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One way the finance minister can earn some brownie points in the coming Budget session is by slashing or doing away with commodity transaction tax. It will be quite painless for the exchequer too as the revenue department earns a measly sum from this tax.
The primary reason given for bringing back the CTT in Budget 2013 was that the absence of transaction tax in commodity futures was making traders migrate from equity futures and options to commodities. This reason will no longer be valid with the merger of the commodity market regulator, the Forward Markets Commission (FMC) with SEBI. Stock exchanges that were only offering equity-related products can now facilitate the trading of commodity contracts too. Traders on equity platforms could then start trading commodities too. Second, since traders operate on wafer thin margins, the imposition of CTT has negatively impacted trading volumes on commodity exchanges. The volume of contracts traded on MCX, the commodity exchange that accounts for more than three-fourth of the trading in commodity futures, is down 45 per cent since 2012. While the NSEL scam and the crash in global commodity prices are among the reasons for this debacle, CTT also has an important part to play in stifling commodity trading.
There is a section that thinks trading and speculation in commodities sends prices higher. But prices can shoot higher due to hoarding and other such activities, even if there are no commodity exchanges. Since India does not have an organised spot market for commodities, the futures traded on exchanges help in price discovery, besides providing the means for hedging the risk taken by commodity producers. Many users of gold and other metals are now hedging their risk in overseas exchanges due to greater liquidity and lower transaction cost. Addressing this issue will help the Centre as a vibrant market will result in higher earnings for the revenue department, if imposed a few years later, after the market is mature and ready to handle this burden .
Senior Deputy Editor and Head of Research
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