Commodity Transaction Tax – An insipid recipe for Commodity Trading

Imposition of transactional tax on derivative trading is important and typical

issues, created with an objective to reduce hedging, remove excess volatility and

price discovery function of future markets. Although, it is debatable whether cutting

the number of transaction by imposing a levy would reduce the speculative

transaction.

There are some in the commodity trading arena who believe that implementation of

Commodity Transaction Tax (CTT) in line with the Security Transaction Tax (STT)

will increase government revenue and bring transparency in future market

transactions, while helping the macro-economy with better resource allocation.

On the flip side, others argue that it would lead to higher volatility and lower trade

activity, distorting the market efficiency and liquidity.

However, the truth is actually otherwise. At a time when the commodity market is

struggling to arrest decline in trade volume, the intent to introduce CTT on the

commodity derivatives would certainly dent the nascent market.

The industry experts opine that any transaction tax on commodity derivatives could

push the declining business to either illegal ‘dabba’ trading or overseas commodity

exchange.

Even the global experience shows that imposition of a CTT of a 0.017 per cent on

trading value will have negative impact on trading volume and positive impact on

volatility, while not raising government revenue.

Though, there has been no official word so far, but speculation is rife in the industry

space that the government could propose the CTT when it announces Budget

proposals for 2012-13 next month.