New Delhi: The incidence of proposed Commodities Transaction Tax (CTT) will increase the cost of transactions on Indian organised commodities markets and increase arbitrage said the industry chamber Confederation of Indian Industry (CII) on Wednesday. It futrther said that the high cost of transactions in organised commodities markets will also render them uncompetitive driving away business to global markets under the open global commodities risk hedging policy of the Reserve Bank of India (RBI).
The Commodities derivatives market in India is just four years old and does not still allow the participation of banks, mutual funds, Financial Institutions (FIs) and Foreign Institutional Investors (FIIs). Instruments like Options contracts, Index futures and futures based on intangibles are still not avaiable. Therefore, feels the industry chamber, the commodities market needs both organized growth and deepening before it could be taxed. Also since commodities derivative contracts are based on physical deliveries unlike stock F&0 contracts, which are cash settled contracts, existence of STT does not justify imposition of CTT.
The Union Budget 2008-9 proposes to levy Commodities Transaction Tax to the extent of 0.017 % on sale of all commodities derivatives contracts besides a service tax at the rate of 12.5 % on the transaction fee earned by the commodities exchanges. CII says that while commodities exchanges might be able to cope with the application of service tax, the incidence of commodities transaction tax will be a severe blow to the existence of commodities derivatives market in the country.
The cost of transaction, per Rs 100,000 transaction, range from Rs 0.71 at the lower end to Rs 7.50 at the upper end in different countries’ commodities derivative markets. Currently the cost of transaction at Indian Commodities Derivatives Markets is Rs 2, which will be Rs. 19.25 after the imposition of CTT. Moreover, CTT is not applicable in any other country. Therefore, Indian commodities exchanges have to be at par with international markets with respect to cost of transaction; otherwise the entire volume will shift either to unorganized market or to other international exchange, says CII.