Govt set to cut commodities transaction tax

NEW DELHI: The government may soon announce a reduction the commodities transaction tax in line with a recommendation by the Prime Minister���s Economic Advisory Council, headed by C Rangarajan.

Prime Minister Manmohan Singh had asked the council to review the proposal, announced in the 2008-09 Union Budget, following representations from industry and the Forwards Markets Commission (FMC), the commodities exchange regulator.

Sources told ET that the council has submitted its report to the prime minister, recommending a partial withdrawal of CTT, saying that the new tax would be detrimental to commodities trading, which is still in its nascent stage.

The finance ministry will now carry out a review of CTT, based on the council���s recommendations before the Finance Bill is passed by Parliament.

The government had, in the Finance Bill 2008-09, proposed CTT on all transactions involving purchase, sale or option in goods, or commodity derivatives.

The proposed rate was 0.017% on the sale of option in goods, or an option which is payable by the seller. If the option is exercised, CTT, which will be paid by the purchaser, would be 0.125% of the settlement price.

The finance ministry has designed the tax exactly on the lines of securities transaction tax (STT), which is more of an intelligence gathering mechanism than a revenue source.

In fact, an expert committee on making Mumbai an International Financial Centre had recommended STT���s removal since it increases transaction costs, leading to loss of business to overseas markets.

The PM���s advisory council feels that the tax in its present form will severely hit trading volumes in India since many genuine hedgers will be tempted to cover their positions in global comexes where liquidity is high and transaction costs are lower.

As far as pure speculators are concerned, they will be driven towards the unofficial `dabba market��� where margin requirements are low. Industry experts point out that the cost of transaction will increase by almost 800% after the levy of CTT.