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Monday, 13 February 2012 01:07
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New tax could wipe out commodity exchanges

Given that collections from the Securities Transaction Tax (STT) are a whopping 26% below that in the April-December 2010 period and will punch a big hole in this year’s budget, it is only natural the finance ministry should look to alternate sources of revenue, even other areas on which the STT can be levied. One such proposal, doing the rounds after the finance minister’s pre-budget meetings with various groups of people, is to put an STT-type tax on transactions in commodity exchanges. On the face of things, that sounds fair, more so since this can also be accompanied by a small reduction in the STT on equity market transactions. Before levying any such tax, however, the finance minister would do well to examine its impact. Right now, the cost of trading in commodities on Indian exchanges is broadly similar to that in global exchanges, around 0.003% per transaction. Apply the same transaction tax P Chidambaram wanted to levy in 2008-09 — it was withdrawn after the Prime Minister’s Economic Advisory Council weighed in against it – and the transaction costs in Indian commodity exchanges will rise around 7 times. In other words, the markets will collapse, moving to non-formal exchanges or to overseas markets.

One reason why equity markets never tanked when STT was introduced was that this was accompanied by an abolition of long-term capital gains taxes on share transactions, but the bigger reason was that it is not possible to transact in Indian shares in overseas markets. In the case of commodities, however, moving to hedge bets in global markets is very easy and doesn’t require any RBI permissions in case of firms who have, as so many do, overseas branches. Ironic that while government was supposed to be helping deepen liquidity in a market that helps in price discovery in the agriculture sector – by allowing options, by allowing banks to participate, etc — it is contemplating actions that could end up killing the markets.



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