Consumer affairs minister KV Thomas said that a tax on commodities derivatives trade, on the lines of securities transaction tax or STT, will hamper the growth of the organised commodity market in India

New Delhi: Amid demand from some banks to impose a tax on commodity derivatives in the forthcoming Budget, food and consumer affairs Minister KV Thomas has written to the finance minister saying that any such move will distort the nascent market, reports PTI.

Last year too, he had requested the then finance minister Pranab Mukherjee not to reopen the old proposal made in Budget 2008-09 to levy a 0.017% tax on commodity derivatives (Rs17 on Rs1 lakh worth transaction).

According to sources, Thomas has written to finance minister P Chidambaram saying his ministry would “like (him) to defer, if there is intent to introduce commodity transaction tax (CTT) on the commodity derivatives in the ensuing Finance Bill 2013”.

The minister said that a tax on commodities derivatives trade, on the lines of securities transaction tax (STT), will hamper the growth of the organised commodity market in India.

Introduction of CTT will distort the market, sources added.

In the letter, the minister has also made a reference to the views of former consumer affairs minister Sharad Pawar and Prime Ministers Economic Advisory Council (PMEAC) chairman C Rangarajan, who had opposed CTT when it was announced in the 2008 Budget.

The ministry of consumer affairs regulates commodities market through the Forward Markets Commission. There are five national and 16 regional commodity exchanges.

Thomas' observation came in reaction to recommendations made by some banks in the pre-Budget discussions with the finance minister that the government should consider either imposing CTT or abolition of STT on equity markets to bring both markets at par.

The CTT of 0.017% on commodity derivatives was proposed in the 2008-09, but was not operationalised. The proposal was kept in abeyance following apprehensions aired by Pawar and the PMEAC.

Commodity players and industry chambers like Assocham are also opposed to the introduction of CTT. They fear it would divert hedgers and speculators to rampant “dabba trading” (illegal trading). The tax would also impact the volume and liquidity of commodity exchanges.

They said while stock markets channelize investments for capital formation, commodity markets are price discovery and risk management platforms.

The commodity, before it comes for trading on exchange platforms, is already taxed to the tune of almost 12%, with levies such as mandi tax, cess, handling costs and warehousing charges, they added.

The total turnover of the commodity futures market, which has been in existence since 2003, has declined marginally to 129.6 lakh crore in the April-December period of the current fiscal.