The Levy is based on wrong assumptions: Financial Express 17th March 2008

The commodities transaction tax (CTT) makes fiscal sense as it is being imposed on a turnover of around Rs 40 lakh crore, which leads to the garnering of Rs 680 crore in revenue. But all new taxes need to be targeted meaningfully so that individual sectors are allowed to grow and meet their objectives. In this case, it is price discovery, especially for hedgers, which will ultimately lead to the inclusion of farmers in the stream of benefits.
The CTT has been imposed on the market based on two assumptions that are debatable. The first is that the market is mature and has come of age. The other is that it needs to be put on par with the securities market. The commodity futures market is now four years old and has followed a fairly rough path in the last two years. There was a ban on trading in four major agro products in 2007, which had pushed the market back by years. Farmers in Punjab had actually protested in favour of futures trading, which had offered them vital price clues in 2006 and 2007.
Liquidity has since then been more or less stagnant in this market and the size is around 20% of the securities market. In fact, there would have been virtually no growth in total traded volumes in FY08 over FY07. Presently, the market caters to the retail segment and corporates with participation coming from commodity brokers in particular. Due to institutional reasons, farmers are out of the ambit and while the exchanges, along with regulator FMC, are struggling to make this happen, the drying up of liquidity will make the job that much tougher.
This, in fact, leads to the second issue of whether this segment is comparable with the securities market. The securities market has been in existence for a much longer time and with the emergence of both NSE and Sebi in the mid-nineties can be said to be nearly a decade-and-a-half old. The array of instruments available is diverse--from cash, futures, options, indices, spreads and so on. The players are diverse, with mutual funds, foreign portfolio investors and hedge funds playing their roles. This diversity of players and instruments has added certain buoyancy to the market today.
Further, present tax laws are skewed in favour of the securities Markets. In this segment, players are allowed to set off losses from trading in futures against... profits from other business. Besides, there is also differentiation between short-term capital gains and long-term capital gains, with long-term capital gains being exempt from taxes. With these facilities not available to the commodities Markets, there appears to be an implicit doubling of the tax burden.
Therefore, to say that the market is mature or analogous to the securities market is not true. The consequences of this tax for the market are more serious. When members are trading on low spreads, this tax becomes serious and would come in the way of traders. In fact, exchanges are presently charging between Rs 2-3 per lakh of transaction, and the CTT comes to Rs 17 per lakh of trading. Hence, the pricing structure of this tax appears to be out of sync with the market mechanics. This, in turn, will reduce the levels of liquidity as the cost of trading increases, which will have a ratchet effect on the market.
Presently, there are a large number of hedgers in sectors such as edible oils, sugar, jewellery, steel and other metal products, spices and pulses. There are several other corporates in the textiles, metals and machinery sectors, which are seriously considering hedging on these platforms. Lower liquidity and the tax will certainly not inspire them.
The Budget appears to be ambivalent in its approach towards the farmers. On one hand it has decided to waive Rs 60,000 crore in bad debts. On the other hand, it is taxing the instrument that has delivered as of now limited results in terms of price discovery and information for farmers, but which has the potential to change their income streams in the future. There does appear to be a contradiction here. As Ayn Rand wrote: “Contradictions do not exist. Whenever you think you are facing a contradiction, check your premises. You will find that one of them is wrong”. Here, there are two premises, and both of them may be incorrect.