Never miss a great news story!
Get instant notifications from Economic Times
AllowNot now

You can switch off notifications anytime using browser settings.
Stock Analysis, IPO, Mutual Funds, Bonds & More

Death blow! CTT dries up F&O volumes by 60% in 6 years

The commodity market expanded 50 times in a span of five years to Rs 33.75L cr in 2007.

Updated: Oct 19, 2019, 03.26 PM IST
Getty Images
Futures trading through national-level commodity derivative exchanges brought about significant changes in the commodity derivatives segment.
By Pradeep Mishra

Trading volumes dropping in commodity derivatives have dropped over 60 per cent on the exchanges ever since the commodities transactions tax (CTT) was introduced six years ago, clearly reflecting its crippling impact on the growth of the market.

The tax has adversely and persistently impacted volumes and liquidity in the market, by drastically reducing participation of hedgers and liquidity providers due to increased cost and compelled them to move commodity hedging to international exchanges, particularly in the agri-commodities space. A large number of exchange brokers have even been forced to shut shops.

While the government has relaxed a number of tax norms, it has sadly failed to pay attention to commodity derivatives segment. Given that CTT is causing serious damage to the growth of market, the government needs to consider abolishing it.

Futures trading through national-level commodity derivative exchanges brought about significant changes in the commodity derivatives segment. Remarkable growth in the first five years (2004 to 2008) laid a solid foundation with the development of an ecosystem around it. Going by industry data, the domestic commodity market expanded 50 times in a span of five years from Rs 66,530 crore in 2002 to Rs 33.75 lakh crore in 2007, and was poised to grow at 30 per cent per year.

Growing business volumes caught the attention of Ministry of Finance, which then slapped the transaction tax to get some revenue out of it. Though the proposal to levy transaction tax first appeared in the Union Budget of 2008-09, presented by the then Finance Minister P Chidambaram, vociferous opposition from the commodity exchanges and traders led to a delay and it became a reality only in 2013.

One of the arguments from the proponents of CTT was that imposition of a transaction tax on commodity derivatives will create a level-playing field between equity and commodity trading markets. The counter-argument of commodity exchanges was that CTT on commodity derivatives could increase the cost of hedging, impair hedging efficiency and drive out hedgers and lead to growth of illegal dabba trading.

While CTT was expected to add significant revenue to the exchequer, a sharp drop in volumes actually led to a loss of revenue for the government, which has been able to garner only about Rs 500 crore from the tax.

Subsequently, the government brought the commodity derivatives market under the Ministry of Finance and designated Sebi as the regulator. On its part, Sebi has undertaken various policy reforms, which have not be effective in helping reduce the cost of transaction or providing any positive impetus to trading volume.

Having a common regulator for both equity and commodity markets and by virtue of being financial instrument cannot be common yardstick to decide taxation.

Way back in 2013, when the commodity transaction tax was introduced, proponents of the move had no business interest in the commodity exchange. Now they are very much a stakeholder and know the reality of this market.

About time Finance Ministry took a pragmatic view on the CTT. If brisk volume growth was the reason for bringing it, current state of affairs demands a reversal of this tax.

(Pradeep Mishra is Head of Research at Indian Commodity Exchange. Views are his own)

(Disclaimer: The opinions expressed in this column are that of the writer. The facts and opinions expressed here do not reflect the views of
Add Your Comments
Commenting feature is disabled in your country/region.
Download The Economic Times Business News App for the Latest News in Business, Sensex, Stock Market Updates & More.

Other useful Links

Follow us on

Download et app

Copyright © 2019 Bennett, Coleman & Co. Ltd. All rights reserved. For reprint rights: Times Syndication Service