Investors and punters in commodities will be forced to exit the futures market in droves or shift part of their funds to agri commodity futures since the government has introduced a widely-expected commodity transaction tax (CTT) on non-farm futures, which will increase trading costs substantially.
Once the Finance Bill 2013 comes into force, CTT of ` 10 per lakh, or 0.01%, will be imposed on sellers of non-farm commodities such as gold and silver, which some market experts said could lead to a 30-40% decline in commodity futures volumes.
The FM also cut STT on equity futures to ` 10 per lakh from ` 17 earlier, which is expected to boost speculative volumes but is unlikely to drive punters, who have tasted the lure of commodities, to stocks. The revised STT rates will be effective from June this year. Besides raising trading costs, CTT is seen to be most detrimental for MCX, the country’s largest commodity futures bourse with an 80% market share.
However, the stock gained 2.4% to close at ` 1,145 on Thursday. Currently, to trade in gold futures contracts, a trader pays a turnover tax of around ` 2 per lakh. From April, if she were to sell this contract, her cost would rise to ` 12 per lakh, or by six times. Analysts claim this would puncture volumes as 50-60% of liquidity in the commodity futures market is contributed by retailers who trade on wafer-thin margins.
“My guess is volumes could be dented by 30-40% within weeks of CTT’s implementation,” said Naveen Mathur, associate director (commodities), Angel Commodities.
The higher cost of trading in non-farm commodities could cause a shift of speculative funds to agri commodities. However, Ani l Mishra , CEO of plantat ions bour s e NMCE, feels this is unlikely to happen on a large scale as agri products have price bands beyond which they cannot be traded on a given day. This, unlike internationally referenced commodities like gold, restricts volatility. Shreekant Javalgekar, MD & CEO, MCX, said the levy would on an average raise trading cost by 300% and would drive the Indian industry towards dabba trading or international markets.
“With respect to CTT, the discrimination is glaring between agri and non-agri commodities, which is not the case as regards STT (sic). This treatment is like having STT on shares of ‘Company A’ and no STT on ‘Company B’. Further, currency markets are 500% bigger than commodities markets, yet there is no transaction tax levied on them, which is again discriminatory. Gold ETFs too have been charged at 0.001% as against 0.01% for gold futures traded on commodity futures markets. Gold ETFs are 100% backed by physical gold,” said Javalgekar.
In an attempt to soften the blow, the finance minister has allowed CTT paid in a particular year to be deducted from business income in the next year if the assessee shows her income as business gains. The move is expected to encourage hedgers, but analysts say it may not be enough to offset the negative impact of CTT.
Mishra believes this will only marginally offset the CTT impact. For instance, if a company pays a CTT of ` 10 in a financial year and earns income of ` 100 in the next fiscal, the tax benefit will only be to the extent of ` 3 and not ` 10 . Also, though the FM said in his speech that business gains or losses could be set off against losses or gains in commodity futures trading, not the case currently, this found no mention in the Budget memorandum.
Source: Bullion Bulletin