Lending its support to the commodity exchanges, the Consumer Affairs Ministry has raised its voice against any move to impose commodities transaction tax (CTT).
CTT is synonymous with Securities Transaction Tax (STT), which is levied on sale and purchase of equity and equity-oriented mutual funds.
In the budget speech for 2008-09, the then Finance Minister, Mr P Chaidambaram, had announced the introduction of CTT.
His argument was that transactions in commodity futures had come of age. However, the proposal was reversed next year, following recommendations of the Prime Minister's Economic Advisory Council (PMEAC).
PROTECTING REVENUE
Now, with a view to reducing STT, the Finance Ministry is said to be considering imposition of CTT to protect its revenues. But, the Consumer Affairs Secretary, Mr Rajiv Agrawal, feels that such a move will restrict the growth of the futures market.
Inaugurating a conference organised by industry chamber Assocham, Mr Agarwal said that the value of trade in the commodity futures market may exceed Rs 170 lakh crore in 2011-12, from Rs 119.5 lakh crore in the previous year and Rs 66,000 crore in 2002-03.
He said that the passage of the Forward Contracts Regulation Amendment Bill, 2010 will generate greater confidence among stakeholders, encourage them to participate in futures market, improve market liquidity and strengthen the true price discovery process.
The commodity exchanges argue that since they provide hedging instruments, commodity futures cannot be treated on par with the equity market, which is purely investment segment.
Hence, the taxation principles cannot be applied to both.
They fear that CTT imposition will make hedging costly. They say that interest rate futures and currency derivatives are also hedging instruments, and if these are not taxed, then why commodity derivatives.
At present, there are about 35 major commodity exchanges in the world, but barring Taiwan, no other country has imposed CTT.
Even when Taiwan imposed CTT, its futures exchange lost trading volume to the Singapore Exchange.