Industry bodies have raised concern against the government’s anticipated move to levy commodity transaction tax (CTT) in Budget 2013-14, scheduled to be announced on February 28.
In a pre-Budget recommendation, the Confederation of Indian Industry (CII) said exchange-traded commodity transactions continued to be exempted from CTT. It argued the imposition of CTT would not only increase transaction costs, add to the cost of risk management and dissuade genuine hedgers, but also shift commodity derivatives trading to unofficial and illegal dabba’ trading. It added globally, imposition /increase in transaction taxes had led to migration of trade.
Some outside the purview of commodity futures trading have said the imposition of CTT would lead to an eight-fold rise in transaction costs.
A tax on commodity transactions would dissuade those who wish to hedge risks using commodity derivatives. This, in turn, would reduce market liquidity by reducing volumes and increasing bid-ask spreads. Low liquidity would lead to high volatility and improper price discovery. Trading volumes could decline, while market volatility might increase significantly.
Some simulation exercises have shown the decrease in volumes resulting from the imposition of CTT would defeat the purpose of revenue mobilisation from this tax. If trading volumes decline further (owing to CTT), the government could even lose more revenue than what it would earn from levying this tax; a large chunk of the business would shift to exchanges abroad. Thus, a tax on commodity derivatives transactions would be self-defeating, CII said.
Opposing the Shome committee report on General Anti-Avoidance Rules, the Federation of Indian Chambers of Commerce and Industry said, “The government should abolish tax on gains arising from listed securities, whether in the nature of capital gains or business income, which shall incentivise investors to participate in capital markets.” On September 1 2012, the Shome committee had recommended doubling the securities transaction tax (STT).
The Associated Chambers of Commerce & Industry of India (Assocham) has suggested the government reduce STT and rescue brokerages by rationalising stamp duty on securities. It argued as STT was applicable to both buyers and sellers, the trading volume was impacted.
During the April-November period in 2012, STT collections fell to Rs 2,905 crore from Rs 3,335 crore in the corresponding period of 2011. Abolition of STT would reduce transaction costs, promote equity culture and encourage retail participation. This would boost volumes. Doing away with STT would also lead to more foreign institutional inflows and boost markets, Assocham said.
Commodity exchanges have also urged Finance Minister P Chidambaram not to introduce CTT at a time when the investment and trade sentiments weren’t favourable. Data compiled by the Forward Markets Commission showed a 5.54 per cent decline in commodities futures turnover between April and December 2012.
Recently, executives of five national commodity exchanges had said levying CTT would drive commodity volume from India to destinations such as Singapore, Dubai, London and New York.