Commodity transaction tax to hit volumes: Traders, chambers

The finance ministry’s proposed move to again impose a Commodities Transaction Tax (CTT) is likely to drive volumes to foreign exchnages, say traders and analysts.

The Union food ministry has already represented to the finance ministry against the proposal, saying it would harm development of the commodites futures market. It is believed the finance ministry may levy a CTT of 0.017 per cent (Rs 17 for every Rs 100,000 of transactions) in the budget proposals for 2012-13, initially for non-agricultural commodity futures.

A CTT was earlier rpoposed in the 2008-09 budget, but was then frozen after objections from the then food and consumer affairs minister and the head of the Prime Minister’s Economic Advisory Council.
 

FUTURES IMPERFECT
Financial Year	Daily average turnover for the year (Rs cr)

 

NSE FuturesNSE OptionsCommodity Futures** 2006-0725,674.423,971.7811,907.19 2007-0845,295.896,857.5612,889.76 2008-0929,011.3016,299.3016,942.08 2009-1037,416.5634,975.5325,718.44 2010-1138,788.7576,361.0638,753.38 2011-12*29,891.8194,401.8158,893.38 * Till Jan 31, 2012,  **Aggregate of all commodity exchanges
Compiled by BS Research Bureau

A Securities Transaction Tax (STT) was imposed on the capital markets in 2004, in the derivatives segment, and raised in both 2005 and 2006. An STT in the cash delivery segment was similarly imposed and then raised. The levy and subsequent increase resulted in a big shift of business from futures to the alternative instrument of options on the National Stock Exchange (NSE). Data compiled by the Business Standard Research Bureau show overall daily average trading during 2006-07 was Rs 3,971 crore in the options segment on the NSE; it had jumped to Rs 79,361 crore in 2010-11 and has reached Rs 94,401 crore so far in the current financial year.

Since options are not available on the commodity futures platform, a large chunk of business would shift to exchanges abroad, feared a senior official of a national exchange.

“The market is still not mature and there will be an impact on turnover, especially on investors, which will draw away liquidity. It will be harmful for agri products just at the time this is stabilising,” said Madan Sabanavis, chief economist, Care Ratings.

A commodity exchange chief, on condition of anonymity, said “vested interests of national level stock exchange groups” were behind the move. These forces were, he said, adopting “dubious means to mislead the policy makers, regulators, media and the ecosystem”.

Why options? “Options have their own advantages. A trader can buy options for longer periods such as for one, two or three years. In case of expiry, the buyer loses only the premiums. It is easy to formulate strategy in options, which are also available on long dates. Hence, the shifting of volumes has favoured options. Volatility is another factor which has prompted traders to look for options,” said Girish Jain, executive director of KJMC Capital, a Mumbai-based research firm.

In a communication to the finance minister, Assocham secretary-general D S Rawat said, “A significant step to harness all benefits of the commodities derivatives markets is to create an enabling policy environment, so that transactions involving derivatives carried out in recognised national commodity exchanges are not deemed speculative. In this context, there should not be any kind of CTT or any such transactions’ tax on commodity derivatives.”

Commodity derivatives, just like interest rate derivatives or currency derivatives, are hedging instruments, an insurance against price volatility. Any additional cost will make hedging more expensive and hedgers will keep away or move to other trades or markets, is the argument.

According to Venkateswaran Karika, assistant vice-president of commodity research at India Infoline, “It appears the issue of a CTT has again raised its head in the wake of the recent sharp price surge in commodities such as guar seed, mustard seed and mentha oil. No doubt, the nodal agency wants to participate in mobilising additional revenue to their kitty. Perhaps such a tax might sound more relevant once there is a clear demarcation between the types of participants in commodity trading, the way it is done at the US exchanges, where the trading fraternity are classified into non-commercial, commercial and non-reportable, and then drafting a selective system of taxation. Else, it might keep genuine trade participants at bay, apart from the high voltage volatility which is already taking a toll on them.”