A hard look at CTT

When the Finance Act 2013 made a provision for a levy of commodity transaction tax (CTT) on sales of commodity derivatives at 0.01 per cent on the value of such transactions, it specifically excluded “agricultural commodities”.

In a recent article titled, “CTT on essential food items unwarranted” ( Business Line , June 20), a case was presented for exempting not only derivative transactions in agricultural commodities, but also such transactions in processed agri products. This meant excluding sugar, various edible oils, and similar items from CTT. Processed agro products did not find a place in the list of agricultural commodities notified by the Finance Ministry for such exemption. Strangely enough, although the list seems to have been drawn by the Finance Ministry, probably with the assistance of the Central Board of Direct Taxes, it is suspected “whether business rivalry played any part in drawing the list of exempted commodities.”

SELECTIVE CONCERN

If at all business rivalry has played any part, it is in distinguishing farm commodities from such non-farm commodities, like metals and energy products, which are slated to attract CTT from July 1.

Exemption is now sought for processed farm commodities from CTT, as taxing transactions in such commodities “is sure to defeat the objective of the government to enhance hedger participation in the market”. It is also argued that such taxation would also “raise the cost of hedging and thereby discourage hedgers”, especially so when “these commodities have high weightage in consumer price index” (CPI), implying that such taxation will fuel inflation. But what is true of processed farm produce is equally true of precious and industrial metals, and energy products. CTT on these commodities will raise the cost of hedging for producers, stockists, importers and exporters, and processors, and manufacturers of these goods and their diverse products. A large number of small and medium enterprises are also engaged in the processing and manufacturing of various metal and energy products, and extensively hedge in the derivative contracts for their base materials. The fear is that these markets will just vanish, once the day-traders desert them. Day trading becomes uneconomical with the levy of CTT, since it is based on very slim margins.

Unfortunately, those who show great concern for farm commodities and their processed products fail to show similar concern for other primary mineral and hydro-carbon products. Not only will CTT raise hedging costs in these primary extracting and drilling commodities, it will also result in an increase in processing and marketing margins, and aggravate inflation. A selective approach in choosing commodity baskets for levying CTT on their derivative transactions betrays undue bias in favour of one exchange, and prejudice against the other. Farmers’ interests need to be protected. But the need to guard the interests of SMEs that provide employment to the upcountry landless labour, artisans and craftsmen cannot be brushed aside either. What a farmer is to agriculture, an SME is to non-farm industry.

UNPOPULAR EVERYWHERE

Actually, CTT is not levied anywhere in the world. Even the proposal of financial transaction tax (FTT) is being opposed by trade and industry, and even economists, in the US, the UK, and Europe. The governments of these countries are hesitant to impose FTT. But we have rushed to levy CTT in the fond hope of reducing fiscal deficit. It won’t be a surprise if such an unproductive tax eventually boomerangs on the Indian government.

(The author was with Forward Markets Commission for nine years.)

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