The commodity market regulator, the Forward Markets Commission (FMC), has urged the Ministry of Consumer Affairs to treat commodity derivatives transactions on a par with equity derivatives. A senior FMC official confirmed the development.
In a letter to the ministry, FMC has laid special emphasis on derivatives transactions on commodity exchanges, which are considered as speculative activities.
P K Singhal, deputy managing director at MCX, said this misconception was the main reason behind thin volumes at exchanges and flourishing parallel markets and bucket shops in various cities and towns.
“Firstly, the government has to recognise trading on commodity exchanges as a ‘line of business’ and not pure speculation, which it is considered under Section 43(5) of Income Tax Act. In fact, this is the most significant reason for thin volumes at official trading floors,” said Singhal.
According to income tax rules, payment of commission and brokerage is subject to 10 per cent TDS (tax deduction at source). However, the Section exempts securities brokerage or commission from TDS.
Trading in commodity derivatives was similar to trading in stock derivatives and therefore brokers getting commission from commodity derivatives trading should be exempted under this Section, said FMC.
In order to promote derivatives trading on stock exchanges, an additional provision was inserted under clause (5) of Section 43 of the Act by the Finance Act, 2005. The additional provision states that eligible transactions in respect of trading in derivatives carried out on a recognised stock exchange will not be deemed to be speculative transactions.
Allowing speculative participation in commodity markets will help bourses generate a critical mass of trade that will attract physical market players as well.
Therefore, in its pre-Budget memorandum to the finance ministry, MCX has also demanded fair treatment to derivatives transactions on commodity bourses. It has also urged the government to provide infrastructure status to commodity exchanges and allied agricultural infrastructure facilities. Singhal argued that such status would give a fillip to investments in cold chains and warehouses, which take seven-eight years to break even.
