The Hindu Business Line : Opposition to commodity transaction tax unwarranted

An orchestrated chorus against the Commodity Transactions Tax (CTT) proposed in the latest Union Budget has been reverberating in the media for several weeks now. The shrill objections are now reaching a crescendo with screaming headlines.

From various commentaries heard and read, it can be safely inferred that most people are unclear about the working of the commodity markets, especially the differences between physical and derivative markets.

Brokerages, commodity exchanges and even the market regulator have banded together demanding removal of CTT. The latest is that the recommendation by the Prime Minister’s Economic Advisory Council to review the proposal has become the rallying point for all those opposed to the tax. Usually, those who are taxed make noises; but in the case of CTT even others have joined the protest party. The aggrieved persons - buyers and sellers in case of commodity transactions - may be justified in opposing the levy of a new dose of tax because the money would go from their pocket.

What is surprising is that the commodity exchanges too are vociferously objecting to the levy. CTT is not a tax on the exchange; it is a tax on transactions made on the exchange platform. Strictly, there is no liability as far as the exchanges are concerned.

But still they are opposed to CTT because of apprehension that imposition of tax may discourage trading and result in loss of trading volumes, and of course profitability of running an exchange. Although not an aggrieved party, the commodity futures exchanges seem to have jumped on to the ‘oppose CTT bandwagon’ in their own self-interest.

Worse, the commodity futures market regulator too has openly objected to the levy. Propriety demands that the market regulator maintain a stoically detached approach to such issues and not take sides.

So, should the CTT proposal be dropped? Or should the proposed rate of tax be cut?

Surely, the rationale of CTT, the quantum and its implications would have been discussed within the Finance Ministry before becoming a part of Budget 2008-09 proposals. Apart from being a revenue measure, CTT would create record of transactions and help set-off an audit trail when needed.

What has changed in the last eight weeks to warrant a review of CTT?

Nothing, really, except the objections raised by certain groups of interested persons. If the Finance Ministry were to review CTT and were to decide to either reduce the tax rate or withdraw the proposal, it is duty bound to explain the considerations that prompted the decision.

Whittling down or withdrawal of CTT cannot be merely on the basis of strong vociferous objections by a section of people. The credibility of the Budget proposal is at stake here.

Currently, Indian bourses are dominated by speculators. Participation by genuine hedgers is rather limited. Primary producers are virtually absent from the derivative market; and they are going to be unaffected by CTT. From the nature of transactions on the commodity exchanges, it is clear, the tax burden would fall largely on speculators who have no genuine interest in any underlying commodity but are in the market to take advantage of price movements.

Objection to CTT has taken many forms. One of the frivolous points is that Indian market participants will migrate to international exchanges. This is a highly exaggerated fear being spread by the exchanges. There is nothing to warrant such an expectation. Genuine hedgers in any case are allowed to participate in international exchanges.

Indeed, last year, the Reserve Bank of India permitted domestic producers and consumers of commodities, especially metals, to hedge their price risk in overseas exchanges, despite the fact that such base metals are traded on the domestic exchanges. The very fact that domestic hedgers prefer to go overseas suggests the failure of exchanges here to inspire confidence of hedgers.

Another scare being spread is that CTT would drive market participants into unofficial trading or dabba trading. Five years after nationwide online exchanges were established, if dabba trading still persists, it reflects rather poorly on the functioning of existing exchanges and on the effective working of the regulatory system.

Last but not the least, technically, for every official trading transaction on the exchange, the exchange itself acts as a counterparty. In other words, for every seller, the exchange is the buyer; and for every buyer, the exchange is the seller. It is the exchange which guarantees performance of the contract. Looked at from this angle, will the exchanges too be subjected to CTT?

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