IDEAS home Printed from https://ideas.repec.org/a/sae/vikjou/v44y2019i1p12-29.html
   My bibliography  Save this article

Impact of Commodity Transaction Tax on Market Liquidity, Volatility, and Government Revenues: An Empirical Study for India

Author

Listed:
  • Sanjay Sehgal
  • Tarunika Jain Agrawal

Abstract

Executive Summary A commodity transaction tax (CTT) of 0.01 per cent is levied on non-agricultural commodity futures trading since 1 July 2013 by the Government of India. This article examines the impact of CTT on market liquidity, volatility and government tax revenues for the Indian commodities market. We use daily data of five sample commodities, namely gold, aluminium, copper, zinc and crude oil available from 1 May 2010 to 31 August 2016. It is found that CTT imposition has destroyed the parity of the Indian commodity futures market with the international markets as CTT is absent on COMEX, LME, NYMEX, and so on. Moreover, evidence of trade migration can be found by drawing a comparison across MCX and international exchanges. This argument is further substantiated by observing the decline in liquidity after the imposition of CTT. It should be further noted that parity with the equity market is also lost as the transaction taxes imposed in equity and commodity markets are not in line with the level of volatilities of the two markets. CTT has also failed to curb speculative pressure as average volatility on major commodities has risen significantly by about 33 per cent post its imposition. Considering the transaction tax, income tax and service tax aspects and decline in the trading volume attributed solely to the CTT imposition, it is found that CTT results in huge revenue loss to the exchequer. It is estimated that at the current CTT rate, government is losing an annual net tax revenue worth ₹30 billion. Even at a lower rate of 0.001 per cent (which is one-tenth of the current rate of 0.01%), the government’s fiscal loss is expected to be about ₹2.50 billion. Even if we make a conservative assumption that CTT accounts for only 25 per cent decline in the trading volumes, the optimal CTT rate, in terms of tax revenue collections, is found at 0.003 per cent, well below the current rate. There is, therefore, no justification for retaining CTT on the commodity futures trading in India as it leads to a huge revenue loss to the government, owing to reduced trading activity and trade migration. Withdrawal of CTT would be ideal for Indian commodities market development, improving its liquidity and making it more internationally competitive.

Suggested Citation

  • 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.
    • Handle: RePEc:sae:vikjou:v:44:y:2019:i:1:p:12-29
    DOI: 10.1177/0256090919826316
    as

    Download full text from publisher

    File URL: https://journals.sagepub.com/doi/10.1177/0256090919826316
    Download Restriction: no
    File URL: https://libkey.io/10.1177/0256090919826316?utm_source=ideas
    LibKey link: if access is restricted and if your library uses this service, LibKey will redirect you to where you can use your library subscription to access this item
    ---><---

    References listed on IDEAS

    as
    1. Robin K. Chou & George H. K. Wang, 2006. "Transaction tax and market quality of the Taiwan stock index futures," Journal of Futures Markets, John Wiley & Sons, Ltd., vol. 26(12), pages 1195-1216, December.
    2. Garman, Mark B & Klass, Michael J, 1980. "On the Estimation of Security Price Volatilities from Historical Data," The Journal of Business, University of Chicago Press, vol. 53(1), pages 67-78, January.
    3. Eyup Kadioglu & Saim Kilic & Nurcan Ocal, 2016. "Determinants of Price Volatility of Futures Contracts: Evidence from an Emerging Market," Journal of Applied Finance & Banking, SCIENPRESS Ltd, vol. 6(2), pages 1-7.
    4. Andrew W. Lo & Harry Mamaysky & Jiang Wang, 2004. "Asset Prices and Trading Volume under Fixed Transactions Costs," Journal of Political Economy, University of Chicago Press, vol. 112(5), pages 1054-1090, October.
    5. Summers, L.H. & Summers, V.P., 1989. "When Financial Markets Work Too Well : A Cautious Case For A Securities Transactions Tax," Papers t12, Columbia - Center for Futures Markets.
    6. Pravakar Sahoo, 2008. "Impact of Proposed Commodity Transaction Tax," Working Papers id:1593, eSocialSciences.
    7. Robert Z. Aliber & Bhagwan Chowdhry & Shu Yan, 2003. "Some Evidence that a Tobin Tax on Foreign Exchange Transactions May Increase Volatility," Review of Finance, Springer, vol. 7(3), pages 481-510.
    8. James Tobin, 1978. "A Proposal for International Monetary Reform," Eastern Economic Journal, Eastern Economic Association, vol. 4(3-4), pages 153-159, Jul/Oct.
    9. Sanjay Sehgal & Mala Dutt, 2016. "Domestic and international information linkages between NSE Nifty spot and futures markets: an empirical study for India," DECISION: Official Journal of the Indian Institute of Management Calcutta, Springer;Indian Institute of Management Calcutta, vol. 43(3), pages 239-258, September.
    10. Verma, Ashutosh & Kumar, C.V.R.S. Vijaya, 2010. "An Examination of the Maturity Effect in the Indian Commodities Futures Market," Agricultural Economics Research Review, Agricultural Economics Research Association (India), vol. 23(2), July.
    11. Woradee Jongadsayakul, 2015. "Determinants Of Silver Futures Price Volatility: Evidence From The Thailand Futures Exchange," The International Journal of Business and Finance Research, The Institute for Business and Finance Research, vol. 9(4), pages 81-87.
    12. Badi Baltagi & Dong Li & Qi Li, 2006. "Transaction tax and stock market behavior: evidence from an emerging market," Empirical Economics, Springer, vol. 31(2), pages 393-408, June.
    13. Umlauf, Steven R., 1993. "Transaction taxes and the behavior of the Swedish stock market," Journal of Financial Economics, Elsevier, vol. 33(2), pages 227-240, April.
    14. Hu, Shing-yang, 1998. "The effects of the stock transaction tax on the stock market - Experiences from Asian markets," Pacific-Basin Finance Journal, Elsevier, vol. 6(3-4), pages 347-364, August.
    15. Minoru Hayashida & Hiroyuki Ono, 2011. "Turnover tax, transaction cost and stock trading volume revisited: investigation of the Japanese case," Applied Financial Economics, Taylor & Francis Journals, vol. 21(24), pages 1809-1817, December.
    16. Schäffler, Christian & Schmaltz, Christian, 2009. "Market liquidity: an introduction for practitioners," Frankfurt School - Working Paper Series 131, Frankfurt School of Finance and Management.
    17. Yongyang Su & Lan Zheng, 2011. "The Impact of Securities Transaction Taxes on the Chinese Stock Market," Emerging Markets Finance and Trade, Taylor & Francis Journals, vol. 47(0), pages 32-46, January.
    18. Mr. Tonny Lybek & Mr. Abdourahmane Sarr, 2002. "Measuring Liquidity in Financial Markets," IMF Working Papers 2002/232, International Monetary Fund.
    19. Jeffrey A. Frankel, 1994. "The Internationalization of Equity Markets," NBER Books, National Bureau of Economic Research, Inc, number fran94-1, March.
    20. Stephan Schulmeister, 2009. "A General Financial Transaction Tax: A Short Cut of the Pros, the Cons and a Proposal," WIFO Working Papers 344, WIFO.
    21. Zhong, Maosen & Darrat, Ali F. & Otero, Rafael, 2004. "Price discovery and volatility spillovers in index futures markets: Some evidence from Mexico," Journal of Banking & Finance, Elsevier, vol. 28(12), pages 3037-3054, December.
    22. Dimitris Kenourgios & Athanasios Katevatis, 2011. "Maturity effect on stock index futures in an emerging market," Applied Economics Letters, Taylor & Francis Journals, vol. 18(11), pages 1029-1033.
    23. John Y. Campbell & Kenneth A. Froot, 1994. "International Experiences with Securities Transaction Taxes," NBER Chapters, in: The Internationalization of Equity Markets, pages 277-308, National Bureau of Economic Research, Inc.
    24. Parkinson, Michael, 1980. "The Extreme Value Method for Estimating the Variance of the Rate of Return," The Journal of Business, University of Chicago Press, vol. 53(1), pages 61-65, January.
    25. Anna Pomeranets & Daniel G. Weaver, 2011. "Security Transaction Taxes and Market Quality," Staff Working Papers 11-26, Bank of Canada.
    26. Yang, Dennis & Zhang, Qiang, 2000. "Drift-Independent Volatility Estimation Based on High, Low, Open, and Close Prices," The Journal of Business, University of Chicago Press, vol. 73(3), pages 477-491, July.
    27. Kate Phylaktis & Antonis Aristidou, 2007. "Security transaction taxes and financial volatility: Athens stock exchange," Applied Financial Economics, Taylor & Francis Journals, vol. 17(18), pages 1455-1467.
    28. 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.
    29. Roll, R., 1989. "Price Volatility, International Market Links, And Their Implications For Regulatory Policies," Papers t10, Columbia - Center for Futures Markets.
    30. Stiglitz, J.E., 1989. "Using Tax Policy To Curb Speculative Short-Term Trading," Papers t2, Columbia - Center for Futures Markets.
    31. Sinha, Pankaj & Mathur, Kritika, 2015. "Impact of Commodities Transaction Tax on Indian Commodity Futures," MPRA Paper 63677, University Library of Munich, Germany.
    32. Pedro Gurrola & Renata Herrerías, 2011. "Maturity effects in the Mexican interest rate futures market," Journal of Futures Markets, John Wiley & Sons, Ltd., vol. 31(4), pages 371-393, April.
    33. 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.
    Full references (including those not matched with items on IDEAS)

    Citations

    Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.
    as


    Cited by:

    1. Priti Dubey & Rishika Shankar, 2020. "Determinants of the Commodity Futures Market Performance: An Indian Perspective," South Asia Economic Journal, Institute of Policy Studies of Sri Lanka, vol. 21(2), pages 239-257, September.
    2. 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.
    3. Agrawal, Tarunika & Sehgal, Sanjay & Kumar, Muneesh, 2020. "Market development and policy issues for agri-derivatives in India: a study of cotton and mentha," Agricultural Economics Research Review, Agricultural Economics Research Association (India), vol. 33(1), June.

    Most related items

    These are the items that most often cite the same works as this one and are cited by the same works as this one.
    1. Sinha, Pankaj & Mathur, Kritika, 2015. "Impact of Commodities Transaction Tax on Indian Commodity Futures," MPRA Paper 63677, University Library of Munich, Germany.
    2. Capelle-Blancard, Gunther & Havrylchyk, Olena, 2016. "The impact of the French securities transaction tax on market liquidity and volatility," International Review of Financial Analysis, Elsevier, vol. 47(C), pages 166-178.
    3. Deng, Yongheng & Liu, Xin & Wei, Shang-Jin, 2018. "One fundamental and two taxes: When does a Tobin tax reduce financial price volatility?," Journal of Financial Economics, Elsevier, vol. 130(3), pages 663-692.
    4. Eichfelder, Sebastian & Lau, Mona, 2016. "Financial transaction taxes: Announcement effects, short-run effects, and long-run effects," arqus Discussion Papers in Quantitative Tax Research 211, arqus - Arbeitskreis Quantitative Steuerlehre.
    5. Alonso, Miguel A. & Rallo, Juan Ramón & Romero, Alberto, 2013. "El efecto de los impuestos a las transacciones financieras en la estabilidad de los mercados de capital. Un debate sin resolver," El Trimestre Económico, Fondo de Cultura Económica, vol. 0(317), pages 207-231, enero-mar.
    6. Thomas Hemmelgarn & Gaëtan Nicodème & Bogdan Tasnadi & Pol Vermote, 2016. "Financial Transaction Taxes in the European Union," National Tax Journal, National Tax Association;National Tax Journal, vol. 69(1), pages 217-240, March.
    7. Copenhagen Economics, 2011. "Elasticities of Financial Instruments, Profits and Remuneration," Taxation Papers 30, Directorate General Taxation and Customs Union, European Commission.
    8. Hvozdyk, Lyudmyla & Rustanov, Serik, 2016. "The effect of financial transaction tax on market liquidity and volatility: An Italian perspective," International Review of Financial Analysis, Elsevier, vol. 45(C), pages 62-78.
    9. Sinha, Pankaj & Mathur, Kritika, 2012. "Evolution of security transaction tax in India," MPRA Paper 40165, University Library of Munich, Germany.
    10. Anna Pomeranets & Daniel G. Weaver, 2011. "Security Transaction Taxes and Market Quality," Staff Working Papers 11-26, Bank of Canada.
    11. Cappelletti, Giuseppe & Guazzarotti, Giovanni & Tommasino, Pietro, 2017. "The stock market effects of a securities transaction tax: Quasi-experimental evidence from Italy," Journal of Financial Stability, Elsevier, vol. 31(C), pages 81-92.
    12. Ms. Thornton Matheson, 2011. "Taxing Financial Transactions: Issues and Evidence," IMF Working Papers 2011/054, International Monetary Fund.
    13. Yuming Fu & Wenlan Qian & Bernard Yeung, 2016. "Speculative Investors and Transactions Tax: Evidence from the Housing Market," Management Science, INFORMS, vol. 62(11), pages 3254-3270, November.
    14. Hayashida, Minoru & Ono, Hiroyuki, 2016. "Tax reforms and stock return volatility: The case of Japan," Journal of Asian Economics, Elsevier, vol. 45(C), pages 1-14.
    15. Peter Gomber & Martin Haferkorn & Kai Zimmermann, 2016. "Securities Transaction Tax and Market Quality – the Case of France," European Financial Management, European Financial Management Association, vol. 22(2), pages 313-337, March.
    16. Rudolf Alvise Lennkh & Florian Walch, 2015. "Collateral Damage? Micro-Simulation of Transaction Cost Shocks on the Value of Central Bank Collateral," Working Papers 6, European Stability Mechanism.
    17. Wu, Yu & Zhang, Tong, 2019. "Effects of change in commission fees on China futures market," Finance Research Letters, Elsevier, vol. 31(C), pages 54-65.
    18. Michał Zator, 2014. "Transaction costs and volatility on Warsaw Stock Exchange: implications for financial transaction tax," Bank i Kredyt, Narodowy Bank Polski, vol. 45(4), pages 349-372.
    19. Walch, Florian & Lennkh, Rudolf Alvise, 2015. "Collateral damage? Micro-simulation of transaction cost shocks on the value of central bank collateral," Working Paper Series 1793, European Central Bank.
    20. Thornton Matheson, 2014. "The Effect of a Low-Rate Transaction Tax on a Highly Liquid Market," FinanzArchiv: Public Finance Analysis, Mohr Siebeck, Tübingen, vol. 70(4), pages 487-510, December.

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:sae:vikjou:v:44:y:2019:i:1:p:12-29. See general information about how to correct material in RePEc.

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a bibliographic reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: SAGE Publications (email available below). General contact details of provider: .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.