FMC Writes to Finance Ministry to Abolish CTT
Says the tax has had an adverse impact on volumes, price discovery and hedging efficiency
Commodity exchanges regulator Forward Markets Commission (FMC) has written to the finance ministry, its administrative ministry, to remove the transaction tax on commodity futures trade or CTT introduced in July last year because of its adverse impact on volumes and indirectly on price discovery and hedging efficiency, said a person aware of the development. The thinking within the market, this person said, was that the new government, led by NDA, during whose earlier term commodity futures trading was re-introduced after an almost four-decade ban, might halve the levy from .` 10 per lakh on the sell side, along with rationalising the securities transaction tax (STT) in the stock market. “Volumes tanked by 40% in July last year from a year ago when the tax was introduced and cumulative value of trade in the fiscal year through March 2014 declined by 40% year-on-year to .` 101 lakh crore. Thus, the adverse effect of this tax alone on volumes is 40%,” he added. The impact of reduced volumes, say commodity exchange officials such as Satyananda Mishra, chairman of MCX, has impacted price discovery and hedging efficiency. Theoretically, an ideal market has an equal number of speculators and hedgers. However, the person cited earlier said on MCX, the proportion of day traders — who square off their positions before the closure of a trading session — after the levy declined from around 60% to 20% and that of speculators increased from 20% to 60%. Hedgers account for the remaining portion on the metals and energy bourse, which has impacted price discovery and hedging quality as the number of speculators — who hold positions for few days based on informed decisions — has risen. Ramesh Abhishek, chairman, FMC, could not be reached for a comment. MCX’s Mishra said the logic for imposition of CTT — that a similar tax existed for stock and index derivatives and thus, commodity futures transactions should be taxed too — was untimely as the market is just a decade old and has limited participation as institutions like mutual funds and banks cannot trade and only futures products are allowed unlike in the stock markets. “There is a strong case for CTT to be abolished,” said Mishra, whose exchange has also been hit by a scam on National Spot Exchange (NSEL), a subsidiary of its promoter Financial Technologies (FT). Apart from MCX, which has a market share of more than 80%, other commexes include farm bourse NCDEX, in which stock bourse NSE holds 10%, CWC-promoted NMCE, Kotakpromoted Ace, Reliance Capital-anchored ICEX and the newest bourse Universal Commodity Exchange, promoted by Commex Technology.
The thinking within the market is that the new government might halve the levy from 10 per lakh now on the sell side, along with rationalising STT