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After proposing a commodity transaction tax (CTT) in its Budget for the coming year, the Union finance ministry seems to have had second thoughts.
It asked the Forward Markets Commission (FMC) for a detailed analysis of CTT's impact on the non-agricultural commodity derivatives segment. The report is ready and would go to the ministry in a day or two.
FMC Chairman Ramesh Abhishek is also to meet the consumer affairs minister. The CTT should come up for discussion, said a source in the know. Efforts to reach the FMC chairman proved futile.
Finance Minister P Chidambaram had proposed to levy a 0.01 per cent CTT on the non-agri futures segment, on the lines of the Securities Transaction Tax (STT) on equity bourses.
Experts fear a repeat of what took place after the STT was levied, with equity volumes shifting from India to the Singapore exchange. Global commodity exchanges such as the London Metal Exchange (LME), New York Mercantile Exchange (NYMEX) and Bursa Malaysia are considered set to gain from India's loss in the commodity futures trade. Non-agri commodities are about 85 per cent of total commodity derivative volumes; gold has a little less than half the share.
Commodity exchanges have already represented against the proposal, saying it would raise the cost of transactions by 500 per cent, on an average. Small stakeholders, they've said, might find this cost too high to enter into risk management.
"When transaction cost is being reduced globally, its increase in India would prove derogatory. It would drive away liquidity from the market. As the spread between two contracts are very thin, trading with such a high transaction cost would be unviable," said Preeti Gupta, executive director, Anand Rathi Commodities.
Currently, jobbers operate with a margin of just Rs 200 for every Rs 1 crore transaction without CTT. The impost would raise this to Rs 1,000 for every Rs 1 crore. So, every Rs 1 crore transaction should give the jobbers a Rs 1,200 margin to cover the CTT and their margin, a herculean task. "Survival would be difficult for them," said Gupta.
With a gradual surge in base metals and bullion, India was steadily moving towards becoming a price setter, from a price taker. Critics say the Budget move would dry up liquidity, increase the bid-ask spreads and raise the cost of hedging.
"Any kind of increase in transaction cost in commodities would be negative for the growth and development of the market. This will discourage hedgers and all other participants from transacting on the exchange platform. I am afraid a large chunk of business might shift to either illegal (dabba) trading or to other international markets where the cost of doing transactions is lower," said Ashok Mittal, chief executive, Emkay Commotrade Ltd.
