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Impact Of Proposed Commodity Transaction Tax On Futures Trading In India

Author

Listed:
  • Pravakar Sahoo

    (Indian Council for Research on International Economic Relations)

  • Rajiv Kumar
Abstract
Trading in commodity derivatives on exchange platforms is an instrument to achieve price discovery, better price risk management, besides helping macro-economy with better resource allocation. Since the inception (2003) of national online trading on multi-commodity exchange platforms, the trade volumes have grown exponentially. In the union budget 2008-09, the government has proposed to impose a commodity transaction tax (CTT) of 0.017%. Though the stated rationale for imposing higher taxes is to contain price rise and volatility, to generate revenue, and to increase transparency, these arguments are debatable and not much rooted in the available literature. In this context, we examine the relationship between trading activity, volatility and transaction cost using a three-equation structural model for five top selected commodities namely Gold, Copper, Petroleum Crude, Soya Oil and Chana (Chickpea). Results suggest that there exists a negative relationship between transaction cost and liquidity, and a positive relationship between transaction cost and volatility. Therefore, if the government imposes CTT, it would lead to higher volatility and lower trading activity affecting market efficiency and liquidity.However, agricultural commodities such as refined Soya oil and Chana are least affected in terms of volume and volatility in response to the imposition of transaction tax. Increased volatility may lead to more speculative activity and fail to achieve the price discovery and resource allocation objectives of the commodity markets. Further, the granger causality results reveal the efficiency of futures markets but do not provide any conclusive evidence about the nexus between price rise and futures trading.

Suggested Citation

  • Pravakar Sahoo & Rajiv Kumar, 2008. "Impact Of Proposed Commodity Transaction Tax On Futures Trading In India," Finance Working Papers 22239, East Asian Bureau of Economic Research.
    • Handle: RePEc:eab:financ:22239
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    Citations

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    Cited by:

    1. Nidhi Choudhary & Girish K. Nair & Harsh Purohit, 2015. "Volatility In Copper Prices In India," Annals of Financial Economics (AFE), World Scientific Publishing Co. Pte. Ltd., vol. 10(02), pages 1-26, December.
    2. Sinha, Pankaj & Mathur, Kritika, 2016. "Linkages between Gold Futures Traded in Indian Commodity Futures Market and International Commodity Futures Market," MPRA Paper 72967, University Library of Munich, Germany.
    3. Pravakar Sahoo & Rajiv Kumar, 2009. "Efficiency and Futures Trading-Price Nexus in Indian Commodity Futures Markets," Global Business Review, International Management Institute, vol. 10(2), pages 187-201, July.
    4. Pankaj Kumar GUPTA & Sunita RAVI, 2012. "Commodity Market Inefficiencies and Inflationary Pressures - India’s Economic Policy Dilemma," Risk in Contemporary Economy, "Dunarea de Jos" University of Galati, Faculty of Economics and Business Administration, pages 31-38.
    5. Sinha, Pankaj & Mathur, Kritika, 2015. "Impact of Commodities Transaction Tax on Indian Commodity Futures," MPRA Paper 63677, University Library of Munich, Germany.
    6. Sanjay Sehgal & Tarunika Jain Agrawal, 2019. "Impact of Commodity Transaction Tax on Market Liquidity, Volatility, and Government Revenues: An Empirical Study for India," Vikalpa: The Journal for Decision Makers, , vol. 44(1), pages 12-29, March.
    7. Sinha, Pankaj & Mathur, Kritika, 2016. "Impact of Global Financial Crisis and Implied Volatility in the Equity Market on Gold Futures Traded on Multi Commodity Exchange, India," MPRA Paper 72966, University Library of Munich, Germany.
    8. Swamy Perumandla & Padma Kurisetti, 2021. "Commodity Transaction Tax (CTT): Nature of Correlation Dynamics and Volatility Linkages Between Indian Commodity and Equity Markets," International Journal of Asian Business and Information Management (IJABIM), IGI Global, vol. 12(2), pages 16-36, April.
    9. repec:ddj:fserec:y:2012:p:31-34 is not listed on IDEAS
    10. Matthias Kalkuhl & Mekbib Haile & Lukas Kornher & Marta Kozicka, 2015. "Cost-benefit framework for policy action to navigate food price spikes. FOODSECURE Working Paper No 33," FOODSECURE Working papers 33, LEI Wageningen UR.
    11. Muneesh Kumar & Tarunika Jain Agrawal & Srishti Sehgal, 2017. "Domestic and International Information Linkages for Indian Commodities Market in the Pre- and Post-CTT Periods," Metamorphosis: A Journal of Management Research, , vol. 16(2), pages 75-91, December.
    12. Copenhagen Economics, 2011. "Elasticities of Financial Instruments, Profits and Remuneration," Taxation Papers 30, Directorate General Taxation and Customs Union, European Commission.
    13. Pravakar Sahoo & Rajiv Kumar, 2011. "The Impact Of Commodity Transaction Tax On Futures Trading In India: An Ex-Ante Analysis," The Singapore Economic Review (SER), World Scientific Publishing Co. Pte. Ltd., vol. 56(03), pages 423-440.

    More about this item

    Keywords

    Commodity Transaction Tax; Futures Market; Liquidity; Volatility;
    All these keywords.

    JEL classification:

    • G19 - Financial Economics - - General Financial Markets - - - Other
    • G13 - Financial Economics - - General Financial Markets - - - Contingent Pricing; Futures Pricing
    • G14 - Financial Economics - - General Financial Markets - - - Information and Market Efficiency; Event Studies; Insider Trading
    • L71 - Industrial Organization - - Industry Studies: Primary Products and Construction - - - Mining, Extraction, and Refining: Hydrocarbon Fuels
    • Q40 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Energy - - - General

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