Commodities transaction tax expanded to cover 38 more items

The Finance Ministry has expanded the list of agricultural commodities on which the commodities transaction tax (CTT) is currently levied. As many as 38 items have been added to the existing list of 23 commodities.

For this purpose, the Central Board of Direct Taxes has amended the CTT Rules notified in July 2013. The new items that have been added include rice, bajra, ginger, sesamum, small millets, tur, tur dal, urad, urad dal, onion, groundnut, moong dal, methi, ragi , betelnuts, cinnamon, nutmeg, jowar, linseed, gram daland sunflower seed.

Currently, some of the new items added to the list are not traded on commodity bourses. This CBDT move is significant as it comes a fortnight before the Budget for 2015-16 is to be presented. The Forwards Market Commission – the regulator for commodity futures market in India – had recently suggested to the Finance Ministry that the CTT should be either done away with in the upcoming Budget or the quantum of the levy should be reduced.

The Centre had imposed a 0.01 per cent CTT on primarily non-agricultural commodities from July 2013, resulting in the volume of trade on the commodity exchanges dropping.

According to the Forward Markets Commission's market report, the volume of trade till January during the current fiscal dropped to ₹51.26 lakh crore against ₹89.03 lakh crore during the same period a year ago. The trade value dropped to ₹101.44 lakh crore in the 2013-14 fiscal against ₹170.46 lakh crore in 2012-13.

Source: Business Line

New China credit policy to hit copper imports in Shanghai trade zone

(Reuters) - Trading companies operating in Shanghai's free trade zone are likely to cut back on using copper imports as a financing tool as they are now allowed to borrow from overseas banks more freely, trading sources said.

 

Traders said the reduction would further hit China's imports of copper, which dropped off after Chinese banks tightened credit in the second half of last year amid probes of an alleged metal financing scam. 

 

More than 50 percent of China's refined copper imports in 2012-2013 were linked to financing deals, according to traders.

 

 

The refined copper imports still hit a record in 2014 due to increased term shipments and state purchases, but weak spot buys cut the inflows by more than 9 percent in the second half from the first half. 

 

China's central bank (www.pbc.gov.cn) said on Thursday that companies in the Shanghai free trade zone would now be allowed freer access to financing from abroad.

 

"We used copper trade for transferring funds in and out of Shanghai. Now we don't need copper any more because we can transfer money directly to and from our subsidiary," said an executive at an Asian trading house with a subsidiary operating in the trade zone.

 

The executive said he expected bonded copper stocks in the zone to fall because of fewer financing deals. He declined to be named because he was not authorized to talk to media.

 

Last year's drop-off in China's copper imports in the second-half of the year was a drag on the metal's prices , which fell about a quarter by the end of January from a five-month peak hit in July.

 

Many metal-trading companies moved into the zone looking for a freer trading environment after Beijing started it up in 2013 to try and gradually open the Chinese market.

 

Like importers outside the zone, these traders imported copper, nickel and zinc , storing the metals in bonded warehouses as collateral for cheaper short-term loans from foreign banks.

 

 

U.S. dollar loans from Hong Kong banks are charged annual interest rates of about 1.5-2 percent, compared to more than 5 percent for yuan loans in the domestic market, said the Asian trading house executive.

 

More loans from aboard would cut demand for yuan loans in the China's domestic market, which could force Chinese banks to lower lending rates, said a trader at a state-owned trading company operating in the zone.

Will LME Copper Cheer up during Chinese New Year Like Years Past?

Copper prices on the London Metal Exchange (LME) usually trend up during the Chinese New Year holiday. Will the same occur during the upcoming 2015 Chinese New Year holiday in mid-February?

Analysts interviewed by SMM list the major events that will affect LME copper during the holiday:

US Data and US Dollar Index 

The US dollar index climbed to a more than 11-year high lately. With the US housing starts, PPI, and existing home sales for January to be released during the holiday, the movements of US dollar index will largely influence LME copper prices.

Crude Oil

Crude oil prices experienced intensified volatility. Crude futures rebounded after hitting an over 5-year low on January 29, with LME copper following up. 

Greek Debt Issue

The Greek debt issue may be the greatest uncertainty, as Eurogroup will discuss the conditions for extending bailouts to Greece at the meeting scheduled for 16 February – just before the holiday. And the result from the meeting may magnify market movements. 

Briefing on China Economic Performance 

There will be a briefing on China’s economic performance at the press conference to be held by the State Council Information Office February 20, which may send signals about olicies to be adopted after the holiday. 

“Copper consumption is often the weak around the Chinese New Year holiday, with inventories both at home and aboard set for rises, however, expectation for more stimulus policies may probably offer some support to prices,” an analyst from Minmetals Futures told SMM. 

FMC urges finance ministry to reduce commodity transaction tax

The Forward Markets Commission(FMC) urged the finance ministry to remove or reduce the commodity transaction tax (CTT) in the forthcoming budget because it has severely hit trade volume in the decade-old commodity futures market.

Brokers said the tax of 0.01% on the seller along with lack of volatility has hit futures volume by 40% since it was imposed in July 2013. FMC data show that volume shrank 41% to Rs 101.4 lakh crore in FY14, the fiscal year the tax was introduced on non-farm and processed farm contracts such as gold, silver, crude oil, cotton, soya oil and sugar.

In the fiscal year through January 2015, volume has fallen 42% to Rs 51.3 lakh crore from the same period last year. Moreover, commodity transaction tax collection has been significantly lower than that from securities transaction tax (STT) on stock market transactions.

On MCX, the country's largest commodity exchange with 90% market share, collection in the fiscal year through December was Rs 374.35 crore against Rs 4,940 crore in securities transaction tax over the same period.

"There has been a recommendation to remove or reduce the tax," said a government official. "Introduction of commodity transaction tax has drastically affected volumes and since the commodity futures market is nascent, it's imperative to either wholly remove the tax or to reduce it substantially," said Suresh Nair, director, Admisi Commodities.

The previous UPA government, which introduced the tax at a rate of Rs 10 per Rs 1 lakh on the sell side, justified it on the ground that a huge number of transactions on the commodity futures market did not result in delivery. Officials from leading exchanges such as MCX and NCDEX - specialising in farm and non-farm contracts respectively - argued that physical market constituents used the market to hedge their price risk and not necessarily to give or take delivery.

Further, they pointed out that speculators provided the market with liquidity by taking a contrarian position to that of hedgers. Some of these market participants, who squared off their positions on a daily basis, would be forced out of the market because of commodity transaction tax as the narrow spreads they trade on are being squeezed by the tax.

In the current fiscal year through January, bullion (gold and silver) volumes are down 53% to Rs 18.3 lakh crore, energy by 39% to Rs 13.1 lakh crore and base metals by 32% to Rs 10.6 lakh crore. Bullion accounted for 70% of the overall turnover, followed by energy (26%) and base metals (21%).

Is Commodities Transaction Tax removal in the offing?

The Commodity Transaction Tax (CTT) was introduced in the 2013 Union Budget on non-agricultural commodities traded on futures exchanges.

This was based on the premise that commodity exchanges have matured; and there is no difference between stock and commodity derivatives trading.

Therefore, the very existence of Securities Transaction Tax (STT) in stock exchanges justified the CTT, as was stated during the time of the tax announcement.

Since then, and even before that, several arguments have been put forward on the differences between the commodity and the stock exchanges; but that is immaterial now as the impact of CTT on the commodity futures markets is quite perceptible in the non-agricultural segment.

The CTT of 0.01 per cent that was levied on the sale transaction of commodity futures on non-agricultural commodities from July 1, 2013 increased the cost of transaction almost six times.

The drying of the liquidity as traders deserted the market has had a compounding effect as the impact cost of trading rose, thereby making the exchange-traded commodity market costlier still. The most perceptible impact is on the hedging efficiency. That the futures market was set up for the purpose of hedging needs no reiteration.

Hedging efficiency

Hedging efficiency measures the degree to which physical market risk can be covered by taking appropriate opposite positions in the futures market. One of the good measures of hedging efficiency is given by the Ederington’s Formula.

Following this formula, the Hedging Efficiencies of four commodities traded on the largest non-agricultural commodity exchange are given in Table 1.

Despite hedging efficiency numbers being good (to the extent of being world class) during the pre-CTT phase, there has been a substantial drop in hedging efficiency after the imposition of commodity transaction tax (CTT).

Table 2 shows the decline in liquidity caused by CTT. Liquidity is measured by the Hui-Heubel Ratio, or HH Ratio; higher the number, more illiquid is the market. Table 2 shows that HH Ratio increased, i.e. liquidity dried up, for commodities in all segments: bullion, base metals and agricultural commodities between the periods before and after the imposition of CTT.

Market buzz has it that a number of large trading firms shifted their commodity trading desks overseas following the steep increase in transaction cost due to CTT.

Lower revenue

A number of corporate hedgers also are now finding hedging in global exchanges more attractive to manage their risks rather than hedging in India, notwithstanding the currency risks they encounter in hedging abroad.

Those that are not able to trade abroad possibly are shifting to the illegal (‘dabba’) markets, as trading interest is a significant function of trading costs.

Significantly, as I had argued in a co-authored paper published in the Economic and Political Weekly (“Commodity Transaction Tax: A Recipe for Disaster, EPW, September 27, 2008), even the revenue generated from CTT would be much lower than the direct and indirect revenue loss due to the lower volumes of trade.

There is a clear case of existence of a Laffer Curve (which states that tax revenues increase with initial increases in tax rates but diminishes thereafter), and the critical point might be reached at between 10 and 15 per cent volume loss.

As we might have noted by now, the volume loss is to the tune of around 60-70 per cent. Hence, there is a high chance of revenue loss than garnering revenue.

The government is contemplating creating an International Financial Centre, which will surely have to offer tax incentives to entice international traders to trade in the country.

One such policy reform should be the removal of transaction taxes such as the CTT, as they do not exist anywhere else in the world, except for Taiwan.

Policy reforms in the field of taxation in the commodity futures market is of critical significance as various taxes and levies are a significant component in the overall cost of transaction. We can look forward to the forthcoming budget now, maybe to witness such changes.

The price of gold is taking a beating

Gold's 2015 rally was looking shaky on Wednesday with the metal falling for a second day in a row to levels last seen January 9.

The decline in the gold price came despite rising concerns that Greece may abandon the euro and Ukraine may be headed for a wider conflict with the stronger US dollar doing most of the damage.

In afternoon trade on the Comex division of the New York Mercantile Exchange gold for April delivery dropped 1.1% or $13.60 to exchange hands at $1,218.60 an ounce, at the lows for the day.

Gold's 2015 gains on the back of safe haven demand have now been trimmed to around $30 an ounce as the metal beat a steady retreat from a high of $1,307 hit on January 22.

Yields on benchmark US treasurys stayed on the higher side of 2% on Wednesday, rising for the sixth straight session to a one month high.

It's an indication that markets are expecting a rate hike by the US Federal Reserve over the summer months. Higher yields raises the opportunity costs of holding gold because the metal provides no income.

Higher rates also boost the value of the US dollar – already trading at multi-year highs – which usually move in the opposite direction of the gold price.

On Wednesday the US currency edged higher again coming close 12-year highs against the currencies of its major trading partners hit late January. The dollar index has strengthened by 17.4% over the last year.

Germany's Commerzbank on Wednesday predicted a gold price of $1,250 an ounce by the end of the year reports Platts News.

The bank said that while it believes that the gold price is likely to continue benefiting from the "ultra-loose monetary policy pursued by the ECB, we expect the gold price to suffer a renewed setback in the summer months because the market is underestimating the [US Federal Reserve's] interest rate hikes."

In Europe, Wednesday's crucial meeting of European finance ministers to discuss the future of the Greek bailout program may offer a surprise to markets, while the outcome of urgent peace talks between Russian and Ukraine happening at the same time is also being closely watched.

Gold investors 'putting aside fundamentals'

Gold price weakness returned on Tuesday as improving prospects of a Greek debt deal dampens safe haven buying and a rise in bond yields in the US make the metal less attractive as an investment.

In afternoon trade on the Comex division of the New York Mercantile Exchange gold for April delivery shed 0.7% or $8.90 to exchange hands at $1,232.60 an ounce, not far off its lows for the day.

Gold's 2015 gains – the metal is still up nearly 4% or over $48 since the start of the year – have been ascribed to safe haven buying amid the West-Russian standoff over Ukraine, a slowing global economy and a debt crisis in the Eurozone.

A stronger than expected jobs report in the US on Friday provided a boost to equities and caused a bounce in bond yields, with benchmark US treasurys on Tuesday scaling 2% for the first time in a month. Higher yields raises the opportunity costs of holding gold because the metal provides no income.

Higher rates also boost the value of the dollar – already trading at multi-year highs – which usually move in the opposite direction of the gold price.

India and China are not buying right now, our books are not full

On Tuesday the greenback edged higher staying in range of 12-year highs against the currencies of major US trading partners hit late January. The dollar index has strengthened by more than 17% over the last year.

Platts quotes the CEO of MKS Frederic Panizzuti as saying that concern about global risks is the main driver of the gold price:

"We have put fundamentals aside in our gold outlook for 2015," Panizzuti said. "Geopolitics, the perception of risk and even emotional risk from investors are the main drivers this year."

Swiss-based MKS is one of the world's largest refiners and Panizzuti said this year's rise in the gold prize has been largely Exchange Traded Funds investing in the precious metal rather than physical demand that has driven the market:

"India and China are not buying right now, our books are not full. But we expect to see some buying from March and April onwards."

Panizzuti was the winner in 2014 of the London Bullion Market Association's gold forecasting contest with his estimate of $1,262 per ounce for the year with the actual average over the 12 months of $1,267.

For this year Panizutti is the second most bullish of the 35 analysts with an annual average prediction of $1,292 per ounce and a range of $1,150 and $1,390.

Overall the LBMA survey indicates gold will trade in a narrow band this year to average $1,211 a troy ounce with a range between $1,085 and $1,356 during 2015.