Commodities Transaction Tax (CTT), which has been
implemented from July 1, 2013, is being regarded as the latest levy on
processed farm items that may have a cascading effect on the food &
beverage sector in the country.
CTT will be applicable on futures contracts on many agricultural commodities – processed farm items to be precise - apart from items like fertilisers, tractors and so on at the rate of 0.01 per cent or Rs 10 per Rs 1 lakh.
While 23 agricultural commodities including almond, barley, cardamom, castor seed, channa, copra, coriander, guar seed, isabgol seed, jeera, maize feed, pepper, potato, mustard seed, red chilli, soyabean, soyameal, turmeric and wheat have been exempted from the purview of CTT, it will be applicable for processed agricultural items like sugar, soya oil, guar gum and coffee.
Though at the outset, it looks like CTT will not affect many items, representatives belonging to major commodity exchanges like NCDEX and MCX and industry experts are fearing that the tax will affect the trade that is directly connected to the food & beverage sector in a big way – almost 300 per cent rise in what the traders will pay as tax+transaction fee (When the tax is Rs 10 per Rs 1 lakh, the latter is Rs 3.2 per lakh thus Rs 13.2 per lakh).
Further, since the trading rates will get so high, many, especially smaller players, will opt for dabba trading or going in for the illegal market. This would mean not only the trade is at loss but the government as well, according to an expert.
Trading comes down
In fact, such is the scenario, states a source, “Trading has come down by 30 to 40 per cent in these 10 days since implementation and a cascading effect is being anticipated for the food & beverage sector as due to the increase in cost of transaction, energy, input and all other costs there will be a steep rise.” The source adds, “The impact will be huge on SMEs (Small and Medium Enterprises), especially those that are connected with coffee and sugar.”
Interestingly, while there are those who feel that the tax will affect only the futures trade and not the concerned sectors, yet a large chunk of those that are dealing in processed farm items and belonging to food & beverage sector maintain that they will affected.
For instance, Tejinder Singh Renu, honorary secretary, Vidarbha Taxpayers Association (VTA), commented, “In my view government has introduced CTT not only to generate revenue but simultaneously discourage futures trading. However such a method would lead to another hurdle of taxation which may result in such trading practices shifting to unaccounted trade.”
He added, “As per practices adopted by government in the past, I fear very soon this rate of 0.01 per cent will be increased, likewise the list of commodities attracting CTT will also go up.”
In contrast, Jekil Patel, deputy manager, Kotak Securities, stated, “CTT will not impact the end-users. But it will impact the trading industry. The participation of the people involved in trading of processed farm items will go down due to this tax. For example, earlier if 10 people were involved in the trading of processed food items now it will be 7. Trading companies will have to bear the burden because we will have to pay additional taxes to the government now.”
Echoing the sentiment, Kirti Rana, director, APMC spices market, stated, “Government wants to earn revenue by one or the other way but CTT will not impact the end-users and traders from the market. The impact will be only on the trading companies and those who are involved in trading processed farm items.”
Effect on jobs, investments
However, Bharat Kumar Shah, chairman, Internal Trade Federation, Karnataka Chambers of Commerce and Industry, differed, “The processed farm items industry will impact in a big way by the imposition of CTT as the prices of certain things which come in the tax ambit will rise. Already the Indian processed farm items industry is burdened and this will have effect on new job opportunities and investments. On the whole, it is not a good move.”
Meanwhile, M K Ananda Kumar, who heads corporate services at NCDEX (National Commodity and Derivatives Exchange Ltd), explained, “The department of revenue, ministry of finance, has issued a notification that CTT is to be levied from July 1, 2013, on futures transactions of all commodities except 23 agricultural commodities. In the notification certain major agricultural commodities such as sugar, soya oil, gur, palmolein, guar gum and rubber have not been included. CTT therefore becomes chargeable on these commodities, raising the cost of futures trading on these agricultural commodities by four-and-a-half times. Other than these, there are several other major agricultural commodities, which have not been included in the list of exempted commodities. This has definitely taken the market by surprise, with the increased cost of hedging, it will discourage hedgers.”
Food inflation
Further, when asked if NCDEX will try for abolition of CTT on processed food items, he informed, “The farm commodities were excluded from the burden of CTT by the finance minister for two special reasons they are - any extra tax on food products will eventually add to food inflation and - futures trading which is still nascent in farm commodities. Both these objectives are defeated by the current notification, which is not consistent to the intent of the Finance Bill. The exchange has written to the finance ministry in the matter.”
Explaining the long-term effect of CTT, Kumar said, “Domestic commodity exchanges are performing the twin functions of price discovery and risk management and thus aiding the Indian farmer for better price realisation. Futures markets provide an efficient means to determine the future price of a commodity. The price discovery has the potential to minimise uncertainties on futures prices in commodity markets. This helps in checking price slumps in post-harvest periods and smoothen out the price changes over the production cycle and help in putting checks on the exploitation of farmers.
He added, “Futures contracts offer farmers, dealers, processors and consumers a means of mitigating the price risks inherent in their business. This results in more efficient marketing system and ultimately lowers costs to consumers. These markets also act as a focal point for the collection and dissemination of price statistics that provide vital signals to all market players and policy-makers.”
He concluded, “India is the largest producer and consumer of agricultural commodities in the world. Domestic futures exchanges have helped establish a consensus on national prices for the agricultural commodities traded on the future exchanges. Thus, for the major agricultural commodities, unlike major non-agricultural commodities, the price discovery takes place within the country and has helped establish a price benchmark used by the domestic industry and policy- makers. Processed agricultural products are derived from agriculture produce and as such any further levy on processed agricultural products will impact the price discovery process and shall have cascading price effect on subsequent agricultural production which will increase the cost of inputs and thereby burden the farming community. Likewise, the end-users i.e. consumers will end up paying higher prices.”
CTT will be applicable on futures contracts on many agricultural commodities – processed farm items to be precise - apart from items like fertilisers, tractors and so on at the rate of 0.01 per cent or Rs 10 per Rs 1 lakh.
While 23 agricultural commodities including almond, barley, cardamom, castor seed, channa, copra, coriander, guar seed, isabgol seed, jeera, maize feed, pepper, potato, mustard seed, red chilli, soyabean, soyameal, turmeric and wheat have been exempted from the purview of CTT, it will be applicable for processed agricultural items like sugar, soya oil, guar gum and coffee.
Though at the outset, it looks like CTT will not affect many items, representatives belonging to major commodity exchanges like NCDEX and MCX and industry experts are fearing that the tax will affect the trade that is directly connected to the food & beverage sector in a big way – almost 300 per cent rise in what the traders will pay as tax+transaction fee (When the tax is Rs 10 per Rs 1 lakh, the latter is Rs 3.2 per lakh thus Rs 13.2 per lakh).
Further, since the trading rates will get so high, many, especially smaller players, will opt for dabba trading or going in for the illegal market. This would mean not only the trade is at loss but the government as well, according to an expert.
Trading comes down
In fact, such is the scenario, states a source, “Trading has come down by 30 to 40 per cent in these 10 days since implementation and a cascading effect is being anticipated for the food & beverage sector as due to the increase in cost of transaction, energy, input and all other costs there will be a steep rise.” The source adds, “The impact will be huge on SMEs (Small and Medium Enterprises), especially those that are connected with coffee and sugar.”
Interestingly, while there are those who feel that the tax will affect only the futures trade and not the concerned sectors, yet a large chunk of those that are dealing in processed farm items and belonging to food & beverage sector maintain that they will affected.
For instance, Tejinder Singh Renu, honorary secretary, Vidarbha Taxpayers Association (VTA), commented, “In my view government has introduced CTT not only to generate revenue but simultaneously discourage futures trading. However such a method would lead to another hurdle of taxation which may result in such trading practices shifting to unaccounted trade.”
He added, “As per practices adopted by government in the past, I fear very soon this rate of 0.01 per cent will be increased, likewise the list of commodities attracting CTT will also go up.”
In contrast, Jekil Patel, deputy manager, Kotak Securities, stated, “CTT will not impact the end-users. But it will impact the trading industry. The participation of the people involved in trading of processed farm items will go down due to this tax. For example, earlier if 10 people were involved in the trading of processed food items now it will be 7. Trading companies will have to bear the burden because we will have to pay additional taxes to the government now.”
Echoing the sentiment, Kirti Rana, director, APMC spices market, stated, “Government wants to earn revenue by one or the other way but CTT will not impact the end-users and traders from the market. The impact will be only on the trading companies and those who are involved in trading processed farm items.”
Effect on jobs, investments
However, Bharat Kumar Shah, chairman, Internal Trade Federation, Karnataka Chambers of Commerce and Industry, differed, “The processed farm items industry will impact in a big way by the imposition of CTT as the prices of certain things which come in the tax ambit will rise. Already the Indian processed farm items industry is burdened and this will have effect on new job opportunities and investments. On the whole, it is not a good move.”
Meanwhile, M K Ananda Kumar, who heads corporate services at NCDEX (National Commodity and Derivatives Exchange Ltd), explained, “The department of revenue, ministry of finance, has issued a notification that CTT is to be levied from July 1, 2013, on futures transactions of all commodities except 23 agricultural commodities. In the notification certain major agricultural commodities such as sugar, soya oil, gur, palmolein, guar gum and rubber have not been included. CTT therefore becomes chargeable on these commodities, raising the cost of futures trading on these agricultural commodities by four-and-a-half times. Other than these, there are several other major agricultural commodities, which have not been included in the list of exempted commodities. This has definitely taken the market by surprise, with the increased cost of hedging, it will discourage hedgers.”
Food inflation
Further, when asked if NCDEX will try for abolition of CTT on processed food items, he informed, “The farm commodities were excluded from the burden of CTT by the finance minister for two special reasons they are - any extra tax on food products will eventually add to food inflation and - futures trading which is still nascent in farm commodities. Both these objectives are defeated by the current notification, which is not consistent to the intent of the Finance Bill. The exchange has written to the finance ministry in the matter.”
Explaining the long-term effect of CTT, Kumar said, “Domestic commodity exchanges are performing the twin functions of price discovery and risk management and thus aiding the Indian farmer for better price realisation. Futures markets provide an efficient means to determine the future price of a commodity. The price discovery has the potential to minimise uncertainties on futures prices in commodity markets. This helps in checking price slumps in post-harvest periods and smoothen out the price changes over the production cycle and help in putting checks on the exploitation of farmers.
He added, “Futures contracts offer farmers, dealers, processors and consumers a means of mitigating the price risks inherent in their business. This results in more efficient marketing system and ultimately lowers costs to consumers. These markets also act as a focal point for the collection and dissemination of price statistics that provide vital signals to all market players and policy-makers.”
He concluded, “India is the largest producer and consumer of agricultural commodities in the world. Domestic futures exchanges have helped establish a consensus on national prices for the agricultural commodities traded on the future exchanges. Thus, for the major agricultural commodities, unlike major non-agricultural commodities, the price discovery takes place within the country and has helped establish a price benchmark used by the domestic industry and policy- makers. Processed agricultural products are derived from agriculture produce and as such any further levy on processed agricultural products will impact the price discovery process and shall have cascading price effect on subsequent agricultural production which will increase the cost of inputs and thereby burden the farming community. Likewise, the end-users i.e. consumers will end up paying higher prices.”
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