Saurashtra Ginners' Association (SGA) and Federation of Small Scale Industries (FSSI) have written a letter to the union finance minister P Chidambaram requesting not to impose transaction tax on commodity derivatives trading. Both the associations have expressed fear that transaction tax would hurt the interests of farmers and encourage dabba (illegal) trading.
Both the associations believe that levy of commodity transaction tax will increase the cost of transactions and discourage genuine hedgers in the commodities market. Any transaction tax on commodity derivatives would shift the already declining business to either illegal 'dabba' trading or overseas commodity exchanges.
"For the efficient functioning of carrying out these two economic functions, especially the function of hedging, it is absolutely necessary that the cost of transaction in our commodity exchanges are totally aligned to those on international commodity exchanges. This is because, unlike in the stock market, the underlying in commodity market is global in nature and therefore, any increase in transaction cost by way of additional taxes and duties will lead to shifting of volumes to either overseas exchanges or more dangerously, to the domestic illegal market – called 'dabba' market," informed a FSSI official.
In its letter, SGA had stated that if commodity futures are burdened with transaction tax, the quality of price discovery will denigrate and will indirectly impact India’s 520-million strong farming community. The increased transaction cost would also discourage the farmer's direct participation, which is yet at the nascent stage.
FSSI urged the finance minister that in the interest of the thousands of Small Scale Industries and SMEs, the transaction tax on commodity derivatives should not be imposed.