Mumbai: Finance minister Pranab Mukherjee has proposed to abolish a contentious commodities transaction tax, or CTT, in his Budget for the fiscal year to March, signalling the government’s intention to grow the nascent futures market in commodities.
CTT was proposed by Mukherjee’s predecessor P. Chidambaram in the 2008-09 budget but remained on paper following strong protests. “The Prime Minister’s economic advisory council has recommended abolition of the CTT,” the finance minister said while presenting the Budget in Parliament on Monday. “I, therefore, propose to abolish the commodity transaction tax.”
Market confident: Dropping of the proposal has been welcomed by traders, analysts and the market regulator. Ramesh Pathania / Mint
Mukherjee announced withdrawing a tax of Rs17 per Rs1 lakh on trading in commodity futures as well a tax of Rs125 every Rs1 lakh on purchase of commodity options. This levy was intended to bring the commodity market in line with equities, where buyers and sellers pay a securities transaction tax.
Traders and commodity market analysts welcomed the move and said it would increase participation.
“People were deterred from entering the market because of that tax proposal,” said Madan Sabnavis, chief economist at National Commodities and Derivative Exchange Ltd, or NCDEX. “Now we expect greater participation from small traders, small farmers, wholesalers, etc.”
Mumbai-based commodities futures market regulator Forward Markets Commission said the move would be good for the trade. “Abolition of commodities transaction tax indicates that government accepted that the levy was detrimental for the market,” said chairperson B.C. Khatua. “It will boost confidence of all kinds of stakeholders in the commodity markets.”
India’s six-year-old commodity futures market had a turnover of Rs52 trillion in the fiscal year that ended on 31 March. There are three national platforms for trade in commodities—the Multi Commodity Exchange of India Ltd (MCX), the National Multi Commodity Exchange of India Ltd and NCDEX. “Now it (the cost of transaction) will be at par with top 25 global commodities exchanges, which constitute 99.99% of the world’s exchange traded commodity derivative volume,” said Anjani Sinha, director, MCX. “This announcement will put Indian commodity market ecosystem at par with international exchanges with respect to cost of hedging.”
A tax of Rs17 per Rs1 lakh would have significantly increased transaction charges in a market where costs currently range between Rs3 and Rs4 per Rs1 lakh. Newswire18 reported on Monday that the proposed levy had led to a fall of nearly 40-50% in volumes immediately after last year’s budget announcement.
The scrapping of CTT comes on back of other measures to boost the commodity markets. The United Progressive Alliance government has removed a two-year ban on wheat futures on 3 July. However, bans on futures trading in other commodities remain.
The Economy Survey 2009, a report that maps the economic health of the country, on Thursday had called for removal of trading bans on all commodity derivatives.
Reuters and Newswire18 contributed to this story.