Indian commodity exchanges received support from their global peers with the Futures Industry Association (FIA) on the proposed commodities transaction tax (CTT).
In a letter to Prime Minister Manmohan Singh, FIA President John Damgard described the “negative consequences” that typically flow from such proposed taxes, and warned that the proposed tax could result in driving trading volume to foreign exchanges and hampering the future growth of India’s commodity futures exchanges.
The FIA is the leading trade organisation for the international futures industry based out of Washington.
Its membership includes the world’s largest futures brokers as well as leading derivatives exchanges from more than 20 countries. “India’s young but vibrant commodity futures exchanges have earned the respect of the futures industry worldwide,” Damgard said.
“I encourage the Indian government to avoid an unnecessary tax burden and permit these markets to continue to flourish,” he said. “In recent years, India’s commodity futures markets have grown spectacularly, but they are still far too nascent to be burdened by a tax that would increase transaction costs by 800 per cent,” Damgard added.
The experience in Japan, Taiwan and the US that such proposals drive business offshore and ultimately result in lower tax revenues and a loss of international competitiveness, he said.
The government’s proposal to impose a commodities transaction tax (CTT) has come in for sharp criticism from market analysts, farmers’ representatives and economists.
The government is considering to reduce CTT from the proposed Rs 17 per lakh on commodities traded in the exchanges to Rs 12 per lakh.
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 to collect revenue of Rs 1000 crore through CTT, a source, who did not wish to be identified, said.