India budget withdraws CTT plan; seen boosting trade

Jul 6 2009 2:29PM

MUMBAI, July 6 (Reuters) - India on Monday withdrew a proposal to levy a transactional tax on commodity futures, a move that indicates a commitment to reforms and ensuring more participation in the market, regulator and industry players said.

The government had proposed the tax in the 2008/09 budget, in a bid to bring the commodities market on par with the stock market where trades attract the Securities Transaction Tax (STT).

"The abolition of commodity transaction tax is good news for the commodity futures market...we are happy," said B.C Khatua, chairman, Forward Markets Commission, the commodity market regulator, which was seeking withdrawal of the tax proposal.

India's six-year old commodity futures market which traded worth 52.49 trillion rupees in 2008/09 was worried over a possible imposition of the proposed tax, which might have eroded trade participation.

"CTT was not being imposed as of now, but there was fear hanging on. .... It (abolition) will help in enhancing confidence of the investors in the market," said Dilip Bhatia, director, Kotak Commodity Services Ltd.

The government had proposed CTT of 0.017 percent payable by sellers on any sale transaction in futures and options, while the buyer will pay 0.125 percent for any sale transaction in options.

REFORMS

The new government has initiated reforms in the battered commodity markets in the past two months by removing a two-year-old ban on wheat futures trade, and the abolition of CTT has cleared way for further reforms, officials said.

"The mention of CTT in finance minister's speech shows the government's inclination towards commodity reforms. Signal of reform itself will prompt more investments," said Anil Mishra, chief executive of Ahmadabad-based National Multi-Commodity Exchange.

Market participants were hoping that banks, mutual funds and foreign portfolio investors may be allowed to trade in commodity futures, but the budget was silent on that aspect.

Analysts said participation of big institutional players will add depth and liquidity in the market, helping in better price discovery and curb speculation.

India has three commodity bourses - National Commodity and Derivatives Exchange, Multi-Commodity Exchange and National Multi-Commodity Exchange - which operate at national level.