax to the extent of 0.017 % on sale of all commodities derivatives contracts besides a service tax at the rate of 12.5 % on the transaction fee earned by the commodities exchanges.

CII feels that while the commodities exchanges might be able to cope with the application of service tax, the incidence of commodities transaction tax will be a severe blow to the existence of commodities derivatives market in the country.

CII is of the view that CTT will also create distortions in prices, create divergence of spot and futures at maturity and send wrong price signals, as physical market exists outside the purview of electronic exchanges.

CTT will also create a regulatory arbitrage between national electronic commodities exchanges and regional ring based exchanges.

Apart from 3 national exchanges, there are 22 regional commodities exchanges and as per policy followed by the regulator, they are not under any compulsion to implement online trading.

Thus, CTT will aggravate the already existing problem of under reporting of transactions.

CII opines that CTT would be an additional burden on commodities market, which is already subject to many taxes and levies such as CST, Sales tax/VAT, excise, custom etc.

Any additional tax burden will also impact the consumer paid price and lead to price inflation, which is already a cause of concern for the Government.

Also, CTT is proposed to be levied on sellers, which implies that a farmer who sells a futures contract to protect himself against price risk, will be required to pay CTT.

This seems to be a regulatory inconsistency because as per APMC Act, no tax, cess or mandi fee is payable by the farmers.

Therefore, CII suggests that commodities trading should be exempted from applicability of any transaction tax, completely failing which the market would become highly unviable, inefficient and illiquid and the worst sufferer would be Indian trade and industry, which has just begun to use this market for improving their pricing efficiency.

Further, CII proposes that commodities derivatives income/loss should be treated as normal business income/loss to promote hedging by trade and industry.

 

 

 

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