New Delhi, Feb. 17: The finance ministry is considering imposing a transaction tax on commodity trading in the forthcoming budget to check the huge flow of money in this market.
The move is aimed at creating a level-playing field with the securities market, which has been paying transaction tax, introduced in 2004, at the rate of 0.1 per cent. Besides adding to the government’s coffers, the securities transaction tax (STT) keeps track of the cash flowing into the stock markets and acts as a check on the black money being channelled into the bourses.
Marketmen have been lobbying the government for an equal treatment by either scrapping STT or imposing a commodities transaction tax (CTT). They feel the commodities market is unregulated and has many unexplained price variations because of speculative buying, at times funded by suspect money.
The proposal is to impose a 0.1 per cent CTT and a 0.17 per cent levy on commodity futures and options from this year’s budget.
Chidambaram had first proposed to levy CTT in his budget for 2008-09.
In his budget speech of that year, Chidambaram had said: “Transactions in commodity futures have come of age. Hence, I propose to introduce the commodities transaction tax (CTT) on the same lines as STT on options and futures.”
But he had to back down in the face of opposition from the food processing and consumer affairs ministry and the commodity exchanges.
Between April 2012 and January 2013, the government collected Rs 3,730 crore in STT, down nearly 10 per cent from previous year because of the volatility in the bourses. Officials estimate they can collect Rs 3,000-4,000 crore from CTT, if it is imposed, and another Rs 5,000 crore from STT in 2013-14.
“The point that we as tax administrators keep making is that commodities exchanges have huge volumes and are often difficult to tax. A CTT will help us keep track of the money flow and alert those who have been trying to funnel ill-gotten wealth into commodity bourses to stay away,” officials said.
Tax administrators have the support of bankers and stock exchanges. At a pre-budget meeting with the finance minister, State Bank of India chairman Pratip Chaudhuri had argued that money, which would have normally gone into stocks, have shifted to the commodities market because of fewer checks and taxes on it.
On the other hand, the commodity exchanges are against the move. They are in favour of scrapping of STT instead of imposing CTT as they feel the levy will destroy the exchanges, which are still in their infancy.
Commodity exchanges have argued that the tax will not only push up costs but can also result in traders shifting to illegal trading platforms, known as “dabba’ system, in market parlance. Taxing derivatives, according to the bourses, would be the most retrograde step with a few international precedents.
However, their arguments are not cutting much ice with the North Block. Chidambaram was widely criticised for introducing STT in his earlier stint as the finance minister of the UPA government, but the levy had little or no effect on trading volumes. Rather, it helped to regulate the market and brought in some revenues.
With the government strapped for cash, it’s more likely that it will not scrap STT while bringing in CTT to rake in some extra revenues.