Abolish CTT, restore investor confidence in commodity market

While the stock market is expecting that Jaitley would remove STT—at least partially, a similar tax under the name of CTT implemented in commodity futures market needs to be abolished to help the industry grow.

As the Narendra Modi government gets ready to present its first national budget, there is an urgent need for the apex commodities regulator—the Forward Markets Commission (FMC)—to pitch for the abolition of Commodities Transaction Tax (CTT) and plead before Finance Minister Arun Jaitley to save the commodity futures market.

Reports in the media say that the apex stock market regulator—the Securities and Exchange Board of India (SEBI)—officials have met with the Finance Minister to demand the removal of Securities Transaction Tax (STT). Stock exchanges and traders are hoping that abolition of STT would be a major announcement in the budget that Jaitley would present a few days from now.

Currently, an investor buying shares through a broker is charged 0.1 percent STT at the time of buying and selling. Ever since the introduction of STT a few years back, volumes in India’s two national stock exchanges—BSE and NSE—have considerably come down on account of the increased transaction costs.

SEBI, stock exchanges, brokers and investors have been complaining that transaction costs of buying and selling shares in India are huge compared to other financial markets in the world. This has hurt investor sentiments and reduced liquidity, turning Indian stock markets less attractive in the emerging markets.

While the stock market is expecting that Jaitley would remove STT—at least partially, a similar tax under the name of CTT implemented in commodity futures market needs to be abolished to help the industry grow faster and better.

Former finance minister P Chidambaram introduced CTT in commodity futures trading in last year’s budget. It was then strongly opposed by commodity exchanges, traders, brokers and investors. Commodity trading in India is just 10-year old, and the government is yet to open up the futures trading sector with the result that banks, FIIs and mutual funds are not allowed entry into commodities trading market.

In India, more than 80% of the trade volumes take place in bullion, metals and energy and hence CTT has resulted in a significant drop in trade volumes in these segments that drove commodity futures business. Unlike in stocks or agri commodities, daily movements in the above mentioned commodities are generally very low, resulting in most of the profits that a trader makes are lost in the existing charges. Bullion, metals and energy prices are closely linked to international price movements and hence trade volumes have shifted to such global exchanges as hedgers try to minimise risk in commodities trading. This could result in India losing its place of pride in the international markets- that of having one of the top gold, silver and energy online exchanges in the world.

In Indian stock markets, STT was introduced after the market matured and attained huge trading volumes while electronic trading in commodity futures were introduced only 10 years back and the sector is still suffering from growth pangs. Hence the broking community is of the view that CTT should be abolished until the market attains sufficient trade volumes and depth.

Ever since CTT was introduced, in the last one year, volumes in commodity exchanges have drastically come down. To be specific, volumes at MCX and other national commodity exchanges are just a third of what it used to be an year ago.

Commodity futures market began losing steam in July 2013 when the government introduced CTT. CTT of 0.01 per cent on the sell side on all volume commodities in bullion and metals ensured that cost of trading shot up by at least 20 per cent. Many traders and intra-day players left commodities market as CTT virtually capped any arbitrage profit booking in trading. It is therefore essential that the new government should review CTT and remove or relax the taxing burden on the market participants.

In the last few years, the government has been debating amendments to the Forward Contract Regulation Act (FCRA) under which FMC is overseeing futures trading in India. The debate has not yet translated into action, with the results that commodity trading is still a restricted sector with banks, mutual funds and foreign institutional investors out of its ambit.

It was the BJP government under former prime minister Atal Behari Vajpayee who gave approval to set up national commodity exchanges in India in 2003. Now, a decade later, a new BJP government with a massive political mandate is in chair to the rule the country. India—one of the world’s largest consumers and producers of the largest varieties of commodities including the glittering precious metal gold—needs a more vibrant commodities futures market.

FMC needs to take up with the Finance Minister on the need to abolish CTT to bring liquidity and market depth the commodity futures trading in the country.