Commodity Transaction Tax: Why it is a bad idea
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Commodity Transaction Tax: Why it is a bad idea

Last Updated: Monday, February 25, 2013, 17:22
 
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Commodity Transaction Tax: Why it is a bad idea
Zeebiz Bureau

It is Budget time and the issue whether the Commodity Transaction Tax (CTT) should be imposed has cropped up again. Even as the government mulls over the contentious tax proposal, the idea has been vehemently opposed by all sides.

CTT is being rightly opposed, here’s why:

The Basics

CTT is a tax levied on exchange-traded commodity derivatives in India on the lines of the Securities Transaction Tax or STT — a tax imposed on the purchase and sale of securities and their derivatives traded on stock exchanges in the local market.

CTT was proposed in Union Budget 2008-09 but was withdrawn later following the recommendations of the Prime Minister’s Economic Advisory Council. The recommendations came after a debate in the media and demands from certain groups on imposing transaction taxes on commodity derivatives.

The Opposition

India's five commodity futures exchange houses are strongly against the idea of a transaction tax on commodity trades similar to that on stock and equity derivatives trade. According to experts, CTT will sound the death knell for the organised commodity futures market as the cost of trading will shoot up eight-folds.

Commodities exchange traders and their fellow mates from the stock markets have locked horns on whether a Commodity Transaction Tax (CTT), on the lines of the Securities Transaction Tax (STT), is desirable or not.
Stock market operators, brokers and officials want the STT withdrawn as they feel it is an unfair levy.

Is CTT necessary?

Straight answer, no! It is a fact that the transaction tax is not an equitable tax. By its very nature, tax should be collected only on profits or gains from business activity. However, transaction tax is imposed on the transaction value irrespective of whether such deal ends up in profit or loss.

For example, if you sell a share in the stock market and incur a loss, you still have to part with a portion of the proceeds of the sale to the government, which is not desirable by many a traders and institutions alike.

Industry representatives have also warned that any transaction tax on commodity derivatives will shift the declining business to either illegal 'dabba' trading or overseas commodity exchanges.

"Imposition of Transaction Tax on commodity derivatives transactions will boost the illegal 'dabba trading' markets without any gain to the exchequer," said the commodity exchanges in their representation to the government.

"The government considered the advice of PMEAC, as it concerns lakhs of jobs and livelihood in the entire commodities market ecosystem and took a considered view", they said, adding it would be retrograde to impose it at a time when the commodities market is struggling to arrest decline in trading volume.

Rejecting the contention that securities transaction tax (STT) was shifting trade to commodity exchanges, they said, while equity trade provides for capital appreciation, commodity exchanges help stakeholders to hedge risk against adverse price movements. Both cannot be compared, they added.




First Published: Monday, February 25, 2013, 17:18


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