Commodities reel under Budget pressure

With Budget 2008-07 ushering in a higher tax regime in commodity trading, traders may find their cost of transaction going up by around 60 per cent.

“Cost of transaction in commodities is set to get costlier by around 60 per cent. That may lead to liquidity dry-up in the market,” said CJ George, managing director of Geojit Financial Services.

Day traders contribute almost three-quarters of daily volumes in highly active commodities like crude oil, bullion and natural gas. A Rs 12.62 lakh futures contract on one-kg gold currently costs Rs 353, including 0.02 per cent in brokerage, 12 per cent service tax on brokerage, 0.004 per cent in exchange levy, stamp duty at 0.001 per cent and three per cent education cess.

An additional levy of 0.017 per cent in service taxes for the aforesaid contract size of Rs 12.62 lakh amounts to Rs 215, which is a 60 per cent increase in cost of transaction. CTT will be charged only on the sell-side.

Meanwhile, domestic commodity exchanges are a worried lot. With Budget bringing them under the service tax bracket, their expenditure is likely to multiply by about eight times.

A 12 per cent service charge and Rs 17 per Rs 1 lakh on the value of the contract, will cause 800 per cent jump in costs.

“What hurts traders most will be the CTT element. However, exchanges’ costs go up to a larger extent, which makes domestic commodity bourses incompetent. This may even lead to an exodus of companies in search of cheaper platforms for hedging in commodities,” said V Shanmugam, economist of the Multi Commodity Exchange.