CTT fears propel dabba trading

The proposed commodities transactions tax (CTT) has resulted in rampant ‘dabba’ (illegal) trading in commodities, say experts.

According to market estimates, the dabba trading volumes top the combined volumes of official trading.

‘Dabba’ trades are dealings that happen outside the exchange without any documentary evidence to relate such transactions.

Analysts estimate that the biggest dabba ‘bazar’ (market) is of guarseed, which is traded up to 20 times more than that in the official mechanism.

Jeera comes second with an estimated trade of 7-8 times more than the volume generated on commodity exchanges. Pepper and other agri commodities trade 4-5 times more.

Experts say the proposed levy may persuade traders with legitimate business to switch to dabba trading to evade taxes. By design, dabba trading is more attractive to unscrupulous speculators, as it scores high on various counts, especially on saving trade margins, stamp duty, penalty and taxes on profit and transactions.

According to experts, the rise in dabba trading has heightened the risk of bookrunners, who deal in illegal commodity business. Bookrunners fear that an increased vigil by the regulator, which suspended the membership of a Chennai-based firm over dabba trading last month, may hit them. They trade in dabba on a weekly, fortnightly and monthly settlement basis and fear the volatile markets may result in loss of business too.

Finance Minister P Chidambaram had proposed a 0.017 per cent CTT in the Budget. But, the levy was made subject to notification, which is still awaited.

“The levy will also waive efforts of the commodity exchanges to attract more retail participation on the official platform through aggregation,” an analyst said.

Illegal trading thrives mainly in Mumbai, Gujarat, Rajasthan, Madhya Pradesh and Chennai.

With growing volumes on commodity exchanges, analysts apprehend proportionate increase in dabba trading too.

Late last month, the Forward Markets Commission (FMC), the commodity markets regulator, had suspended Chennai-based commodity trading firm Altos Advisory Services from the membership of both the MCX and National Multi-Commodity Exchange of India (NMCE), on finding it guilty of dabba trading. It also prohibited the company from entering into any forward contracts for three years.

“CTT is a licence for illegal commodity traders to kill derivatives market,” said an analyst who did not wish to be named.

Increasing the cost of hedging by imposing a tax to the extent of 800 per cent of the current figure is apparently licensing the taxman to kill the commodity derivatives market at one go, he points out.

Dabba trading will also force small and medium enterprises (SMEs) and large corporates to hedge their risk on commexes.

Dabba trading is also prevalent in precious metals, said another analyst. But, because these commodities can be referred globally, only marginal trade is executed through dabba route, that too of black money, he added. However, no derivative is in practice in the unofficial trade route because of huge price volatility and availability of global references.