The Finance Minister, P. Chidambaram, said in his Budget speech that there was no distinction between derivative trading in securities market and that in the commodities market. He went on to argue that the underlying asset was the only difference. Hence, he proposed a commodity transaction tax (CTT) on non-agricultural commodities futures contract of 0.01 per cent of the price of the trade.
The move has seen commodity bourse MCX shares take a beating on the Bombay Stock Exchange. MCX closed 4.51 per cent lower at Rs.1,093.35 on Friday. Intra-day, the stock tumbled 5.23 per cent to Rs.1,085.05. On the NSE, the scrip ended at Rs.1,093.10, down 4.86 per cent from its previous close.
Analysts have questioned the Finance Minister’s assertion while proposing CTT on non-agricultural commodities futures contract. “There is certainly a distinction. In the case of commodities, the underlying asset is universally common,’’ they said. The CTT would increase the cost, and, as a consequence, trigger distortions in price discovery, they pointed out.
They fear that the imposition of CTT would drive the volume down, and shift the trading to international markets. “Only shallow trading will take place, which is not conducive,” they added. In this context, they cited the experience of other countries which had imposed similar tax and found themselves rueing the loss of trading volume. CTT would also force investors to shift to agri-commodities, which could trigger price volatility. “CTT will lead to inflationary pressures, as spot markets, more often than not, tend to follow futures,” said R. Pattabiraman, a commodity expert. With overseas markets too designing and developing commodity futures contract, volumes had already shifted out of the country, he pointed out
Coming against this backdrop, the imposition of CTT would have a negative effect in the long-run. “India will be at a considerable disadvantage in competitiveness vis-a-vis other countries,” market analysts pointed out.