A study done by the Confederation of Indian Industry (CII) has revealed that if commodity transaction tax (CTT) is imposed, it may lower the volume of futures trading in the range of 18-59% depending upon the commodity within just seven days.

The study clarified that if in case the CTT is applied, then commodities will see great fall in their volume. Gold volume will fall by 59%, crude oil by 57% and channa by 56%. Other than this, the volume of copper will decline by 53%, and refined soybean oil may decline by 18% within just seven days-the specified period.

Other than this, CII also said that imposition may lead to lowering of trading activity as well. This will adversely affect and reduce the volume of transaction on the commodity exchanges and thereby increase the cost of hedging. Thus, the process of price discovery will be affected badly too.

A proposal to charge a CTT by the Union Budget 2008-09 was made of Rs 17 per lakh of commodities traded on exchange lines of Securities Transaction Tax (STT). The imposition of CTT may increase the transaction cost more than eight times, where presently traders on exchange incur an average transaction cost of about Rs 2 per lakh.

CII clarified that there is no country which charges transaction cost on commodities. Thus if it is implemented in India, there is a big fear that it would render domestic futures market uncompetitive through the global markets.

On the other hand, imposition of STT in trading volumes of stock markets across countries signs towards high sensitivity of trading volumes to the transaction costs.