CTT likely to hit trade volume of comexes

Imposition of commodity transaction tax (CTT) may lower the volume of futures trading in the range of 18-59 per cent depending upon the commodity within a short span of seven days, a study by the Confederation of Indian Industry (CII) said.

The study said gold volume will decline 59 per cent, crude oil may fall by 57 per cent, chana by 56 per cent, copper by 53 per cent, and refined soybean oil may decline by 18 per cent within the specified period of one week since the levy.

The study was conducted for a sample of five major commodities representing a significant share of the derivatives market for a period of two years between May 2006 and April 2008. In the longer term, the study forecasts a sharper fall in the volumes of chana by 93 per cent and copper by 36 per cent.

 

CII also said the imposition would lead to lowering of the trading activity. This in turn would reduce the volume of transaction on the commodity exchanges and hence increase the cost of hedging. This will adversely affect the process of price discovery.

The Union Budget 2008-09 had proposed to levy a CTT of Rs 17 per lakh worth of commodities traded on exchanges on the lines of Securities Transaction Tax (STT). At present, traders on the exchange incur an average transaction cost of about Rs 2 per lakh. Hence, the imposition of CTT would increase the transaction cost more than eight times.

CII said no country in the world levies transaction tax on commodities, and therefore, when it is implemented in India, there is a fear that it would render domestic futures market uncompetitive vis-à-vis the global markets.

Imposition of STT in the trading volumes of stock markets across countries indicates a high sensitivity of trading volumes to the transaction costs. For instance, in Sweden the imposition of STT by 2 per cent in 1986 brought volumes of 11 most actively trade Swedish stocks down by as much as 60 per cent in seven years.

Similarly, in Indian debt markets also the announcement of STT on July 9, 2004, had a dramatic impact on the trading volumes. The average volume, which was Rs 4,476 crore during 2003-04, witnessed a sharp fall of 80 per cent to Rs 898 crore in 2006-07. The empirical analysis conducted by CII predicts similar impact in select commodities in derivatives markets, after the imposition of CTT.