Mar 05, 2013 03:39 PM IST | Source: CNBC-TV18

Budget Analysis: Volumes will shift to other channels post CTT, warns MCX

Talking to CNBC-TV 18 about the introduction of commodity transaction tax (CTT) in the Budget last week, Shreekant Javalgekar, MD & CEO, MCX, said the proposal was fraught with many inconsistencies.

Shreekant Javalgekar, MD & CEO, MCX, said the proposal of commodity transaction tax (CTT) was fraught with many inconsistencies. For one, he saod, CTT is being sought to be imposed on commodities, and not the currencies market.

Also, within the commodities basket, he said, it is being sought to be imposed only on certain products. He said that with the cost of transactions going up with this move, volumes could shift to other channels like dabba-trading or the overseas market.

Finance minister P Chidambaram, in the Union Budget presented last week, proposed to levy 0.01 percent CTT on the price of every trade. CTT is a transaction tax on futures contracts of non-agricultural commodities.

Below is an edited transcript of Javalgekar's interview on CNBC-TV18.

Q: Give us a word on the big change for you, which is the imposition of commodity transaction tax (CTT). Do you expect to see a big impact on volumes for precious metals or non-agricultural commodities because of it?

A: I would first give you a brief background on the CTT. CTT was sought to be imposed in the Budget of 2008, but it was never notified after specific advice from Prime Minister’s Economic Advisory Council (PMEAC). So, we are surprised how this proposal has come up again when PMEAC has clearly mentioned that it is not advisable.

Coming to the present proposal of CTT, we see that there are a lot of inconsistencies and discrepancies which have crept up in the proposals. We believe these must be inadvertent and unintentional, but are quite glaring.

The first inconsistency is that CTT is being sought to be imposed on commodities. What we see is that CTT is not imposed on the currencies market, which is USD 60 billion per day, five times bigger than the commodities market. We do not see why there is a distinction between the asset classes.

The second glaring discrepancy is that within the commodities basket too, CTT is being sought to be imposed only on certain products. Some other products are being totally exempted. This is again very hard to understand. It is like saying that you will have a CTT on share X of a company but there will not be a CTT on share Y of the company.

So, we believe that this is not going to serve the interest of the nation. This is because what could happen is that base metals, energy and precious metals are internationally referenceable products. So, their prices will move in tandem with international prices. However, if at all the speculators move even in a small way to agricultural products, the agricultural prices could go haywire and we will have a major problem on inflation.

Q: These inconsistencies would have been relevant to point out before the event. So maybe should we focus on the impact, rather than making a case or a debate on why it should not have been done?

A: We are still going to the finance minister (FM) with our proposal, saying that there has to be consistency across asset classes and there has to be rationalisation of taxes. So, that is the way I would like to react first.
The third inconsistency, as I was pointing out, was on gold.

Basically, gold exchange traded funds (ETFs) are 100 percent physically backed, whereas there the securities transaction tax (STT) has been reduced by almost 90 percent. Now it is only Re 1 per lakh.  Whereas, for a hedger and a small and medium enterprise (SME) hedging for gold, the STT is ten times bigger than that. Gold has created problems for the country’s current account deficit. The government is finding out ways to reduce physical buying and holding of gold.

So we find it very hard to understand how on the same product, in one segment, the STT has been cut down by 90 percent and in another it is 10 times bigger than that. We believe that this would result into a major shift to dabba-trading and market overseas.

Q: Just as a rough figure though, could you quantify what kind of impact on volumes you would expect to see, would it be 10-15 percent lesser once the CTT is imposed?

A: That would be extremely hard to quantify but what I would say is that volumes and the liquidity are dependent on the cost of transaction. If that goes up significantly, there is every chance that the volumes could shift to other channels like dabba-trading or the overseas market. You also have to understand that we have an incomplete market where we do not have options and indices.

In equities, when CTT was imposed, the volumes moved from cash initially to futures and then to based options. We do not have index-based options. So what is going to happen is that it will be a shift to other markets or it will go to underground and overseas.


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