Government to Levy Commodity Transaction Tax (CTT) from July 1

Come July 1, the world's biggest buyer of gold, government of India is going to levy 0.01% Commodity Transaction Tax (CTT) on futures contracts of non agricultural commodities like base, precious metals, oil and gas.

With already high brokerage charges that a daily trader pays, here comes a tax that will shift an active trader’s returns into the hands of the Government. Yes, the Commodity Transaction Tax that Finance Minister P. Chidambaram proposed in the Budget session this year will be effective from July 1, 2013. CTT will be implied at the rate of 0.01% or Rs. 1000/Cr to be paid by the seller. But have you ever thought where your costs will go and how your profits will slip south, once the tax is imposed.

Before going further, here’s how Commodity Transaction Tax will drag more money out of your pockets.

Typically a trader is charged Rs. 1000/Cr as brokerage and he pays a transaction cost to the exchange, which on an average is Rs. 450/Cr that totals his cost to Rs. 1450/Cr plus service tax. So, the cost that an individual trader pays before the CTT is Rs. 1629.22. However, once CTT is effective, a trader will have to shell out Rs. 2629.22/Cr as investment charges, which is nearly 61% hike. In order to take home some returns, he will have to earn at least 62% more to stay above the breakeven.

High brokerage is already a curse on trade returns and now, Commodity Transaction Tax will further dent trader profits. But there is hardly anything we can do? We can’t do anything on the imposition of tax and neither can we increase our profits by least 62% in this current scenario, where market returns are not fascinating. The only way we can deal with this situation is by changing our trading strategies and paying less to the brokerage houses.

How Brokerage Cost is ruining your Profits

Let’s take an example of a Gold trade and see how a normal brokerage company fares when compared to Finvasia. You’ll see the difference yourself.

An investor trades 1 lot of gold (buy & sell) on the Multi Commodity Exchange and his turnover is nearly Rs. 56 lakh (Rs 28000 per 10 grams). Taking Rs 1000 per crore as average brokerage being charged, he is paying Rs. 560 and in addition to transaction cost which on an average is Rs 450 per crore. According to his trading volume, he will pay the transaction cost of Rs 252. Summing it up by adding service tax of 12.36%, an investor pays Rs. 912.4(560+252+100.4). After the introduction of CTT of Rs 1000 per crore, the investor in this trade will pay Rs. 280 CTT, which will increase his cost to Rs. 1192.4.

On the other hand, Finvasia charges Rs 9/Lot, which is significantly a low brokerage charge when compared to its competitors. Hence, if an investor trades with Finvasia, he pays Rs. 18( buy and sell) as brokerage cost and Rs 162.4 (Rs 290 per crore) as the transaction cost. Summing it up by adding the service tax, an investor will have to pay only Rs. 202.7 (18+162.4+22.25). And after the implication of tax, the cost would be Rs. 482.7.

We can easily see the difference of costs between the two companies. And in the market where almost every company charges between Rs. 1000/Cr to Rs. 3000/Cr as brokerage, we can see how the profits can be increased. The difference between the costs of trading in the above said example is Rs 709.7. Therefore trading with Finvasia will add 59.5% more to your profits. Always remember that “a penny saved is a penny earned” and by minimizing your costs, you increase your returns.

Given below is the table compares the brokerage charges of different companies. The table demonstrates how these charges impact your returns, before CTT as well as after CTT and decide the fate of your money. Profits or Cost!!!

Brokerage charges of different companies:

 

Competitor A

Competitor B

Competitor C

FINVASIA

Competitor D

Brokerage

Rs 1000/Cr or

Rs.20/trade (whichever is lower)

Rs 1000/Cr or

Rs 25/trade (whichever is lower)

Rs 1000/Cr

Rs 9/lot

or Rs.19/trade (whichever client picks)

Rs 9/ lot

Transactional Cost

Rs 440/Cr

Rs 400/Cr

Rs 375/Cr

Rs 290/Cr

Rs 450/ Cr

Let’s take an example of gold trading by different companies given above. An investor buys and sells 1 lot of gold of value Rs. 5600000. The total cost paid by him before CTT is:

Companies

Competitor A

Competitor B

Competitor C

FINVASIA

Competitor D

Costs

Brokerage (Rs)

40

50

560

18

18

Transactional Cost (Rs)

274.4

280

210

162.4

252

Service This email address is being protected from spambots. You need JavaScript enabled to view it. %

38.85

40.8

95.17

22.3

33.42

Total Cost (Rs)

353.25

370.8

865.17

202.7

303.42

After CTT (Rs 1000 per crore to be paid by the seller)

Companies

Competitor A

Competitor B

Competitor C

FINVASIA

Competitor D

Costs

Brokerage (Rs)

40

50

560

18

18

Transactional Cost (Rs)

274.4

280

210

162.4

252

Service This email address is being protected from spambots. You need JavaScript enabled to view it. %

38.85

40.8

95.17

22.3

33.42

CTT (Rs)

280

280

280

280

280

Total Cost (Rs)

633.25

650.8

1145.17

482.7

583.42

 

 

THINK!!!!

 

 

 

Disclaimer: The above mentioned charge comparisons have been obtained randomly from published websites in Jan., 2013. The mentioned brokerages are commissions that are charged by various firms at their discretion, subject to change in size, trading frequency and other conditions being met, as defined by them.