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Commodities trading has come of age in India & the MCX was expected to surpass the NSE's derivative turnover. But with the imposition of Commodities Transaction Tax, the business is expected to suffer

Has your business come of age? If yes, then be prepared to get taxed. Well, at least this is what one will be forced to infer, looking at the rationale given by the Finance Minister behind imposing Commodities Transaction Tax (CTT) on commodity futures trading. The numbers speak volume about the voluminous volumes being traded at the exchanges and certainly, the trading has come of age.

For the uninitiated and for those who have remained confined to equities all these years, its a fact that commodities turnover (MCX) in just a short span of time is almost half of that of equities and if Mr. Ventakchari, Chairman, MCX is to be believed, then MCX will surpass NSE's derivative turnover soon. The assumption was made before the budget announcement of imposing CTT on commodities futures. The proposed CTT will not only wreck havoc on the volumes, but Mr. Venkatchari will have to rework his mathematics as well.

The total volume of trade in the commodity futures market rose from Rs. 34.84 lakh crore in 2006 to Rs. 36.54 lakh crore in 2007, notwithstanding the suspension of trading of wheat, rice, urad and tur. In the recent past, this 'coming of age' of trading in commodities has caught the attention of the government and has been hit left, right and centre.

The reason too is obvious, while commodity trading is gaining momentum, participants are making money, but still there seems to be growing disconnect between the commodity trading and the farming community, the benefits of which should ideally be passed on to the farmers.

So, first it was the ban on futures trading of essential commodities, which made it to the headlines and now CTT. Commodity transactions will attract taxes on a par with securities transactions. Revenues will be substantial as turnover in the 23 commodity exchanges is much more than the combined securities transactions on both BSE and NSE.

CTT is expected to contribute at least Rs 5,000 crore in the first year, which will be used to cross-subsidized government's populist schemes. Isn't it a classic case of robbing Peter to pay Paul? Industry participants have taken the news with a pinch of salt as exchanges are already reeling under the ban on futures trading in essential commodities imposed last year. Though the Abhijit committee constituted to study the impact of futures trading on price of farm commodities, found no conclusive evidence, the ban (till the time, left parties are there) is here to stay.

CTT imposed will make Indian exchanges the most expensive ones in the world in terms of transaction cost and is natural to expect that local commodity businesses and traders will access exchanges with the lowest transactions cost.

The Economic Survey 2007-08 highlights large lot size, daily margining, high membership fees, etc., as deterrent for farmers' participation in commodity markets. However, nothing was done to rectify that. So, Indian participants could follow to access international commodity exchanges, given the shortcomings of the Indian futures markets, in terms of higher transaction cost and the resultant drop in liquidity - a possible fallout of CTT or myopic vision of the government.