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Commexes jointly oppose CTT move

Say this or other new tax on commodity derivatives will kill an already handicapped market

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BS Reporter Mumbai
Last Updated : Jan 29 2013 | 2:34 PM IST

Any move to impose a commodity transaction tax (CTT) on commodity derivative transactions will be detrimental to growth of the sector and kill the market, the five commodity exchanges have said with one voice.

All five have come together to oppose the move to tax commodity futures, by imposing a CTT on the same lines as the Securities Transaction Tax (STT) on trades in the securities market. The five are Multi Commodity Exchange (MCX), National Commodities and Derivatives Exchange, National Multi Commodity Exchange (NMCE), Indian Commodity Exchange (ICEX) and ACE.

Their joint statement says, “There have been demands raised by certain vested interests, from time to time, for imposing STT on derivative transactions across all classes, including commodity, currency and interest rate, for the ostensible ground of creating a level playing field across all asset classes...we, the commodity exchanges, strongly feel that STT should not be levied on any such derivative instruments.”

MARKING TERRITORY
Parameters
(Table 1)
Stock
Exchanges
Commodity
Exchanges
Participation by institutions (FIIs, banks, mutual fund, NRIs, DIIs & insurers)YesNo
Trading in cash, options, indicesYesNo
Tax exemption under section 43 (5) of IT ActYes*No**
Capital gainsYes#No##
Autonomous regulatorYesNo
* Business losses can be off-set by profits in stock trading.
# Short-term gains are taxed at a concessional rate. No long-term capital gains tax.
**Treated as “speculative” income, despite being hedging platform.
##Treated as “speculative” gain or loss.

Rejecting the argument that because of STT, volumes have shifted from equities to commodity derivatives, Jignesh Shah, chairman of the FT group and promoter of MCX, said: “After STT was imposed on the security market, volumes have shifted from the equity cash market to equity options; in the commodity market, options trading is not permitted. This year, 2012-13, commodity market volumes have diminished and, hence, the question of volumes shifting from equities to commodity derivatives does not arise.”

SHIFT IN PREFERENCE
Year
(Table 2)
Equity
Futures
Equity
Options
Increase
(%)
Commodity
Futures
Increase
(%)
2007-08*45,2966,858-13,375-
2008-09*29,01116,29913817,04227
2009-10*37,41734,97611525,54250
2010-11*38,78976,36111838,92252
2011-12*31,49397,6582858,47150
2012-13*# 27,166123,0172656,7163
* Since 2007, volumes have been shifting from equity futures to equity options as STT on equity options that are not exercised— which is always the case — is negligible;
#April-November 2012.
Source: Periodic bulletins from SEBI and FMC.

Any further increase in tax on commodity derivatives will only hurt hedging activities, which otherwise need to be given incentives, is the contention. In fact, when STT was imposed on equities, concessions were given in capital gains tax, along with permission to set-off a loss or gain in equity derivatives against other business loss/gains, while such a facility is not available for commodity derivatives. Anil Mishra, managing director of NMCE, said, “There are various other indirect taxes on commodities like octroi, VAT and so on, which are not there in equities.”

There are several issues whereby the equity market enjoys privileges vis-a-vis commodity derivatives, apart from set-offs on losses and gains, they argue (see table-1). Rajnikant Patel, managing director of ICEX, said, “Even from a trading perspective, there are several disparities, like several types of institutional players are not allowed to trade in the commodity market.”

“There is a need for convergence between spot commodity market prices with derivatives, which will help hedgers to manage their risk. Any tax or increase in tax on commodity derivatives will kill that basic purpose,” says the statement issued by these five exchanges.

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First Published: Jan 11 2013 | 12:35 AM IST

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