India’s Commodity market is overburdened by a host of taxes

Imposition of transaction tax on commodity trades will prove to be retrograde move for India’s commodity market

The commodity derivatives market in India was set up to serve the price risk management and price discovery functions. Commodity derivatives such as forex futures and Interest Rate Futures are hedging tools and are not for investment purpose. An important step to realise the full potential of a commodity derivatives market is to have a congenial tax environment so that the market can play a critical role in facilitating hedging, and mitigating volatility in prices, leading to efficient price risk management for market participants.

India’s commodity derivatives are comparatively a lot more disadvantaged than any other exchange traded segment in the country. Unlike the equity market, which enjoys a congenial tax environment with various tax exemptions, a host of taxes are imposed on commodity spot and derivatives transactions.

Though, Securities Transaction Tax (STT) is imposed on equity (cash and derivatives) segments, there are various advantages enjoyed by these segments, which is not enjoyed by the commodity derivatives markets.  Some of these include:

·         The largest contributors to the equity market volumes are Banks, Mutual Funds and FIIs. They are not allowed to participate in commodity markets. Moreover, in terms of products, the largest contributors to volumes are indices, options and cash segments. The commodity derivatives markets are not permitted to offer these products for trading.

·         Trading in options and indices is not permitted in the Indian commodity derivatives market whereas it is permitted in the Indian equity derivatives market.

·         Derivative transactions other than those in commodities are recognised as ‘hedging’ for income tax purposes, even if they do not culminate in physical delivery of the underlying. This benefit is not provided to the commodity derivative transactions.

·         In the case of equity derivatives transactions, speculative losses are treated as business loss and can be off-set by profits while in case of commodity derivatives transactions, it is treated as “speculative” income, despite being a hedging platform.

·         In the case of equity derivatives transactions, short-term gains are taxed at a concessional rate and long-term capital gains are not taxed, whilst in the case of commodity derivative transactions, short-term and long-term capital gains are treated as “speculative”. Similarly in the case of equity cash transactions, business profits can be set-off by losses in equity derivatives transactions. However, this is not allowed in the case of commodity spot transactions.

·         The tax treatment of the commodity spot transactions vis-à-vis the equity cash transactions are also stacked in favour of the latter. VAT, Mandi Tax, Cess, Octroi, Excise duty, Customs Duty are some of the taxes levied on the commodity spot transactions. These are not levied on equity cash transactions. Business profits can be set-off by losses under section 43(5) of the IT Act, 1961 in the case of equity derivatives trades, while this provision is not there for commodity spot trades

Imposition of transaction tax on commodity derivatives will increase the cost of “hedging” transactions, impair hedging efficiency, and will drive out hedgers. By increasing the cost of participation, the transaction tax will negatively impact the small players, Small and Medium Enterprises (SMEs), farm community, producers, processors, importers, exporters etc.  They will lose out on a potent domestic risk management platform in the process.  This will also lead to job losses and loss in incomes.

The size of the illegal market in commodity derivatives is a few times that of the regulated commodity exchanges. Imposition of transaction tax on commodities market will further boost the illegal ‘dabba’ markets. Moreover, all the gains to the state and central exchequer because of the network effect of the commodity derivative exchanges would be drastically diminished with the levying of transaction tax on commodity derivatives transactions.

KOCHI- Kerala Cardamom Dealers Chamber

Mr. Santhosh Joseph, Secretary, Kerala Cardamom Dealers Chamber has said, “We at the Kerala Cardamom Dealers Chamber are alarmed at some of the newspaper reports suggesting that the government is considering bringing commodity futures trading under Security Transactions Tax or STT. He added,“..if tax is imposed on commodity trading, the market will become too costly for hedgers to hedge their risks.”

KOCHI- Cardamom Planters’ Association

Mr. S. V. Subramanian, President , Cardamom Planters’ Association has said, ”.… if the commodity futures trading in India are unfortunately subjected to transaction tax, common participants like us (spices farmers) would be maximum affected. In short commodity transaction tax will prove to be a bane to the spices economy, hence we urge upon you to please refrain from imposing it.”

CHENNAI- Tamilnadu Small & Tiny Industries Association

In a letter to the Union Finance Minister, Shri P. Chidambaram, Mr. V. Nithiyanantham, Hon. General Secretary, Tamilnadu Small & Tiny Industries Association, has said, “… the increasingly volatile metal prices have been posing risks of uncertain cash flows and at times risks even the very survival for many firms, especially those in the SME sector. Fortunately, commodity exchanges in India provide a platform for the industry participants to manage risks arising from metal price volatility.” He has also requested the Hon’ble minister, “to recognize the varying role played by the Indian commodity futures market in contrast to stock market… and desist from imposing a transaction tax on this market.”

CHENNAI- Tamilnadu Investors’ Association

Mr. Shyam Sekhar, President of Tamilnadu Investors’ Association, a SEBI recognized investors Association, has requested the Union Minister of Finance to consider that, “Participants in commodity derivative markets all over the world are very sensitive to costs and the profits are made on marginal price movements. Imposition of CTT has the possibility of increasing the costs significantly thereby encouraging the market players to move to other low-cost parallel markets which may not be legal in nature.”

BANGALORE- Peenya Industries Association

In a memorandum on behalf of the metal-related industries, to the Union Minister of Finance, Mr. Ravi Basavraju, President, Peenya Industries Association has appealed to, “….not deny us the cost effective risk management platform that commodity futures market has been offering and request you to desist from imposing a transaction tax on this market”

BANGALORE- Copper Consumers’ Association of South India.

“Any increase in cost of participation in commodity futures market through transaction taxes (if any), would have multiplier effect on our risk management strategies, posing big uncertainties to our industry. While increased cost will increase our direct cost of hedging in commodity futures market, the increased cost would also lead to fall in overall market liquidity, raising impact cost, which would further indirectly add to our cost of hedging,” said Mr. Jayaram Krishnappa, President, Copper Consumers’ Association of South India.

BANGALORE- University of Agricultural Sciences

In a plea to the Union Finance Minister Dr. P.K. Mandanna, Professor & University Head Department of Agricultural Marketing, Co-operation and Business Management - University of Agricultural Sciences has said, “If a transaction tax is introduced in this market, hedging will become too expensive for the hedgers and they will be left without any protection from commodity price risk. Farmers and other small producers will be the worst affected, as they are most vulnerable to commodity price risk”.