While markets may be better off if commodity tax is held back, the revenue possibilities make it inevitable
There are at least three compelling reasons for introducing the commodity transaction tax (CTT) this year. The first is that the government requires money, and any amount is welcome as the effort is to look at all options. The second is that if the stock markets are subject to the securities transaction tax (STT), why not the commodity market? The third is that the market is now mature, or has reached whatever level of maturity that is possible given the constraints of absence of movement in policy, and is almost a decade old. In fact, as a corollary, once done, the government can also start looking at the forex derivative market.
The crux of the debate really is how many layers of taxation there should be in any market. There is already a service tax being imposed as well as a capital gains taxes. The rationalisation of the latter led to the creation of STT. The idea was that such a tax makes collection easy and normalises the payment across all participants. Also, it helps to reduce volatility in the market as speculative activity gets more affected and, to this extent, the unwanted ‘noise’ is eliminated. The securities market did not want to have this tax and, when the commodity market started picking up, made an appeal to have the same across this segment too.
The securities market clocks around R1,00,000-1,20,000 crore a day, while the commodity market does around R70,000 crore. The forex derivative market does another R40,000 crore a day. Clearly, such a turnover does, prima facie, show some level of maturity and merits the transaction tax, once it is accepted that we want to tax transactions in any market. The raison d’être is that all transactions that are carried out in the market that are based on an investor-gain motive need to be taxed. Therefore, bank transactions are not taxed, but stock market transactions are. If this is accepted, then one can extend the logic to other segments too.
The mathematics of such a tax is compelling. Of the R70,000 crore being traded on a daily basis, not more than 10% comes from farm products. The rest comes from bullion and energy products, which are non-delivery based. The participation is more from traders rather than hedgers, which strengthens the case for the tax. Also, the standard argument given that futures trading leads to price discovery, which can get thwarted, is countered here by the fact that in crude oil or gold or silver, price discovery takes place on international exchanges and the price at home is simply the international price multiplied by exchange rate plus taxes. If trading volumes come down, this will entail the weeding away of the speculators who are adding ‘noise’ and not substance. Long-term investors would not be affected by such a tax.
In the stock market too, volumes did not really come down with the tax, just like it can be argued that if STT is removed, volumes will increase temporarily but will not sky-rocket, as all stock market activity is based on the state of the economy and not a tax. If the tax is, say, R17 per lakh, as was proposed earlier, with the volumes being more than twice our GDP at close to R200 lakh crore, the government could pick up close to R3,500 crore, which is not bad given that STT was to pick up R5,900 crore this year.
Two issues arise. The first is what about farm products? Should they be taxed? Today, vibrant trade takes place in the oil complex and to a limited extent in chana and some spices. The trading community is well dispersed across traders, brokers, corporates, etc. There is also a suspicion about the role played by speculators in pushing up prices in the case of pulses and cereals earlier that prompted bans and the magnification of prices when there are shortages in narrow commodities such as spices. We have had an expert committee that looked into the linkage between futures trading and spot prices which did find any such relation.
But, this raises an interesting question. If futures trading does not influence spot prices, then what exactly do we mean by price discovery? Therefore, there is an inherent contradiction in such logic because if prices are discovered and efficient, then they should logically impact spot prices. And if they do not, then what could be the purpose of such prices? One may recollect that the main reason from bringing back futures trading was to enable benefits to go to farmers through better prices. Therefore, the basis of futures trading hangs precariously when this rationale has to be balanced with causes for inflation and the quality of trading.
The second is what happens to hedgers in this market? Farmers do not trade, because they have little access. The non-passage of the FCRA means that their participation remains a part of the wish-list of FMC, which has little power to change the rules of the game. Further, there are hedgers such as jewellers and corporates who deal with steel, aluminum, edible oils, etc. Such a tax puts a burden on them. The solution is really to have exemptions for hedgers who already have separate hedge limits with the exchanges as per the rules laid down by the FMC. Therefore, they should get refunds or exemptions. The UID Aadhaar scheme should help to keep farmers out of the ambit of such a tax as and when they come in.
The CTT issue is contentious and there are an equal number of examples of success and failure of such taxes in markets, be it securities or commodities. The same holds for countries with and without such taxes. But the reality is that the government is trying to tap all possible sources of taxation and this market looks juicy enough—especially the non-farm segment. The fact that there is a lot of concern on gold imports could be a factor hastening the introduction of this tax. Hence, while the market would be better off in case CTT is held back for some more time, it may be inevitable.
There are at least three compelling reasons for introducing the commodity transaction tax (CTT) this year. The first is that the government requires money, and any amount is welcome as the effort is to look at all options. The second is that if the stock markets are subject to the securities transaction tax (STT), why not the commodity market? The third is that the market is now mature, or has reached whatever level of maturity that is possible given the constraints of absence of movement in policy, and is almost a decade old. In fact, as a corollary, once done, the government can also start looking at the forex derivative market.
The crux of the debate really is how many layers of taxation there should be in any market. There is already a service tax being imposed as well as a capital gains taxes. The rationalisation of the latter led to the creation of STT. The idea was that such a tax makes collection easy and normalises the payment across all participants. Also, it helps to reduce volatility in the market as speculative activity gets more affected and, to this extent, the unwanted ‘noise’ is eliminated. The securities market did not want to have this tax and, when the commodity market started picking up, made an appeal to have the same across this segment too.
The securities market clocks around R1,00,000-1,20,000 crore a day, while the commodity market does around R70,000 crore. The forex derivative market does another R40,000 crore a day. Clearly, such a turnover does, prima facie, show some level of maturity and merits the transaction tax, once it is accepted that we want to tax transactions in any market. The raison d’être is that all transactions that are carried out in the market that are based on an investor-gain motive need to be taxed. Therefore, bank transactions are not taxed, but stock market transactions are. If this is accepted, then one can extend the logic to other segments too.
The mathematics of such a tax is compelling. Of the R70,000 crore being traded on a daily basis, not more than 10% comes from farm products. The rest comes from bullion and energy products, which are non-delivery based. The participation is more from traders rather than hedgers, which strengthens the case for the tax. Also, the standard argument given that futures trading leads to price discovery, which can get thwarted, is countered here by the fact that in crude oil or gold or silver, price discovery takes place on international exchanges and the price at home is simply the international price multiplied by exchange rate plus taxes. If trading volumes come down, this will entail the weeding away of the speculators who are adding ‘noise’ and not substance. Long-term investors would not be affected by such a tax.
In the stock market too, volumes did not really come down with the tax, just like it can be argued that if STT is removed, volumes will increase temporarily but will not sky-rocket, as all stock market activity is based on the state of the economy and not a tax. If the tax is, say, R17 per lakh, as was proposed earlier, with the volumes being more than twice our GDP at close to R200 lakh crore, the government could pick up close to R3,500 crore, which is not bad given that STT was to pick up R5,900 crore this year.
Two issues arise. The first is what about farm products? Should they be taxed? Today, vibrant trade takes place in the oil complex and to a limited extent in chana and some spices. The trading community is well dispersed across traders, brokers, corporates, etc. There is also a suspicion about the role played by speculators in pushing up prices in the case of pulses and cereals earlier that prompted bans and the magnification of prices when there are shortages in narrow commodities such as spices. We have had an expert committee that looked into the linkage between futures trading and spot prices which did find any such relation.
But, this raises an interesting question. If futures trading does not influence spot prices, then what exactly do we mean by price discovery? Therefore, there is an inherent contradiction in such logic because if prices are discovered and efficient, then they should logically impact spot prices. And if they do not, then what could be the purpose of such prices? One may recollect that the main reason from bringing back futures trading was to enable benefits to go to farmers through better prices. Therefore, the basis of futures trading hangs precariously when this rationale has to be balanced with causes for inflation and the quality of trading.
The second is what happens to hedgers in this market? Farmers do not trade, because they have little access. The non-passage of the FCRA means that their participation remains a part of the wish-list of FMC, which has little power to change the rules of the game. Further, there are hedgers such as jewellers and corporates who deal with steel, aluminum, edible oils, etc. Such a tax puts a burden on them. The solution is really to have exemptions for hedgers who already have separate hedge limits with the exchanges as per the rules laid down by the FMC. Therefore, they should get refunds or exemptions. The UID Aadhaar scheme should help to keep farmers out of the ambit of such a tax as and when they come in.
The CTT issue is contentious and there are an equal number of examples of success and failure of such taxes in markets, be it securities or commodities. The same holds for countries with and without such taxes. But the reality is that the government is trying to tap all possible sources of taxation and this market looks juicy enough—especially the non-farm segment. The fact that there is a lot of concern on gold imports could be a factor hastening the introduction of this tax. Hence, while the market would be better off in case CTT is held back for some more time, it may be inevitable.
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