BackIt’s taxing for commodities
It’s taxing for commodities
Planning Commission deputy chairman Montek Ahluwalia publicly opposed finance minister P. Chidambaram’s Budget proposal to impose a transaction tax on commodity trading on Tuesday.
This adds one more credible voice to the already widespread criticism of a thoughtless finance ministry bid to raise revenue at any cost—even when it means discouraging growth of a market that touches the common man far more than equity stocks.
That is because a well-regulated and liquid futures market reduces price volatility and helps in making price discovery efficient. And when seen in the context of agricultural commodities, this helps both farmers and common consumers.
Ahluwalia agreed with the fundamental opposition to Chidambaram’s proposal— that raising transaction costs through such taxes would make the market inefficient at home and send much of the potential and existing business abroad to other commodity exchanges. The other outcome would be more grey market, or dabba trading as it is called in India.
A comparison of the cost of transacting on commodity exchanges across the US, EU, Malaysia and Japan shows India is already on a par—with some variations—and the Budget proposals would raise this cost by around 800%. Derivative markets are very sensitive to transaction costs and won’t be able to take the hit.
The primary motive for the tax proposal was to raise tax revenues by replicating the equity market’s security transaction tax story—Chidambaram had said in his Budget speech that commodity futures had become a market mature enough for such a tax.
The immediate and sustained opposition from various stakeholders and the forwards market regulator was based on a rejection of the finance minister’s premise. They have been ably supported by eminent tax-expert economists and observers. Not only is the commodity market a fraction of the equity market, but also a similar tax on the latter was bundled with offsetting concessions.
This proposal needs to be axed—in full—if we want to encourage participation in the market. Any effort by the finance ministry to ensure revenue neutrality will be bizarre. Why impose a wrong tax first, then say we need another option to raise a similar amount?
Should this tax be withdrawn in full? Write to us at views@livemint.com
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