Given the Rs 50,000 crore of daily volumes on commodity exchanges in the country, it’s not surprising the finance minister should once again be contemplating imposing a securities transaction tax (STT) type of levy on such sales/purchases. Based on today’s STT rates, this will mean extra revenues of R2,040 crore a year from commodity exchanges. Indeed, even on level playing field grounds, the proposal seems fair. After all, if such a tax is levied on one form of investment, why not levy it on the other type of investments that people make? Indeed, if a commodity transaction tax (CTT) is to be levied, the finance minister can even think of lowering the STT on equity. In other words, the proposal is a win-win.
The problem is that while this sounds fair, it isn’t. For one, investments in equity and commodity face very different tax structures, and that’s not even taking into account that firms have no option but to hedge in commodity markets, while investing in shares is clearly not in the same league. So while commodity spot markets have to pay various taxes like octroi, mandi taxes, VAT and even excise, none of this applies to equity markets. Indeed, while there is no long-term capital gains tax on equity transactions, commodity transactions are taxed as speculative trades at the highest rate of 33%. It is true F&O transactions on equity markets are also taxed at the highest marginal tax rate but since these are viewed as business transactions, profits here can be set off against losses elsewhere.
The larger issue, of course, is of what the proposed tax will do to commodity markets and, therefore, to government revenues. It’s useful to keep in mind that the STT collections on equity markets has also fluctuated a lot depending on the volumes of transactions. These fell from R7,394 crore in 2009-10 to R7,155 crore in 2010-11 while the Sensex rose; they collapsed to R5,200 crore in 2011-12 as the Sensex fell around a fourth—though the Sensex has recovered by around a third this year, there are as yet no details of STT earnings. Equally interesting, thanks to the STT and also the fear of GAAR (till the government announced it being put off), a very large part of Indian share market transactions now take place overseas. In December, while the NSE’s average daily turnover was R6,425 crore, the average turnover of Nifty futures