Perturbed by the possible negative implication of the proposed commodity transaction tax (CTT), the Finance Ministry has asked commodity derivatives market regulator the Forward Markets Commission (FMC) to do a detailed impact analysis of how CTT once implemented will affect commodity derivatives non-agri segment and submit the report to it.
Business Standard's efforts to reach the FMC chairman were futile.
The Finance Minister P Chidambaram had proposed to levy 0.01% of commodity transaction tax (CTT) in non-agri future segment in the last Union Budget similar to securities trade on equity bourses.
Experts fear the repeat of equity volume shifting from India to Singapore exchange as happened after the securities transaction tax (STT) was levied. Global commodity exchanges including London Metal Exchange (LME), New York Mercantile Exchange (NYMEX), Bursa Malaysia and others are set to gain from India’s loss in commodity futures trade. Non-agri commodities on which CTT is proposed to be levied has nearly 85% share in total commodity derivative volumes and gold has little less than half of the share in volumes.
Even commodity exchanges have said in their representations to FMC that the Budget’s proposal to impose a CTT on non-agricultural commodities of 0.01% is set to increase the cost of transactions by more than 500% on an average. Increase the cost of transaction, leading to increase in cost of hedging. Small stakeholders may find the cost too high even to enter; risk management using transparent and regulated instruments such as commodity derivatives will be disincentivized.
“When transaction cost is being reduced globally, its increase in India would prove derogatory. It would drive away liquidity from the market. Being the spread between two contracts, commodities and exchanges very thin, trading with such a high transaction cost would be univable,” said Preeti Gupta, Executive Director, Anand Rathi Commodities.
Currently, jobbers were operating with a margin of just Rs 200 per Rs.1 crore transactions without CTT. But, CTT will be Rs.1,000 per crore and hence, Rs.1 crore transaction should give the jobbers Rs.1,200 margin to cover CTT and their margin which will be a herculean task for jobbers. “Survival would be difficult for them”, she added.
With a gradual surge in base metal and bullion, albeit a recent slowdown, India was steadily moving towards becoming a price setter now from a price taker earlier. This would also dry up liquidity, increase bid-ask spreads and increase the cost of hedging. Increase in the cost of trading in commodities having global reference price like gold, metals and energy products would severely impact the competitiveness of Indian market.
|CTT to lower trade volumes, distort price discovery, govt unlikely to get expected revenue|
|To hurt day traders and jobbers and hurt liquidity|
|Dry up volumes, impairing hedging efficiency|
|Marketing efficiency of the commodities will be lost|
“Any kind of increase in transaction cost in commodities shall be negative for the growth and development of the market. This will discourage hedgers and all other participants to transact on the exchange platform. I am afraid a large chunk of business may shift to either illegal dabba trading or other international markets where the cost of doing transaction is much lower,” said Ashok Mittal, CEO, Emkay Commotrade Ltd.
India shall lose its dream of being price setter in gold and other major commodities to China who is growing its exchange traded commodity business rapidly with lower cost.
Apparently, CTT levy would also make trading in gold exchange traded fund (ETF) cost effective than gold futures. Against transaction cost in gold futures at Rs 10 per lakh the same works out to Re 1 in gold ETF. this discrepancy has happened when government is discouraging demand for gold. Even BSE official has also said that transaction tax should be there in all markets and wherever such tax is not there playing field can not be leveled. He was referring to the fact that even after imposing tax on non agri commodities, there is no transaction cost on currency trading.