Commodity futures trade moving to black market
Almost two months since the finance minister announced the proposal to impose a transaction tax on commodity futures (CTT), commodity exchanges in the country have seen an exodus, including corporate hedgers and day traders.
Fears of a higher cost regime on commodity futures has already seen several companies move on to cheaper exchanges overseas for hedging. Now, day traders, who contribute almost three-quarters of daily volumes (in major commodities like bullion, crude oil and natural gas) have shunned exchange platforms to dabba trading, where transactions are settled outside the exchange at exchange prices, without paying any margins or taxes.
The average traded turnover of commodity exchanges have dropped by 20-25 per cent. “The business has been affected after the CTT was proposed. Traded turnover across commodities have dropped by 20-25 per cent since late February” said Anjani Sinha, director of the Multi Commodity Exchange.
Dabba trading, which is not permitted by the regulators, has seen a sudden spurt. "It has picked up quite fast after the CTT was proposed. The activity has recently picked in commodities like Mentha Oil and Guar Seed, mostly in Uttar Pradesh, Madhya Pradesh, Punjab, Gujarat and Rajastan," said the head of a prominent brokerage house.
The Budget has added an incidence of 12 per cent service charge and a commodities transaction tax of Rs 17 per lakh, which will increase the cost by over 800 per cent. This rise in cost eats into the profits of traders and even causes losses to them in case of negligible price moves.
For example, if a trader buys one lot of gold futures at Rs 12675/gram. The market lot is 100, and the total contract value would be Rs 12,67,500. For a rupee increase in the price of gold, the trader earns a profit of Rs 100.
At prescribed rates, this trader pays stamp duty of Rs 25.35, exchange fee of Rs 50.70 at 0.02 per cent and a CTT of Rs 221.81 at 0.017 per cent.
Thus, the total cost of contract amounts to Rs 297.86. The price of gold moves up by only Re 1 on the day and the trader, who has taken position on borrowed money, is forced to wind up before the end of the session and thus makes a profit of only Rs 100. Hence, he incurs a net loss of Rs 197 (Rs 100 profit – Rs 297.86 cost of transaction).