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Higher tax to hit commodity markets: ICRIER
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August 04, 2008 13:04 IST
A higher transaction tax is likely to defeat the very purpose of commodity markets by forcing farmers and hedgers to exit due to greater cost, an ICRIER report said.

"Any increase in transaction tax, as proposed, would increase the transaction cost and may keep farmers and hedgers out of the market, an outcome which would fail to achieve the objectives of commodity futures markets," the report said.

Finance Minister P Chidambaram had announced a 0.017 per cent Commodities Transaction Tax (CTT) in Budget 2008-09.

The study, released by economic think-tank ICRIER last week, said international experience shows trading volume goes down due to either increase or imposition of transaction tax.

Further, no other major futures trading markets have CTT. The report pointed out a negative relation between high transaction cost and trading volume on the basis of 'empirical results' for five top selected commodities - gold, copper, crude, soyaoil and chana - and said higher is the cost, greater is the volatility.

"Therefore, any increase in transaction cost would lead to lower trading activity and higher volatility." After imposition of a tax of 0.017 per cent, the cost of transaction would increase substantially and may be highest in the world, ICRIER said.

The report also ruled out an adverse impact of futures trading on inflation, saying, of the five commodities, only in case of crude, 'causality runs from volume to spot prices'.

"Therefore, we do not have sufficient evidence to support that futures market leads to higher inflation," it said.

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