CTT may take a toll on commodities futures

After a similar tax was levied on securities, Nifty futures volumes shifted from NSE to the Singapore exchange

The securities transaction tax (STT) has resulted in a shift in volumes from domestic to foreign markets. Nifty futures listed on the Singapore-based SGX rose multi-fold, while these fell on the National Stock Exchange (NSE).

For the government, reportedly considering a commodities transaction tax (CTT), this might well be a signal.

Effective 2005-06, the government had introduced 0.125 per cent STT on delivery and 0.025 per cent on intra-day equities trade.

While SGX Nifty volumes more than doubled in the last five years, the high transaction tax in India led to Nifty futures volumes on the NSE falling two thirds. As SGX Nifty trading resumes when the market in Singapore opens (the Indian market opens later), it offers more trading hours to foreign investors in time zones different from India’s. SGX Nifty trading also gives foreign investors an opportunity to trade in dollar-rupee, something they can’t do in the Indian market. This is because SGX Nifty is quoted in dollars and taking simultaneous positions in SGX Nifty and NSE Nifty let investors trade in dollar-rupee, as domestic trades in Nifty are in rupees.

In 2011-12, NSE earned Rs 8.19 crore by licensing foreign exchanges to trade in Nifty, according to the exchange’s annual report. This means NSE partly recovered the loss in transaction fee income resulting from volumes shifting to foreign exchanges. Forward Markets Commission (FMC) Chairman Ramesh Abhishek said, “If the government imposes CTT, in line with STT, it would result in volumes shifting to illegal markets or to foreign bourses, as the tax would add to trading and hedging costs.”

Traders believe the incremental volume, in addition to existing volume, has shifted to SGX, where negligible STT of 0.2 per cent is levied. In India, total transaction charges stand at 0.469 per cent, of which STT is 26.64 per cent.

In the previous three financial years, volumes in the domestic commodity futures market grew 50 per cent. So far this financial year, average daily volumes have fallen 4.23 per cent. If levied, CTT would only prune volumes further.

“The equities volume India lost because of STT is yet to be recovered, as foreign institutional investors have alternatives like SGX Nifty, where transaction charges are much lower,” said Priti Gupta, executive director of Anand Rathi Commodities.

“The retail portion, accounting for about 40 per cent of the daily exchange turnover, would either shift to the unorganised market, where the finance minister would have no control, or go out of the market permanently. Similarly, corporate hedgers who can go through the cumbersome process of getting a clearance from the Reserve Bank of India for trading on foreign commodity exchanges, would do so. Liquidity from the third type of traders, intraday arbitrageurs, would be heavily impacted,” said Priti.

FMC has urged the finance minister not to levy CTT. “Our stand remains unchanged. The commodity futures market is not ready for CTT,” said Abhishek.

Global commodity futures trading platforms, including the London Metal Exchange (LME), the New York Mercantile Exchange, the Chicago Mercantile Exchange and Bursa Malaysia have been striving to grab a chunk of the Indian corporates’ hedging business on their platforms. In case CTT is levied, for hedging in edible oils, traders could shift to Bursa Malaysia, while for base metals, they could consider the LME. For crude oil and agricultural commodities, traders could opt for the New York Mercantile Exchange and the Chicago Mercantile Exchange, respectively.

“On most global exchanges, traders do not have to pay exposure-free margins upfront to commence trade. The credit line provided by brokers is enough to start trading. Hence, commodity trade volume would move to foreign exchanges, as seen in the case of equity,” said an analyst.

Correction
The chairman of the Forward Markets Commission (FMC), Ramesh Abhishek, was misquoted in the report — CTT may take a toll on commodities futures. In the interview, the FMC chairman had said he had informed the Department of Consumer Affairs about his views on CTT, and not the finance ministry, as wrongly mentioned.  Also, the chairman did not make any statement to the effect that the imposition of CTT would result in volumes shifting to illegal markets or to foreign bourses. What he had said was that “the higher cost of transaction may drive some of the participants away from the market and that it may affect the development of the commodities derivative market as  a hedging mechanism”. The errors are regretted.