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Rediff.com  » Business » Traders cheer CTT's vanishing act

Traders cheer CTT's vanishing act

By BS Reporter
July 07, 2009 09:58 IST
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The Budget announcements are expected to prove a big boost for the commodity trade.

The Finance Minister declared that the Commodity Transaction Tax (CTT) levied on transactions in commodities traded on recognised exchanges would be withdrawn, and has moved an amendment through the Finance Bill. Another boost could be the tax incentives for warehousing and cold chain facilities.

The two measures are intended to make the commodities market more tax-efficient. Apart from futures, the physical market will also grow and improve linkages between the physical and the futures markets.

The proposal to introduce the CTT was moved by then Finance Minister P Chidambaram while presenting the budget for 2008-09. The tax was never notified but it remained on the statute books, as the Finance Bill was passed. Such a tax exists nowhere in the world and is detrimental to commodity futures.

The exchanges and even the Prime Minister's Economic Advisory Council had told the government that such a tax would only harm the commodity futures market, which is in a nascent stage. Commodity futures exchanges have been saying that such a tax will be a cost for hedgers, and such hedging was feared to be moving to overseas exchanges legally, or as a grey market operation wherever not permitted.

Another booster is incentives for warehouses and cold storages. The Finance Minister has proposed inserting a new section, 35AD, in the Income-tax Act for setting up and operating cold chain facilities for specified products and warehousing facilities for storage of agricultural produce.

The memorandum explaining the provision says that 100 per cent deduction will be allowed "in respect of the whole of any expenditure of (a) capital nature, incurred wholly and exclusively for the purposes of the specified business during the previous year in which such expenditure is incurred."

Forward Markets Commission (FMC) chairman B C Khatua said, "The FM has sent positive signals by removing the CTT and also providing incentives for warehouses."

The Warehouse Act is already in operation and improvement in the warehousing network will help channel more bank credit to the agriculture sector. The receipts issued against goods deposited in warehouses can be traded and are also acceptable for transfer of ownership of goods. "This will certainly help trading in agriculture commodities on the floor of the exchanges," said an executive with the online commodity exchange.

The Budget also spoke about the target of 4 per cent growth for agriculture growth. If proper infrastructure for trading is available, higher growth will translate into higher and smoother trading on commodity exchanges.

Khatua however said, "There is a need for establishing closer linkages between the physical market and the futures market. Introduction of the Goods and Services Tax from next fiscal will ensure uniform taxes and hence smooth trading." He said uniform taxes also reduce scope for tax evasion, thereby reducing unhealthy trading practices.   

There are over 7,500 markets known as Agriculture Produce Market Committees, where agriculture commodities are traded. There is no national price for any commodities. Uniform taxes and electronic trading will facilitate this.

The commodities market is also hopeful of higher trading, as there are many measures that aim to boost rural development and help farmers by way of incentivising farm loans. All these will certainly help commodity trading, said a senior executive of Multi Commodity Exchange.

What has not been spelt out in the Budget about the commodity sector is when the bill giving more powers to the FMC - the regulator - will be introduced and when banks and mutual funds would be allowed to participate in the commodity futures market. A positive indication on this front would have made the things clear to the market, said the executive.

"We expect now that the new Forward Contract Regulation Act will also be passed and more reforms will be seen in the commodity exchange business. Once the reformist approach is perceived by our member brokers they would allocate more resources, human and capital, to commodity exchange-related initiatives," said Anil Mishra, CEO of the National Multi Commodity Exchange.

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