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Budget 2020: Reduce transaction costs to increase volumes, say commodity participants

Joe C Mathew     January 14, 2020

Commodity market participants have urged prime minister Narendra Modi-led government to reduce transaction cost to make commodity trade more attractive and internationally competitive. In its pre-Budget representations to the Prime Minister's Office (PMO) and the finance ministry, Commodity Participants Association Of India (CPAI), the representative body of Indian commodity exchanges and its participants said that ever since the introduction of commodity transaction tax (CTT) in 2013, volumes on commodity markets have been coming down against substantial growth in international markets.

"Cost of executing a trade on Indian Exchanges has been 4-19 times of cost of trade on similar instruments on Exchanges in other countries. With the levy of CTT, the volumes on commodity markets have come down by 61 per cent, from Rs 69,449 crore per day in 2011-12 (annual volumes at Rs 18,12,6103 crore) to Rs 27,291 crore per day in 2018-19 (annual volume of Rs 71,22,841 crore)," Narinder Wadhwa National President, CPAI said.

The association points out that the CTT, stamp duty and GST combined would form over 67 per cent of the cost of transaction. The substantial portion (54 per cent) is the CTT, a form of presumptive direct tax, levied upfront when a transaction is executed, irrespective of loss or profit. "It is regressive as it is neither on profits nor on value-addition. In other presumptive taxes, once it is paid, no more tax is payable while CTT is currently allowed as an expense (not as a tax paid) resulting in double taxation amounting to taxation rates of 70-80 per cent," Wadhwa notes.

The association states that if the government treats CTT as non-refundable tax paid upfront or rebate under Income Tax Act (like section 88 E, Chapter VIII), double taxation will be avoided. "The volumes will increase and impact cost will go down further increasing the liquidity and rekindling hedgers' interest. Higher volumes will result in lot of employment, and will also be revenue positive due to huge volume surge," the association points out. If commodity sector is charged 34 per cent tax, with no leakages, zero cost of collection and huge increase in volumes, the government's revenue realisation will not be hit, they say.

The association also called for exemption of long-term capital gains on securities held for one or more years and changes in dividend distribution tax (DDT) to stop double taxation.

"A conventional investor likes to invest in instruments that he considers not too risky such as in fixed deposits, gold or real estate. Progressive steps are needed to develop equity culture and channelising savings into equities, which outperform inflation in long-term. Exemption of long-term capital gain on securities held over one year or more will be one such measure that merits the consideration," CPAI suggests. On DDT, the association points out that after corporate tax payment, dividends are subject to DDT at 15 per cent and after being grossed up and applying surcharge and education cess, it is effectively 20 per cent. People earning dividends above Rs 10 lakh pay an additional 10 per cent. "The rich pay 30 per cent tax on dividends. Their peak income tax rate is much higher at 42.7 per cent. It is urged that recipient should pay 10 per cent tax on dividends," they say.

CPAI represents all the National Commodity Exchanges and comprises commodities participants of the recognised commodity exchanges such as MCX, NCDEX, NMCE and ICEX operating across India.

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