Not thought through

Futures trading in commodities has been put in jeopardy with the proposed imposition of the commodity transaction tax (CTT), on the lines of the securities transaction tax, and a service tax of 12 per cent on such trading. The parallel with the securities transaction tax (STT) introduced a few years ago does not hold, because that was in lieu of capital gains tax. In any case, a turnover tax in the rest of the world applies only to cash transactions, not futures trading. But going beyond these issues of principle and theory, there is the question of practical impact "" because the CTT has been pegged at a level that multiplies nearly 10-fold the cost of futures transactions, so that 85 per cent to 90 per cent of the total cost of a trade is accounted for by tax. This makes no sense at all in a high-volume, low-margin business like commodities trading.

If not withdrawn, the CTT will deal a body-blow to commodities exchanges that are still in the process of establishing themselves. Indeed, when the definition of short-term and long-term gains is extended to business on the commodities exchanges, which seems to be almost a foregone conclusion, the problem will get compounded. You do not need a crystal ball to see that jobbers (largely day traders) and hedgers, who are among the bigger players in the commodity futures markets, will be the first to shun the exchanges. For, commodities markets have become global in their reach and the trade naturally flows to the most efficient as also the lowest-cost markets. With such high transaction costs, commodities futures will also lose their appeal as instruments of risk management and price discovery. What makes the CTT proposal all the more odd is that it has even been extended to trade in commodities options, though such trading has not yet been allowed in the country.

The commodities market regulator, the Forward Markets Commission (FMC), has been quick to decry this move and has offered to take up with the finance ministry the issue of withdrawing the proposal. After all, nowhere in the world has commodities trading been subjected to such a tax and, as the regulator for the sector, it is presumably part of the FMC's responsibility to ensure a level playing field for Indian commodity exchanges vis-à-vis their counterparts in other countries. Indeed, though trading volumes on commodities exchanges have been climbing, crossing Rs 35 lakh crore last year, this form of trading is only a few years old and is still in the formative stages. So far, barely a score of commodities are allowed to be traded on these exchanges, with potentially high-volume items like rice, wheat and pulses still on the banned list. This ban is expected to be lifted after the submission of the report of the Abhijit Sen committee, which is looking into the impact of futures trading on inflation in food prices, but that report has not come even though the panel was set up a year ago. Under the circumstances, the FMC's expectation that commodities futures trading will hit the Rs 50 lakh crore-mark in the next fiscal year is sure to be belied. The government would be well-advised to put this ill-conceived tax on hold, listen to the FMC and thoroughly weigh the pros and cons of such a levy before taking any final decision.