Budget 2013: FM should not increase import duty on gold says expert

Although pre budget event to raise import duty on gold has hammered the investor sentiments about bullion market in India, if CTT introduced then it will have radical impact on over all commodities section. Even commodity brokers and trader are waiting for a bill to amend FCRA and strengthen FMC and allow option trading in this sector.

Introduction of CTT
The commodity transaction tax (CTT) was proposed in Union Budget 2008-09 and withdrawn in July 2009-10, there are round the clock talk of reintroducing CTT again. If the idea of a CTT has been conceived to generate revenues, discourage speculative trading and reduce volatility, it needs to be unveiled that the idea is misplaced. CTT, by increasing cost of transactions, will dent short-term transactions, Short term volume will come down, and so the idea of generating extra revenue will go off.  Again, such reduction in market liquidity will increase the bid-ask spread, a major component of transaction costs. It will hamper over all price discover mechanism too.

Import duty on Gold
The government has already targeted gold, by hiking the duty to 6 per cent from 4 per cent on January 21, but since the last hike, prices in India have fallen by nearly 4 per cent, potentially boosting demand, and an austere budget that leads to a stronger rupee could also lower domestic prices. Further tariff increases could stem the legal flow at a risk of increased smuggling.

Amendment to FCRA
There is speculation about FCRA bill to be passed in this budget session. If FCRA bill is passed by the parliament, this will strengthen the FMC, This will also allow Options in Commodity Futures, permit institutional players, banks and even foreign institutional players to trade in Commodity Futures, and also allow the Index Futures. If we see MCX daily volume stands nearly average of 55000 cr without option, without PMS and without fund houses, all these are add we can see an increase by 100% from current levels.

Conclusion - We are hopeful from government and expecting a positive budget this year, positive for commodities market where CTT is not introduced also Government should take a pause on further increasing of import duty on Gold. We are hopeful that government will pass FCRA bill this time which is pending from long time and as this is a burning need for commodities market.