Published On: Thu, Feb 9th, 2012

India Commodity Transaction Tax, a Welcome Proposal to Raise Revenue

Close on the heels of a sharp hike in customs duty on import of gold and silver comes the report that the Government is considering re-imposition of commodity transaction tax (CTT) on derivative trades that take place in the futures exchanges. Clearly, New Delhi is keenly looking to raise more and more revenue from sources hitherto untapped.

Trade transactions on the futures exchanges became the logical target for revenue generation five years ago; but unfortunately, the government buckled under intense pressure from lobbies and withdrew the levy. The case for re-imposition of CTT has never been stronger than it is at present.
Volumes expanding

Trade volumes in the futures exchanges have been expanding. Newer exchanges have come into operation; but there is no evidence to suggest that the benefit of futures trading actually flows to the intended stakeholders.

The proposal currently under consideration relates to CTT on trade transactions of non-farm commodities. Precious metals and energy products fall in this category. These are commodities which account for well over 80 per cent of all commodity futures transactions. The element of speculation as opposed to hedging is significantly large in metals and energy products. There is, therefore, no reason why these should not be taxed.

Indeed, in some cases like crude futures, there is no delivery at all and in case of precious metals extremely modest. In gold and silver, the domestic market simply tracks international trends. Every rise in international prices brings windfall gains for speculators here who have no genuine exposure to the physical goods. Speculators trade paper contracts. There is strong case for treating hedgers and speculators differently.
Speculative transactions

At the same time, there is no reason to exempt highly volatile and speculative farm commodities. Guargum and mentha oil are two prime examples. Some seed spices also fall in this category. The element of speculative transactions in these narrow commodities is rather heavy. Far from helping discover fair price, it actually distorts the market and hurts the commercial interests of genuine businesses such as processors and exporters. These commodities should also be brought under the ambit of CTT.

A part of the revenue generated from CTT should be ploughed back into reforming the physical side of the market. Physical production, processing and consumption (either domestic or export) should be the focus of attention. Unfortunately, the way our commodity markets have been managed and regulated all these years, derivatives trading has become the principal activity for most market participants and physical trade has become secondary. Unless we have a healthy physical market, we cannot hope to have a healthy and transparent futures market. Policymakers have to realise this is axiomatic.

Interested parties are sure to speak against CTT and raise the bogey of consumer interest, farmers’ interest and so on. These objections deserve to be ignored. There already exists STT (securities transaction tax) in stock market deals. It is often claimed that there is no difference between trading equities and commodities on the bourses. Levy of CTT is most unlikely to hurt anyone, but is sure to generate revenue for the exchequer.

Source: Hindu Business Line

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