As the buzz on the commodity transaction tax (CTT) making a comeback becomes louder in the corridors of power, the commodity exchanges are keen to ensure that no transaction tax is imposed on derivatives in the upcoming Budget.
Their contention is that CTT may discourage trading and thereby result in loss of trading volumes, which could hurt their profitability, as it would increase transaction costs.
They are even willing to play the ‘job losses’ card to buttress their point about the negative effects of hedging becoming costly, volumes shifting to illegal (dabba) trading platforms and liquidity drying up if CTT is imposed.
“Absolutely, there will be job losses if CTT comes”, said Mr Venkat Chary, Chairman, Multi Commodity Exchange of India Ltd (MCX), in an interaction with Business Line journalists here on Thursday. He was replying to a question on whether CTT would have any social impact in terms of job losses.
He said the commodity derivatives industry would provide for ample jobs in the next five years if the Forward Contracts Regulation Act amendments are carried out. This is because new products will be introduced and that will deepen the market. But, levy of CTT would adversely impact this nascent industry, Mr Chary added.
At present, there are three lakh terminals where commodity derivative transactions are done. In the last one year itself, about one lakh terminals were added and four lakh additional jobs were created, said Mr P.K Singhal, Deputy Managing Director, MCX. The reach of the commodity market is more than the equity market, they said.
Mr Chary said equity derivatives and commodity derivatives are distinct markets and the same principles of taxation cannot be applied for both.
There are suggestions in certain quarters that the Securities Transaction Tax (STT), imposed on equity markets, should be done away with or reduced or CTT be imposed on commodity derivatives. This is because equity exchanges want a level-playing field with commodity exchanges, as they see shifting of volumes from cash and equity futures to non-agri commodities market.
The commodity exchanges, however, contend that volumes have shifted from equity futures to equity options in recent months.
The Centre had introduced CTT in the Union Budget 2008-09, but the proposal was reversed in 2009-10 following recommendations made by the Prime Minister’s Economic Advisory Council.