The Hindu Business Line : Defer taxing commodity transactions

In Para 179 of the Budget Speech, the Finance Minister, Mr P. Chidambaram, announced: “Transactions in commodities futures have come of age. Hence I propose to introduce the Commodities Transactions Tax (CTT) on the same lines as STT on options and futures.”

Is it true that our commodity markets have really come of age? Commodity markets include both ‘spot’ markets, where goods are traded for immediate delivery, and ‘forward and future’ markets, where prices are agreed in advance for trading at various dates in the future.

Finance Bill Provisions

Commodities traded in bulk on the Indian exchanges are bullion and crude oil.

Finance Bill 2008 has introduced Chapter VII in the Income-Tax Act, 1961 to provide for the levy and collection of the Commodities Transactions Tax (CTT).

CTT is defined to mean the tax leviable on the taxable commodities transactions. ‘Taxable commodities transaction’ means a transaction of purchase or sale of option in goods, or option in commodity derivative, or any other commodity derivative, traded in recognised associations.

Words and expressions used but not defined in Chapter VII will have the meaning given in the Forward Contracts (Regulations) Act, 1952. CTT will be charged in respect of every taxable commodity transaction as per the table given in Chapter VII (see Table).

The value of a taxable commodity transaction will be the option premium in the case of sale of option as per Sl.No.1. In the case of sale of an option where option is exercised, it will be the settlement price of the option. In respect of sale of any other commodity derivatives, it will be the price at which the commodity derivative is sold.

As in the case of FBT, returns will have to be filed before the assessing officer (AO) giving details of all taxable commodity transactions entered into during the financial year in the recognised association. An assessment will also be made after scrutinising the return, to determine the CTT payable.

There is also provision for allowing as deduction under Section 36 of the Income-Tax Act, 1961, the CTT paid by the assessee on condition that income from taxable commodity transactions will be included under the head “profits and gains of business or profession”.

Adverse impact

Critics have cautioned that the imposition of CTT will lead to a fall in the volumes of exchanges and encourage traders to indulge in unofficial trade and move business to global markets. Commodity bourses have also been brought under the service tax net of 12 per cent.

Even the Chairman of the Forward Market Commission has opined that the introduction of CTT will adversely affect the commodity futures market at a time when options are to be introduced in India.

The commodities market in India is only four years old. We have two notable exchanges, namely, the MCX and the NCDEX. CTT is modelled on STT. But STT confers the benefit of not having to pay long-term capital gains. It also allows futures income loss to be treated as normal business income loss. This is not true of CTT. The CTT, it is said, will not serve the economic purpose of enabling risk management. Commodities are internationally traded and CTT would distort the price discovery mechanism.

Commodities traded in bulk on the Indian exchanges are bullion, natural gas and crude oil. Arbitrate traders derive risk-free profit in day trades.

The CTT, it has been pointed out, will affect the viability of such trade for short-term traders and arbitragers. Assuming that jobbers incurred an expenditure of Rs 500 for buying futures worth Rs 1 crore, the extra burden because of the Finance Bill, 2008 will be Rs 1,700 as CTT and Rs 50 as service tax. The total burden will rise to Rs 2,250, working out to 800 per cent rise in the burden.

Transaction costs

It has also been pointed out that in rest of the world, a turnover tax is applied only to cash transactions and not futures trading. This will only push up transaction costs and commodity futures will lose their appeal as instruments of risk management and price discovery. CTT is extended even to trade in commodities options, though such trading has not yet been allowed in India.

The levy has come as a bolt from the blue. The transactions cost in commodity exchanges will increase fourfold because of this levy.

Also, the inflationary potential of this levy cannot be overlooked. Nothing would have been lost if the proposal had been thrown open for discussion and debate before being made part of the Finance Bill.

The Government still has time to consider the pros and cons of the measure. It will come into force from the notified date. The best solution under the circumstances will be to defer the introduction of the CTT for the time being.

(The author is a former Chief Commissioner of Income-Tax.)

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