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G. Chandrashekhar

It is now well over four months since the proposal to impose a Commodities Transactions Tax (CTT) was mooted in the Union Budget on February 29; yet, the notification to formalise the proposal even after passage of the Budget by Parliament has not been issued.

It is believed that pressure has been continually brought on the Government to delay as much possible the CTT notification. Some of those opposed to the tax have raised the bogey of inflation. Inflation, in general, and the sharp rise in prices of essential food articles, in particular, has been a matter of serious concern for the Government.

Prices have been rising sharply week after week, and the efficacy of several steps to control inflation is yet to show in the weekly numbers. No wonder, the Finance Ministry seems to be in no hurry to notify the CTT. But the question is whether imposition of CTT would make any difference to inflation.

Given the trading volumes, nature of transactions and sensitivity of commodities, the CTT would make little difference to market prices, but yield revenue, apart from bringing in greater discipline. For one, futures trading in sensitive commodities such as wheat, rice and pulses is still prohibited.

Many other agricultural commodities currently traded, – such as spices, guar, and so on, cannot be categorised as “essential food products”. CTT on these will hurt no one except, of course, traders who trade these commodities on the bourses. That leaves gold and crude as major exchange-traded commodities. In particular, gold has attracted tremendous speculator attention in the last two years because of rising prices. CTT on gold futures trading, at a paltry Rs 17 for a Rs 1,00,000 transaction, cannot hurt by any stretch of imagination. Gold, as everyone knows, is currently trading at about Rs 13,000 per 10 grams. Why, then, this unseemly opposition to CTT?

The truth is, in many commodities, especially in large-volume commodities such as gold, a few players contribute to a substantial volume of transactions on the national exchanges.

CTT would obviously be a financial burden on this limited number of participants (mostly speculators) with very large trading volumes. If this small number of players decides to scale down trading transactions, it would affect the business of the exchanges and their valuations. This must explain the chorus against CTT.

Without taking sides, the market regulator must step in. The Forward Markets Commission (FMC) has the data on all commodity derivatives transactions. If data on total trading volumes in top 10 commodities(covering agriculture, precious metals, base metals and fuel) and who contributed to the transactions (share of, say, top 10 participants) in last three years are made public, it would help clear many a doubt and serve the cause of transparency.

When the nationwide exchanges were set up in 2001-2002, the primary objective was to strengthen agricultural futures. Initially, trading volumes in farm commodities were almost 90 per cent. Today, the share of agri-futures is as low as 20 per cent. Non-agricultural trade is dominant. In other words, the original purpose and objective of opening up the futures industry as a price discovery and risk management system for agricultural market participants stands not only diluted, but largely ignored.

By implication, those trading in non-agri markets, such as precious metals (gold and silver) and energy products (crude), will be taxed under the present circumstances. These traders are by no stretch of imagination poor; they can well afford the CTT.

Recently, the Finance Minister was quoted as saying the Government would take a call on the date to notify CTT. Senior officials of at least two exchanges told this correspondent they have no problem with imposition of CTT and that the market would be able to absorb the tax.

More Stories on : Commodities | Taxation | Commodity Exchanges

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