Stamp duty on commodity derivatives may fuel inflation

“It (stamp duty) will kill the commodities market as high cost of transaction will not only reduce liquidity, encourage illegal trade but will also add to the inflation,” Commodity Participants Association of India (CPAI) president DK Aggarwal

New Delhi: Brokers and experts have cautioned against the move to impose a uniform stamp duty for all derivatives transactions saying it will affect nascent commodity futures market and fuel food inflation, reports PTI.

Despite strong opposition from the ministry of consumer affairs (MCA), the finance ministry has moved a Cabinet note suggesting a uniform stamp duty of Rs300 per crore (0.003%) on transactions in all kind of derivatives—commodities, stocks and electricity.

“It (stamp duty) will kill the commodities market as high cost of transaction will not only reduce liquidity, encourage illegal trade but will also add to the inflation,” Commodity Participants Association of India (CPAI) president DK Aggarwal told PTI.

Low liquidity will lead to price volatility and improper price discovery, he said, adding that commodity derivatives in India have been introduced as a hedging instrument to safeguard against adverse price movements and not for earning profits through trading like in stocks.

Mr Aggarwal further said, “An upswing in stock market is a feel good factor, but a firm price trend in commodities is a cause of concern to the government and consumers.”

“It fuels inflation and results in depressed demand and consumption. An active commodity futures market seeks to achieve stable price trend by reducing seasonal and abnormal cyclical swings,” an official with one of leading commodity exchanges said.

Already, when food inflation is ruling at double-digit level, the stamp duty on commodities derivatives would only worsen the situation, he added.

The MCA, which oversees the functioning of 23 commodity exchanges, is of the opinion that commodity derivatives should be kept out of the ambit of stamp duty as the sector is already heavily taxed, with multiple taxes (like Mandi tax and VAT) by state and central governments, sources said.

It will only burden the nascent market by increasing the cost of commodity trade transactions and also encourage illegal trading, they added.

The finance ministry has proposed an amendment to the century-old Indian Stamp Duty Act to align the stamp duty law with contemporary requirements of the market and also to ensure increase in revenue collection of states.

Stamp duty accounts for a significant share of the tax revenue of states.

Expressing similar views, Harish Galipelli of Hyderabad-based brokerage firm JRG Wealth Management said: “The stamp duty will reduce liquidity through decrease in trade participation of hedgers and jobbers.”

Indian stakeholders do not have any other mechanism to hedge the risks that may arise due to vagaries of global trade. The only institution they may be able to protect themselves is through domestic futures exchanges, he added.

Experts also said that experiences of various states show that the primary objective of garnering higher revenues from imposition of high stamp duty may not be met.

For instance, after the Delhi government imposed stamp duty on commodities trading in July 2010, growth in trade volumes experienced a downturn in comparison to previous years, they said.

In Maharashtra also, the stamp duty on commodities is only 0.001%. Recently, the state government hiked the duty to 0.005%, but later rolled back the hike after concern was expressed by commodity markets regulator FMC.

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COMMENTS

jiten sharma

4 years ago

can you plzz tell me, where we made the payment of stamp duty on commodity transaction and what will be the procedure.

Plan panel went wrong on inflation projection: Ahluwalia

“It is true that we were hoping that this (moderation in inflation) will happen earlier, to that extent our credibility becomes a question,” Planning Commission deputy chairman Montek Singh Ahluwalia told Karan Thapar in an interview for CNN-IBN’s TV programme ‘'Devil's Advocate’

New Delhi: Planning Commission deputy chairman Montek Singh Ahluwalia on Sunday conceded that he went wrong while projecting moderation in inflation which remains near the double-digit mark, reports PTII.

“It is true that we were hoping that this (moderation in inflation) will happen earlier, to that extent our credibility becomes a question,” he told Karan Thapar in an interview for CNN-IBN’s TV programme ‘'Devil's Advocate’ when asked why government's repeated projections on inflation proved false.

“You should recognise that short-term forecast is subject to error,” he said. He, however, asserted inflation would moderate to 7-%7.5% by March 2012.

Headline inflation has remained over 9% for several months and was 9.73% in October. Food inflation stood at 10.63% for the week ended 5th November.

Inflation has remained stubbornly high despite repeated assurances by several government functionaries that it would moderate.

Responding to criticism of India Inc that there was a policy paralysis in the government, Mr Ahluwalia said, “Industry has been a lot more focused on decisions that are holding up infrastructure projects, and not the (financial) reforms.”

The government, he said, “is keen to push (reforms) ahead but needs to develop political consensus and if the measures like GST, DTC and other reforms are delayed, that does not mean that they wound not happen.”

On opening up the multi-brand retail sector for foreign investment, Mr Ahluwalia expressed the hope that the government would take a decision by the end of next month.

“I am hopeful”, he said, when asked whether the government would be able to take a decision on allowing foreign direct investment (FDI) in multi-brand retail. The decision to allow FDI in retail has been pending for long.

As regards the economic growth, Mr Ahluwalia said it would moderate in the backdrop of sluggishness being witnessed in the developed world.

The growth, he added, could moderate to 7%-7.5% during the current fiscal, as compared to 8.5% in 2010-11.

“I think that it (growth) will range between 7%-7.5%. We have to do something about it. It is difficult to know when the turnaround will come,” he said.

Mr Ahluwalia further said it would be difficult for the government to restrict fiscal deficit to 4.6% of the gross domestic product (GDP) during 2011-12, in view of rising oil prices and burden on subsidy.

Answering questions on recent decision of Moody’s to lowering rating of Indian banking system to ‘negative’ to ‘stable’, he said “it was part of knee-jerk response”.

Mr Ahluwalia also raised concern about rising trade deficit and said it could increase to $150 billion by the end of the current fiscal.

However, he added, India has enough cash reserves to handle the situation arising from surge in trade deficit.

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Dr Reddy’s seeks denotification of SEZ at Medak

“We are locating both our SEZs close together (at Visakhapatnam). Having an API unit at one place and formulation unit at another place complicates the whole matter,” Dr Reddy's Laboratories (DRL) chief financial officer Umang Vohra informed the media

Hyderabad: Pharma major Dr Reddy’s Laboratories has requested the government to denotify its Special Economic Zone (SEZ) at Medak in Andhra Pradesh, reports PTI.

The formulations unit, which was to come up at Medak, will now be moved to Visakhapatnam where the company has another SEZ for manufacturing Active Pharmaceutical Ingredients (APIs).

“We have requested for denotification of entire SEZ (in Medak). We are locating both our SEZs close together (at Visakhapatnam). Having an API unit at one place and formulation unit at another place complicates the whole matter,” Dr Reddy's Laboratories (DRL) chief financial officer Umang Vohra told PTI.

DRL, he said, has given an undertaking to the commerce ministry for refunding the duty benefits availed of in the name of SEZ and the development commissioner of VSEZ has recommended the proposal.

It is expected to come up for consideration at the Board of Approvals meeting scheduled on 28th November.

Mr Vohra said DRL is setting up the formulations SEZ in Vizag for better synergies of management and material flows.

“Land was bought by us (in Medak) and will remain with us. We (have now) decided to put both the units at one place,” he said.

DRL had acquired around 103 hectares at Melasangam and Lingampally villages in Medak to set up a tablets and capsules manufacturing unit for exports. In Vizag, it had acquired around 260 acres for the bulk drugs SEZ, which will now house the formulation SEZ as well.

The company is expected invest around $200 million in both the SEZs, a company official had said earlier.

Mr Vohra said the SEZ land, after denotification, will be used for other expansion plans.

“Every two years or three years we require capacity addition. We can think of that in future. Later on when we wanted to do something with this land, we will go for two plants (API and Formulations) together,” he explained.

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