Transaction tax may lead to illegal trading

The proposed imposition of the commodity transaction tax (CTT) in the Union Budget by Finance Minister P Chidambaram is expected to divert hedgers and speculators to rampant 'dabba trading' (illegal trading), a top industry official said.

"The commodity transaction tax will attract hedgers and speculators to 'dabba trading', where traders settle their transaction on exchange prices, without paying any margins or taxes," National Commodity and Derivatives Exchange (NCDEX) chief economist Madan Sabnavis said here.

The transaction in illegal trading is almost equal to commodities exchanges' turnover of Rs 40 lakh crore and the practice is quite common in Gujarat, Uttar Pradesh, Madhya Pradesh and Punjab.

Marketmen said the two categories most affected would be jobbers and hedgers. Jobbers or day traders contribute almost three-quarters of daily volumes in commodities such as bullion, natural gas and crude oil.

The Budget has added an incidence of 12 per cent service charge and Rs 17 per lakh for commodities trading, which will increase the cost by over 800 per cent.

Arbitrage trading literally means "risk free profit". Arbitrage is the bread-butter of commodities traders, with which they earn their living. After the proposal of CTT, a majority of their earnings would go towards tax payment.

"CTT will affect the viability of trades for short-term traders and arbitragers. Till now, for buying futures worth Rs 1 crore, jobbers incurred an expenditure of Rs 500. Now, they will pay an extra Rs 1,700 as CTT and Rs 50 as service tax. So the total comes to Rs 2,250 a crore as compared to Rs 500 earlier. This is a huge increase," Kotak Commodities Director Dilip Bhatia said.

The government is expected to generate Rs 680-700 crore from CTT on an estimated combined commodity exchanges turnover on Rs 40 lakh crore in FY09, Sabnavis said, adding that the CTT would be charged on sell side and not on buy side.

CTT will also impact the volume and liquidity of commodity exchanges.

"The daily volume on commodity exchanges may also witness a fall. The volume had started improving since January following the FMC's decision to relax margins," NCDEX's Legal Head Ravindra Sachdeva said.

The average volume witnessed drastic fall from Rs 4,000 crore to Rs 2,000 crore a day on NCDEX when the Forward Markets Commission (FMC) hiked margins last year, Sachdeva said.

While, stock markets are for channelising investments and capital formation, commodity markets are for price discovery and risk management.

"Actual user participation on commodity exchange is very high. Nearly 30-35 per cent of our open interest is from actual users. The commodity, before it comes for trading on our platforms, is already taxed to the tune of almost 12 per cent with taxes such as mandi tax, the cess, the handling cost and warehousing charges," NCDEX Managing Director P H Ravikumar said.

"A stock market has none of these charges; you cannot tax a commodity which is already taxed earlier," he added.

The market was not in a position to bear the commodity transaction tax at this stage, Ravikumar said, adding that all the exchanges had already made representations to the FMC to take up the matter with the Finance Minister and seek a roll back of the tax.