The Hindu Business Line : Less-than friendly to commodity derivatives

Henceforth, all commodity trade transactions on futures exchanges will attract a commodity turnover tax (CTT) on the lines of Securities Transaction Tax.

Trade intermediaries told Business Line that the tax rate would be 0.0025 per cent. In other words, CTT would be Rs 25 for every Rs 1 lakh worth transaction. On a conservative estimate, CTT would fetch the Government between Rs 900 crore and Rs 1,000 crore if trade volumes in last two years were taken as guide.

Given the huge volumes in the futures section, it is clearly a revenue generating measure for the Government. Even while levying CTT, the Finance Minister did not say anything about setting-off speculative losses /profits against normal business profits/losses. Because fiscal legislation has to be given strict interpretation, there is nothing, based on the latest proposal, to suggest that the set-off facility will be available for the commodity-based transactions.

There was an expectation within the trade that the Finance Minister would concede the demand. Commodity exchanges had strongly lobbied the Government in their pre-Budget representations. So, it is a double-whammy; and the third one is enhancement of short-term capital gains tax to 15 per cent (from 10 per cent).

Unlike securities brokers/traders, commodity market brokers/traders are unlikely to go beyond launching verbal protest, but meekly accept the tax burden. The trade has reason to be upset with the Minister.

Service Tax

In a further expansion of the list of services for purpose of tax, commodity exchanges and clearing houses have been brought under the service tax net. The current rate of service tax is 12 per cent plus 2 per cent education cess, taking the total to 12.24 per cent.

Commodity exchanges will have to shell out this tax. Whether they would seek to recover it from market participants by raising the transaction fee charged remains to be seen.

Although a year or two ago, the Service Tax Department had sent notices to commodity exchanges demanding to show-cause why they should not be brought under the tax net, they managed to stay out. With this latest Budget proposal, commodity exchanges will have to begin to pay service tax.

More Stories on : Budget | Commodity Markets

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