Consumer Affairs Min opposes commodity transaction tax

Amid reports that the Finance Ministry is mulling a tax on commodity derivatives in the forthcoming Budget, Food and Consumer Affairs Minister KV Thomas has written a letter to the Finance Minister saying any such move would distort the nascent market.

"...I would like to defer if there is an intent of introduction of commodity transaction tax (CTT) on the commodities derivatives market in the ensuing Finance Bill 2012," Thomas said in a letter to Finance Minister Pranab Mukherjee.

The Ministry of Consumer Affairs regulates the commodities market through the Forward Markets Commission. Currently, there are five national and 18 regional commodity exchanges.

Thomas' observation came in reaction to media reports that the Finance Ministry was mulling over reopening 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).

Pointing out that a CTT on commodities derivatives on the lines of Security Transaction Tax (STT) will hamper the growth of the organised commodity market in India, the minister said, "In the era of reforms, introduction of CTT will act as a deterrent and distort the market, having an adverse impact on not only stakeholders, but also the economy."

The minister also made reference 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.

"You [the Finance Minister] were kind enough to withdraw CTT in the Finance Bill, 2009, which was levied in the Finance Bill, 2008," he said.

The CTT of 0.017% on commodity derivatives was levied in the 2008-09 Budget, but was not operationalised. The proposal was kept in abeyance following apprehensions aired by Pawar and the PMEAC.

Meanwhile, commodities players are also opposed to the introduction of CTT as they fear it would divert hedgers and speculators to rampant 'dabba trading' (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, they added.

The total turnover of the commodity futures market, which has been in existence since 2003, rose by 66% to Rs 137.22 lakh crore in the April-December period of the current fiscal.