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Feb 26, 2013, 08.00 PM IST | Source: CNBC-TV18

Union Budget 2013: CTT would hurt market liquidity, says Religare Sec

There has been some talk that the Budget could levy a commodity transaction tax (CTT). Jayant Manglik, President at Religare Securities in an interview to CNBC-TV18 says he would be surprised if the Finance Minister tried to impose CTT in the upcoming Budget.

There has been some talk that the Budget could levy a commodity transaction tax (CTT). Jayant Manglik, President at Religare Securities in an interview to CNBC-TV18 says he would be surprised if the Finance Minister (FM) tried to impose CTT in the upcoming Budget because that would hurt market liquidity and would distort price discovery.

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He hopes the finance minister talk passes the Forward Contracts Regulation Act (FCRA) bill, and allow options and index derivatives in commodities.

Below is the verbatim transcript of his interview on CNBC-TV18

Q: How strong is the rationale for a CTT because Mr Chidambram did introduce it in 2008-2009 but could not go ahead and implement it, do you think he will try again this time?

A: I would be surprised if he went again and tried to implement CTT. The logic is very clear. In commodities, you have price discovery which is a key function and if you impose a commodity transaction tax (CTT) then the day traders would not come in, which would not create enough liquidity. Therefore, price discovery would get distorted.

More importantly, if price discovery is distorted, the hedgers will not be able to come in because they would therefore have to hedge or do the risk mitigation against distorted price. That would undermine the entire business. The commodity trading is based on price discovery and risk mitigation, and if both of these get diluted, then there isn’t any rationale for having that industry.

It is a sunrise industry and it has done very well over almost last ten years of its existence. So, I think instead of talking about putting a CTT, we should be talking about expanding it, about passing the Forward Contracts Regulation Act (FCRA) bill, about allowing options in commodities, about allowing index derivatives in commodities. There is so much to be done. So, I am not expecting CTT to happen in this Budget. In fact I am surprised that the amount of debate that is still taking place around this.

Q: There is one logic that if you can have a securities transaction tax (STT) for equities, why not for commodities, so like an STT, put a CTT?

A: There are two parts to this. One is that the reasons why both these markets exist are completely different. You have securities where essentially people are coming into make money but you have a commodities market because hedging and price discovery are the primary requirements which are there.

Second is the more positive thing to do, even STT should either be seriously reduced or it has to go because the Finance Minister  himself has been on record saying that the percentage is very low in every market and we need to do something about that. One way is to decrease the STT in deliveries and also decrease the STT in derivatives because of all the business, which has gone ahead to Nifty in Singapore.

Q: On that argument though, do you think he may see merit in feeding one mouth and snatching from the other in the sense that he may go towards the CTT and remove the STT because in the past, he has moved with curbing the duty imports on gold, he may think that the CTT is an extension of that process in order to just dampen sentiment or interest in commodities a little bit?

A: The last time when this was introduced or proposed, we had extensive discussions with people in the ministry. What came out was that we do not need to do something to, and from the capital market itself because that does not need to be a box in itself.

What they would want is suggestions on how the revenue can be maintained and that can be done from outside of capital markets. And that is pertinent because in capital markets, if you want to kick-off the investment cycle, we need to get STT and of course short-term capital gains in place. If we want commodities business which has done very well and in fact after IT and telecom it has been one of the shining stars in the way India has been performing on the global stage.

So, we need to keep that strong, we need to keep that healthy and we need to look at the long-term and not do anything short-term just because we may or may not make a little bit of money. The other important point is that even if you did impose a commodities transaction tax, it would simply kill the markets. Therefore, all the projections of revenue, which are being done, since the volumes would certainly fall and therefore, we would not only lose out on the CTT but also on the tax, which is being paid by the traders who are making profits on this.

Q: Could you illustrate with an example, if you have worked with the same rate as what the STT functions right now, what would the impact or hit be for a trader who is trading in a commodity?

A: It would be significant, because today if you look at the percentage, if you impose commodity at the same rate, there is no tax right now in commodities. So, there is only brokerage and the service tax which comes from that and the stamp duty which the states put.

So, putting any tax especially in the range of the STT on commodities would completely distort it and day traders would not come in because the turnaround from when they are buying say one lot of gold and selling that again would be significantly impacted.

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