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Farmers oppose transaction tax

The proposal to levy a transaction tax of Rs 17 per lakh on goods traded on commodity exchanges was made in the Budget for the current fiscal year, reports Gaurav Choudhury.

business Updated: Apr 22, 2008 23:14 IST
Gaurav Choudhury

Farmers and experts, including a member of Prime Minister's Economic Advisory Council, oppose the government’s proposal to impose a commodities transaction tax, saying it is a ‘retrograde’ move.

The proposal to levy a transaction tax of Rs 17 per lakh on goods traded on commodity exchanges was made in the Union Budget for the current fiscal year. There have been reports that the government is already considering a partial rollback and may cut the proposed tax to Rs 12 per lakh.

“Commodities transaction tax (CTT) is a retrograde step,” said M Govinda Rao, Director, National Institute of Public Finance and Policy (NIPFP) and a member of the PM's advisory council. “A tax system should reduce the cost of operation in the formal sector and increase the cost of operation in the informal sector.”

The CTT is modelled on the lines of securities transaction tax (STT) that is levied on equity trading in stock exchanges.

Currently, the cost of transaction on commodity exchange is Rs 2 per lakh, after the imposition of the CTT at Rs 17 per lakh and and the service tax of Re 0.25 per lakh as per the proposal in the Union Budget, it will go to Rs 19.25 per lakh.

The government has estimated it would be able raise about Rs 1000 crore through CTT, a source, who did not wish to be identified, said. Percy S Mistry, Chairman, Oxford International (UK), said an efficient derivatives market requires vibrant arbitrage.

“What we are now witnessing is the loss of a number of key derivative contracts to offshore markets. The trend will accelerate if we keep the present transaction cost structure in place,” Mistry said.

Managing Director and CEO of National Commodity and Derivatives Exchange (NCDEX) PH Ravikumar said if farmers transact on futures exchanges have to pay CTT as sellers.

“Given that deliveries are taking place and the cost is getting imbibed in the price, the final price of goods in spot market would tend to increase,” Ravikumar said.

P Chengal Reddy, secretary general of Consortium of Indian Farmers Association, said CTT would distort the price discovery mechanism of commodity exchanges.

“Unlike STT in equities, the imposition of CTT will result in aberrations in price discovery as the incidence of the tax will fall on the farmers,” Reddy said.