Book Description

This paper examines the economic consequences of Commodity transaction tax (CTT) for the Indian commodities market. We use daily data on 5 sample commodities, namely gold, aluminum, copper, zinc and crude oil from 1st May 2010 to 31st August 2016. MCX has been used as a reference commodity exchange for India, while we use COMEX and DGCX for gold, LME and SHFE for base metals and NYMEX and ICE for crude oil for international comparison. We find that CTT imposition has weakened the price discovery and volatility spillover process, thus reducing the price and hedging efficiency of the Indian commodities market. International information linkages seem to have been more adversely impacted, owing to lower cost competitiveness. CTT has also substantially decreased commodity market liquidity and increased return volatility. Analysing the impact of CTT on total tax revenue, involving transaction tax, income tax and service tax, we conclude that CTT has been revenue negative. Additionally, CTT is found totally unjustified on the grounds of market parity and curbing speculation. Based on the economic and market related arguments, the study suggests a phased withdrawal of CTT, which would not only boost the growth and development of Indian commodities market but also imply greater fiscal revenues besides bringing in economic competitiveness among commodities stakeholders.