CTT’s out,cold chain investment turns hot
Abolition of commodity transaction tax may boost sentiment, but the real gain’s in early depreciation rule
A LINGERING UNCERTAINTY THAT LOOMED OVER THE commodity market has been put to rest. Commodity transaction tax (CTT), a levy on the lines of securities transaction tax (STT) proposed for taxable commodity transactions on exchanges such as MCX and NCDEX, has been scrapped from the Finance Act of 2009.
While the CTT abolition may not immediately raise trading volumes as the tax was never levied, the sentiment will improve among investors and punters who have shifted to commodity derivatives due to lower margin requirement.
A more tangible gain for the commodity market will be the decision to make investments in cold chains and warehouses eligible for 100% depreciation in the first year itself, rather than over a period. The depreciation benefit to this key infrastructure for commodity trade, together with the removal of CTT, will encourage investment in warehouses.
“The Budget announcement (on CTT) will stimulate huge investment in the warehousing sector since the uncertainty of commodity market viability with respect to the cost of transaction has been removed. Now it will be on a par with the top 25 global commodities markets, which constitute 99.99% of the world’s exchange-traded commodity derivatives volume,” said MCX director Anjani Sinha.
Other stakeholders like R Ramaseshan, managing director & CEO of agri bourse NCDEX, believe that the abolition of CTT will increase market participation.
“The removal of commodity transaction tax has removed the apprehension that was associated with it when this clause was introduced last year. We are sure that this will improve the level of participation in the market as there are a large number of value chain participants dealing in farm products, who will feel more encouraged to trade in this segment more freely now.”
Depending on the volumes transacted on the bourse, a client has to pay Rs 2-4 per Rs 1 lakh now. Had the CTT of Rs 17 per Rs 1 lakh been imposed, the overall transaction cost would have risen dramatically to Rs 19-21 per lakh and pushed out day traders and speculators who work on very thin margins. This would have made the market less liquid and more volatile.
Commodity market stakeholders had told the government that high impact cost would eventually drive volumes to international exchanges and to the unofficial dabba market, where trades are settled on the books of unscrupulous brokers. However, on Monday, the market did not react much to the Budget announcement.
Another long-pending industry demand that commodity derivatives traders be treated on a par with their equity derivatives counterparts, who can set off losses from derivatives transactions against any business profits, remained unmet.
Volumes on three multi-commodity bourses — Mumbaibased MCX and NCDEX and Ahmedabad-based NMCE — increased from Rs 27,787 crore in FY04 to Rs 51.85 lakh crore in FY09. In the current financial year to June-end, volumes were worth Rs 15.42 lakh crore.
This dramatic rise in traded value has come about despite the market being constricted in terms of both participation and available trading instruments. While institutional investors such as FIIs, banks and mutual funds cannot access this market, the only product available to hedgers and speculators on commodity bourses is plain vanilla futures, which expose participants to high losses and gains. An option, on the other hand, can increase retail level participation by limiting the downside risk to the premium paid by the investor, even as the upside can be unlimited.
Source: ET
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