Impact of Ctt (commodity Transaction Tax) on Commodities Market & Analysis of Survey

Analysis of Commodity Transaction Tax on Indian Commodity Exchanges:-

Indian Finance Minister Mr. P.C. Chidambaram created two records on the day when he proposed to waive off Rs 60,000 crore worth agriculture loans this year and on the other hand announced the introduction of Commodity Transaction Tax (CTT), a first in the history of commodity markets anywhere in the world. The introduction of CTT and the service tax already imposed on commodity exchanges, would serve a severe blow to the nascent commodity Futures industry in the country. With one shot the Finance Minister raised the transaction cost in commodity futures by over 800 per cent. Majority of the volumes in commodity exchanges is created by jobbers, speculators and arbitrageurs and they play a very important role in price discovery and providing liquidity in the market. With the imposition of CTT, there is no incentive for such people to operate. Hence, the price discovery function, hedging and volumes will not happen in our commodity exchanges, a cross section of commodity players told Commodity Market. The commodities markets are global assets and trade flows to most efficient markets which have least cost of trading. With the addition of commodities trading tax, Indian market will become unusable for risk management. "The Budget has added an incidence of 12 per cent service charge and Rs 17 per lakh for commodities trading which will increase the cost by more than 800 per cent. A study done by me regarding taxes implied on various Commodity Exchanges around the world clearly shows that the implication of CTT would be disastrous for Indian commodity Market. This is shown through the following figure:-

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Figure 1:-

As I can see from the above graph, with the proposed CTT, the cost of transaction on Indian Commodity Exchanges would be highest and would lead to decrease in volume and liquidity. It would virtually kill the growth story of 23 commodity exchanges in the country. Out of the total transaction cost, 85 per cent will be towards CTT and the balance will be towards exchange transaction fee, service tax, stamp duty, and so on. Indian exchanges will become costlier to participate and thus, will lose their global competitive edge. HOW CTT WILL WORK? At present commodity trading attracts the following charges: brokerage (0.03 per cent), service tax (12 per cent of brokerage), education cess (3 per cent on service tax), stamp duty (Re 1 per lakh), exchange levy of 0.004 per cent of turnover. From April 1 onwards, the additional burdens would be created: service tax of 12 per cent on exchange levy, educational cess at 3 per cent of service tax, and a CTT of 0.017 per cent on turnover (Rs 17 per lakh). In addition to this, a buyer of Futures needs to shell out a CTT of 0.125 per cent. CTT AND ITS IMPACT

That apart, CTT will also lead to illegal trading from India even in overseas exchanges. In fact some of the overseas futures markets are open to investments by foreigners. The exchanges could even see a major drop in volumes this year by as much as 70 per cent. The difference between bid and ask will be widening, which

150

80

625

200

300

1925

US Based Exchanges (NYMEX, CBOT etc.)

European Exchanges (LME, Euronext)

Chinese Exchange

Malaysia

Japan

India

Comparison of Taxes on various Commodity Exchanges

Cost of Transaction per Rs 100Lakh

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will create problem of liquidity into the commodity derivatives market. During my interaction with traders, most of them were of the view that due to CTT, the positive impact of many of the progressive initiatives such as:- 1) Granting autonomy to FMC 2) Introduction of options What will be the short-term, medium and long-term impact of CTT on commodity Futures? Based on interactions with leading commodity players, exchanges and market regulator, have found out that:

If implemented in its present form, CTT could be akin to imposing a 55 percent tax on jobbers and hedgers. This could Ill mean that the business could go to overseas futures exchanges. An increase of cost from Rs 2.00 per lakh to Rs 19.25 per lakh implies an escalation of more than 800 per cent. Table 1:- An Increase in Transaction Cost of 800%

Cost components

Present