New Delhi: The commodities transaction tax, or CTT, introduced in the 2008 Budget effective 1 April, will not be levied on all transactions on the commodity exchange, clarified a finance ministry official.
The clarification came even as India’s two major commodity exchanges, Multi Commodity Exchange of India, or MCX, and National Commodity and Derivatives Exchange, NCDEX, put aside their rivalry to mount an aggressive lobbying campaign against the proposed 0.017% CTT on commodity derivatives.
According to the official, who did not want to be identified, participants in commodities exchange who physically deliver the underlying commodity will not be required to pay CTT. Instead, the new tax only covers those transactions where the settlement is in cash.
CTT, which is to be imposed when a commodity derivative is sold, mirrors the securities transaction tax or STT, including the provision to offset the tax paid from the profit of the trader, the finance ministry official pointed out.
Senior officials from MCX and NCDEX have already met officials at consumer affairs ministry and made a representation against the proposal.
The ministry of consumer affairs regulates commodities market through the Forward Markets Commission.
Their argument for a rollback is because the tax, they claim, amounts to an eight-fold increase in transaction cost and makes India’s leading commodities exchanges uncompetitive. India has three national and 22 regional commodity exchanges.
All the regional exchanges are not automated and the executives at the national exchanges claim that business will shift to regional exchanges as the tax will be levied on transactions done online.
The finance ministry official said CTT would be levied on any transaction carried out in a recognised exchange. The official also said there was no justification for a rollback as CTT is not just a tax, but also an anti-evasion measure.
Once a trail is established through CTT, it would help income-tax department check general tax evasion, he said. The anti-evasion logic applies in the case of STT too, the official noted.
Officials at MCX and NCDEX, in a Friday afternoon presentation to Mint, maintained that nowhere in the world are transactions on commodity exchanges taxed. “Indian commodity derivatives market is only four years old. Banks, mutual funds, financial institutions are still not allowed to participate in this market,” said a senior MCX official who asked not to be named.
“Derivative instruments such as options, contracts, index futures, etc., are still not there in commodity markets. The correct approach would be to let the market grow after enabling all types of instruments,” added a senior NCDEX official who too didn’t want to be named.
Responding to the finance ministry clarification, the exchange officials said on Friday night the government should allow a tax credit under section 88E of the Income-tax Act on the CTT levied on transactions settled in cash. Instead, the Budget has proposed that the tax paid could be used as an income-tax deductible under section 36 of the Income-tax Act.
An expert working with commodity markets, who did not wish to be identified, felt it was unjust to levy CTT because any such move will push up the cost of the underlying commodity, saying: “Besides, since the entire business is online and exchanges as also individuals are taxed and records...are in public domain where is the question of tax evasion?”