sitemapHome | Registration | Job Portal for CA's | Expert Exchange | Currency Converter | Post Matrimonial Ads | Post Property Ads
News shortcuts: From the Courts | News Headlines | VAT (Value Added Tax) | Placements & Empanelment | Various Acts & Rules | Latest Circulars | New Forms | Forex | Auditing | Direct Tax | Customs and Excise | ICAI | Corporate Law | Markets | Students | General | Mergers and Acquisitions | Continuing Prof. Edu. | Budget Extravaganza | Transfer Pricing | GST - Goods and Services Tax
Latest Expert Exchange
« News Headlines »
 Know all about how to file ITR FY 2017-18
 Government extends sale of pre-GST goods with stickers of revised price till July 31
 All 7 ITR forms for assessment year 2018-19 activated for e-filing: Income Tax Department
 Check if new salary structure is income tax efficient
 GST refund drive extended till June 16
 5 income tax returns filing mistakes you must avoid
 Your complete guide to file income tax return
 Input Tax Credit refund drive till June 14
 File Your Income Tax Return for FY 2017-18 Immediately, Know Why
 Which ITR form to file if income is in dollars?
 5 investment lessons to maximize returns; here is all you need to know

Volumes may migrate to offshore markets
April, 04th 2008
Higher incidence of CTT

Jinesh Panchali
Venkat Giridhar

Commodity exchanges have been offering an increasingly efficient platform for price discovery. This has resulted in better prices to farmers and lower prices for consumers due to a steady decline in the middle-mens margins and increasing efficiency in the supply chain.

However, these benefits are likely to get reversed if high incidence of commodity transaction tax (CTT) is imposed on commodity derivatives markets, as proposed in the Budget (2008-09).

Commodity transaction tax

It is an irony that commodity exchanges levy only nominal fee as transaction charge, say, Rs 2-3 per Rs one lakh of transaction, while the Government has proposed a hefty charge of Rs 17.25 per lakh as CTT.

This levy will increase transaction costs on local commodity exchanges and make it cheaper for participants of commodity markets to hedge or trade in offshore markets.

Ideally, to improve the competitiveness of the farm sector internationally, the Government needs to promote institutionalisation of important services and institutions.

Cause for migration

Higher transaction costs often leads to lesser trading volumes in the markets and, consequently, more illiquidity, acting as a disincentive for wider participation in relatively costly markets, particularly, on availability of alternative platforms. In such a situation, the existing participants may migrate to other relatively low-cost markets.

Thus, transaction cost is the crucial variable in deciding efficiency of any market and, hence, unreasonably high transaction cost may have a disastrous impact on market survival. Research in market microstructure shows a systematic relationship between the volumes of trading in two different exchanges offering platforms for same or similar products.

It suggested that the trader trade in the lowest cost markets which maximises the value of their information. Hence, trading volumes migrate from high-cost to low- cost markets.

International exchanges

It is observed that international commodity exchanges are already in an enviable positions so far as transaction costs are concerned. If the proposed CTT is levied, the transaction cost would domestically go beyond Rs 19 per Rs 1 lakh.

This would result in the migration of significant volume of the local exchanges, particularly related to hedging, making the domestic markets inefficient.

Empirical evidence from international experiences clearly substantiates such migration over a period of time. For example, the Nikkei 225 futures contracts are listed and traded on three different markets Singapore International Monetary Exchange (SIMEX), Osaka Securities Exchange (OSE) and Chicago Mercantile Exchange (CME).

Transaction costs on SIMEX and OSE are significantly different and trading on SIMEX is a relatively cheaper than OSE due to difference in brokerage; margin and interest on margin; and exchange fees. This causes migration of trading volumes from OSE to SIMEX.

The significant differences in the transaction costs at the two exchanges are provided in the Table.

This suggests that where two or more markets trade similar products, informed traders will transact in the market with the lowest transaction costs and migrate from relatively costly to cheaper market.

Domestic commodity markets deal in global commodity groups such as gold, silver, base metals and energy. These commodities are traded in global offshore markets as well.

CTT, a threat

This makes it imperative for the domestic commodity markets to keep costs of trading especially, margin fees, brokerage, and exchange fees, and other levies to a reasonable level to ensure competitiveness and minimise, if not eliminate, the probability of traders migrating to overseas exchanges. If CTT is imposed as proposed, it is difficult to prevent such migration.

CTT, as proposed, poses a potent threat to the functioning and survival of domestic commodity markets.

Provisions related to CTT need to be withdrawn at least at this stage to continue and extend benefits of commodity markets up to the grassroots level.

(The authors are with FT Knowledge Management Company Ltd, Mumbai.)
Home | About Us | Terms and Conditions | Contact Us
Copyright 2018 CAinINDIA All Right Reserved.
Designed and Developed by Binarysoft Technologies Pvt. Ltd.
Software Outsourcing Company Offshore Software Outsourcing Software Outsourcing Company India Offshore Outsourcing Company India Software BPO Software Business Process Outsourcing Software Outsourcing India Offsho

Transfer Pricing | International Taxation | Business Consulting | Corporate Compliance and Consulting | Assurance and Risk Advisory | Indirect Taxes | Direct Taxes | Transaction Advisory | Regular Compliance and Reporting | Tax Assessments | International Taxation Advisory | Capital Structuring | Withholding tax advisory | Expatriate Tax Reporting | Litigation | Badges | Club Badges | Seals | Military Insignias | Emblems | Family Crest | Software Development India | Software Development Company | SEO Company | Web Application Development | MLM Software | MLM Solutions