Comexes seek exemption of commodity futures from CTT

Effective July 2014, CTT has increased the cost of transaction in futures by as much as 300%, prompting SMEs to move to overseas platforms

Faced with trading volume migrating to competing countries, India’s leading commodity exchanges (commexes) have urged the central government to exempt futures trading from the commodity transaction tax (CTT).

Effective July 2014, CTT has increased the cost of transaction in futures by at least 300 per cent and, therefore, eliminated day traders from the system. Plus, making small and medium enterprises (SMEs) hedge their risk on similar platforms in competing countries, like the Dubai Gold and Commodity Exchange and Singapore Mercantile Exchange. The demand assumes significance in terms of the relevance of futures trading for small players.

“Non-agricultural commodities should not be subjected to CTT as is the case with agricultural commodities, as these contracts help SMEs to hedge in rupee-denominated contracts in an effective manner on domestic exchanges. Increased cost impaired not only price discovery and market efficiency but also denied socio-economic benefits to the commodity value chain,” said a spokesperson at Multi Commodity Exchange.

The CTT levy raised the cost of exchange-traded derivatives trading. CTT is imposed at Rs 1,000 per Rs 1 crore on the sale side as against about Rs 180 per Rs 1 crore on each side of the trade charged by commexes. After its imposition, the bid-ask spread for gold has risen from Rs 1.5-2 to Rs 5-7 per 10g and India lost the opportunity of becoming a price setter, is one complaint.

The rising trading cost also encouraged migration of financial businesses to offshore centres Dubai and Singapore, lured by low cost and zero taxes.

A recent Nielsen study showed a spurt in illegal (dabba) trading, which was three times the size of the regulated market even before CTT was introduced. The National Commodity and Derivatives Exchange has urged the government to exempt processed agricultural commodities from CTT levy, for the benefit of farmers. CTT levy has reduced hedging activity on comexes and, therefore, the real price discovery in agri commodities is compromised, it says.

Commexes have also sought an amendment in the central excise rules, so as to allow Cenvat credit for the first removal of excise-applicable goods from an exchange-designated warehouse, after initial deposit in the same warehouse. This is to encourage delivery-based transactions in such goods.

Also, permission to introduce entities such as banks, depositories, financial institutions and insurance companies, and new products like options, indices and weather derivatives on futures exchanges.