India's leading national commodity exchanges have asked Finance Minister P Chidambaram not to compare the commodity derivatives market with the securities derivatives market.
In a memorandum to the Finance Minister, the exchanges said that Chidambaram's proposal to impose the Commodities Transaction Tax (CTT) will ruin the budding commodity futures business in India.
Following is the argument that commodity bourses have submitted to Chidambaram:
Commodity Transaction Tax (CTT) should not be levied on Commodities Derivatives Market (CDM) just because there is Securities Transaction Tax (STT) on Securities Derivatives Market (SDM).
CDM & SDM are completely different DNA and are performing different economic utility function. 800% increase in the cost of transaction will kill the Indian CDM. Cost of transaction has to be in line with global peers as Commodity is Global Asset Class unlike equity which mainly is a Local Asset Class.
CDM is at a nascent stage. It is only 4 years old. Participation of banks, mutual funds, FIs, FIIs is still not allowed. Options contracts, index futures and futures based on intangibles are still to come. Therefore, the correct approach would be to let the market grow properly after enabling all types of instruments and participants, let the market attain its full potential and then tax it, rather than taxing the market before it properly takes off. When STT was applied in stock exchange, it was already grown to its size and all types of contracts were available on its platform.
Stock derivative is on local underlying assets, while commodity derivatives is based on global underlying asset, e.g. gold, soya, cotton, etc. and hence commodity derivatives market cost of transaction should have to be in full convergence with its international peers, otherwise it becomes inefficient and will self-kill because volume will shift to unofficial dabbas or international exchanges, which was the status before the Government lifted the ban in 2003.
Commodity markets are global in nature and are comparable with currency markets, where transaction cost sensitivity is severe up to 4 decimal points. Considering this fact, sudden increase of 800 % will make commodity markets highly inefficient, dormant and illiquid. For instance, gold, soya, cotton, etc. are traded on various global exchanges. Any cost increase in India will induce hedgers to shift their business to overseas exchanges or unofficial markets on which the Government will not have any control.
Cost of transaction will increase almost by 800 %. Out of the total transaction cost, 85 % will be towards CTT and balance will be towards Exchange fee, service tax, stamp duty, etc. Indian exchanges will become costliest exchange in the world losing their global competitiveness. Commodity and currency markets are comparable and both these markets are very cost sensitive.
CTT is nowhere in the world & STT is only applicable for the cash segment of equity in the global market. It is not there in the derivatives segment of equity in USA.
It will create a regulatory arbitrage between national electronic commodity exchanges and regional ring based exchanges. Apart from 3 national exchanges, there are 22 regional commodity exchanges and as per policy followed by regulator, they are not under any compulsion to implement on line trading. Under reporting of transactions is the perennial problem in all outcry markets. Imposition of CTT will aggravate this problem and will lead to regulatory arbitrage between Regional Exchanges and national exchanges.
CTT has been applied on this market, even before the market is properly born. It has only one product 'Futures' and only traders are participating and corporates have just begun. It doesn't have options, indices, futures or indices. It also doesn't have banks, mutual funds, FI, FIIs and hence it is been levied by market is fully born. It should not be levied just because it is there on stock derivatives. It should not be the rational or justification to levy CTT.
