CTT to adversely impact derivatives markets: CII

The commodities transaction tax (CTT) would lower volume in futures trading by 18-59 per cent within a week of its imposition, says a study by the Confederation of Indian Industry (CII). The maximum decline would be felt by gold (59 per cent), followed by crude (57 per cent), chana (56 per cent), copper (53 per cent), and refined soybean oil (18 per cent) if the CTT had been levied on May 1, 2008. In two years, the study forecasts a sharp fall in volumes of future trading from 93 per cent (chana) to 36 per cent (copper). The Budget had proposed to levy a CTT of Rs 17 per lakh worth of commodities traded on the commodity exchanges.

At present, traders on the exchange incur an average transaction cost of about Rs 2 per lakh. Imposition of CTT would increase transaction cost to more than 8 times the current cost. There is a fear that it would render domestic futures market uncompetitive vis-à-vis the global markets.

CTT has been proposed on the lines of Securities Transaction Tax (STT) as per the Budget announcement. Announcement of the imposition of STT on July 9, 2004, saw average trading volume, which was Rs 4,476 crores during 2003-04, drop 80 per cent to Rs 898 crores in 2006-07. CII predicts similar effects in select commodities in derivatives markets, after the imposition of CTT.

“Reduced trading interest will result in a more volatile commodity market, which is the risk a liquid futures market is supposed to eliminate. The same price signals are then passed on to spot markets, which makes commodities costlier as the traders tend to pass on the costs of bearing the volatility over to the consumers thereby contributing to inflation. Increased volatility will lead to more speculative activities and will lead to the failure of the commodity exchanges objectives of price discovery and resource allocation,” said CII.