The finance ministry is looking at taxing transactions on commodity exchanges to provide better regulation and monitoring of the market. The proposal is being considered for Budget 2013-14, despite hectic lobbying by commodity exchanges and the consumer affairs ministry against the imposition of the tax.
The proposed move was not intended to maximise the government’s revenues, as it might not garner more than Rs 3,000 crore (Rs 30 billion) a year, officials said. The ministry, instead, was looking at it for regulation, to bring in more transparency in commodity transactions on exchanges.
“Commodity Transaction Tax (CTT) has to come. Volumes in commodities transactions are huge and there is a need to track those transactions,” said a finance ministry official, asking not to be named. He added, usually, people with substantial investible surplus transacted at commodity exchanges and there should not be a problem in paying tax.
Officials, however, mentioned a final call would be taken by Finance Minister P Chidambaram, as there was a lot of political and industry pressure to drop the proposal. Proposed first by Chidambaram in Budget 2008-09, the tax was never notified due to stiff opposition from the food processing & consumer affairs Ministry and commodity exchanges. The proposal was to levy 0.017 per cent tax on commodity derivatives trade, on the lines of the securities transaction tax (STT).
Commodity exchanges have cautioned the finance ministry the levy of the tax would be retrograde and push up transaction costs, forcing traders to shift to illegal (dabba) trading system. In a representation to the finance ministry, they said exchange-traded commodity transactions were used as a hedging instrument against adverse price fluctuation and led to fair price discovery.
“If the government’s objective is to get tax revenue, volume will come down after CTT imposition. Where is the tax going to come from in that case,” said an executive with a commodity exchange. He added various other state and local taxes were levied on commodity spot that were not imposed on transactions in equity cash segment.
Stock exchanges and banks, on the other hand, are seeking a level playing field, arguing trade is shifting from equity market to commodity exchanges due to differential tax treatment. Currently, STT is levied on sale and purchase of equity, in the range of 0.017-0.125 per cent.
After a pre-Budget meeting with the finance minister, State Bank of India Chairman Pratip Chaudhuri had said much of the money that could have been invested in the stock market was going into the commodity market. He proposed either CTT be introduced or STT be abolished. At present, banks are not allowed to trade in commodity futures.
If CTT is imposed, Multi Commodity Exchange, National Commodities and Derivatives Exchange, National Multi Commodity Exchange, Indian Commodity Exchange and Ace Derivatives and Commodity Exchange would be affected. A study by Icrier had found the introduction of a transaction tax would shoot up transaction cost and lead to higher volatility and lower trading activity.