CTT concerns haunt commodity traders

Will distort the market, says consumer affairs minister

The fear of a commodity transaction tax (CTT) is haunting derivative traders once again, prompting the consumer affairs ministry to take up their cause.

Minister of Consumer Affairs, K V Thomas, has written to Finance Minister Pranab Mukherjee, saying such a move would distort the nascent market. Meanwhile, the buzz is growing louder about the finance ministry's move to introduce CTT on non-agri commodities in the Budget to garner additional funds from the rapidly growing futures market. Non-agri commodities account for over 80 per cent of the entire trade on the commodity exchanges.

A CTT of 0.017 per cent, or Rs 17 for every lakh of transactions, on commodity derivatives was announced in the 2008-09 Budget. However, it was never put to practice, as there were apprehensions from then Minister of Consumer Affairs Sharad Pawar and the Prime Minister’s Economic Advisory Council (PMEAC).

Commodities players are opposed to any such move, as they fear it would divert hedgers and speculators towards rampant 'dabba trading' (illegal trading). The tax would also impact the volume and liquidity of commodity exchanges.

Commodity futures are considered useful for hedgers and, without them, real market depth won’t come. Increasing the transaction tax will create a road block for their entry.

The minister’s letter had specified that such a tax would hamper the growth of the organised commodity futures market in India, said sources.

Referring to the views of Pawar and PMEAC chairman, C Rangarajan, who had opposed CTT when it was announced in the 2008 Budget, Thomas said, “In an era of reforms, the introduction of CTT will act as a deterrent and distort the market, having an adverse impact on not only the stakeholders, but also the economy.”

An increase in CTT is contrary to an observation in the Economic Survey, 2007-08, “Direct participation of the farmers in the commodity futures markets is somewhat difficult at this stage, as the large lot size, daily margining, high membership fees, etc work as deterrent for farmers’ participation in these markets” and the increase in CTT will further increase the cost.

Though the Agricultural Produce Marketing Committee (APMC) Act has a provision that says no tax, cess or mandi fee is payable by the farmers, they will have to pay CTT as it is proposed to be levied on sellers. It implies that a farmer, who sells a futures contract to protect himself against price risk, will be required to pay CTT.