A marathon run through India's FY 2013-14 budget speech would tell you that it is India's first anti-commodity budget (and hopefully the last). The budget has created some uproar in the commodity markets with the introduction of Commodity Transaction Tax for non-agricultural commodities. But that is all not. The equity markets have been handsomely incentivised while the commodities have been sidelined and even discouraged.
But let's start from the controversial CTT:
“There is no distinction between derivative trading in the securities market and derivative trading in the commodities market, only the underlying asset is different. It is time to introduce Commodities Transaction Tax (CTT) in a limited way. Hence, I propose to levy CTT on non-agricultural commodities futures contracts at the same rate as on equity futures, that is at 0.01 percent of the price of the trade. Trading in commodity derivatives will not be considered as a ‘speculative transaction’ and CTT shall be allowed as deduction if the income from such transaction forms part of business income. As I said, agricultural commodities will be exempt.” the budget statement read.
While one could point out that trading in the commodities market is still at its nascent stage and technically while there could be nil distinction between 'trading in the securities market and derivative trading in the commodities market', the case may not be the same in a practical sense; the markets still require incentives in India.
Unfortunately, the finance minister has chosen not to think that way.
The finance minister has also drawn a distinction between agricultural and non-agricultural commodities which may not be the case with STT or Securities Transaction Tax already prevalent in India; the tax for instance draws no distinction between agri stocks and non agri stocks. This has become a bone of contention:
“With respect to commodities transactions tax (CTT), the discrimination is glaring between agri and non-agri commodities; which is not the case as regards STT. This treatment is like having STT on shares of ‘Company A’ and no STT on ‘Company B’. Further, currency markets are 500% bigger than the commodities markets, yet there is no transaction tax levied on them, which is again discriminatory. Gold ETFs too have been charged at 0.001 % as against 0.01% for Gold futures traded on commodity futures markets. Gold ETFs is 100% backed by physical gold.” said Shreekant Javalgekar, MD & CEO, Multi Commodity Exchange of India (MCX) in an e-mailed response.
“CTT on Indian commodity exchanges will increase the transaction cost by more than 300% on an average, which will drive the trades towards dabba trading or international markets. The commodity futures markets have created nearly 10 lakh jobs in non-urban areas, which are also under threat now. This is also expected to be inflationary as spot market and futures market move in tandem. Shockingly, PMEAC had advised against imposition of CTT and the provision of CTT was abolished in Lok Sabha (2009-10). No fundamentals have changed since then, and still CTT has been levied on non-agri commodities. The commodities futures industry fails to understand this rationale.” he added.
Javalgekar heads India's biggest exchange in trade volumes with laser focus on Metals-Energy segment.
“In the commodities space, major focus by the government was an introduction of transaction tax on non agri commodities. In line with the STT, the government introduced Commodity transaction tax on non agricultural commodities @0.01 percent. This move will increase transaction costs by 4-5 times and therefore to a large extent discourage participation in Commodities derivatives market. Lack of participation and liquidity shall distort price discovery mechanism, the main purpose of the derivative Exchanges. Further, levy of CTT shall also dissuade hedgers from participation at Indian Commodities Exchanges due to high transaction costs. It is therefore feared that imposition of CTT may divert traders towards international markets.” said Naveen Mathur, Associate Director- Commodities & Currencies; Angel Broking.
“Further, main aim of 2013-14 budget is to reduce the fiscal deficit to 4.8 percent which will lead to appreciation in the Indian Rupee and will exert downside pressure on the gold prices in the domestic markets. Also, liberalization of Rajiv Gandhi Equity saving Scheme, tax benefits for new house loan, additional interest deduction upto Rs.1,00,000 along with introduction from Reserve Bank of India (RBI) for instruments protecting savings against inflation may reduce investment demand for Gold.” he added.
No wonder, the budget document as a whole looks anti-commodity to many observers especially as the Securities Transaction Tax (STT) has been slashed by the minister:
“Securities Transaction Tax (STT) has a stabilizing effect on transactions, although it adds to the transaction cost. Taking note of the changes and shifts in the market, I propose to make the following reductions in the rates of tax:
Equity futures: from 0.017 to 0.01 percent
MF/ETF redemptions at fund counters: from 0.25 to 0.001 percent
MF/ETF purchase/sale on exchanges: from 0.1 to 0.001 percent, only on the seller”--the Finance Minister noted in the speech.
MF/ETF redemptions at fund counters: from 0.25 to 0.001 percent
MF/ETF purchase/sale on exchanges: from 0.1 to 0.001 percent, only on the seller”--the Finance Minister noted in the speech.
This could in a way make stock exchanges attract more in volumes. No wonder the likes of Javalgekar are fuming.
Anti-bullion stand
The anti-bullion stand of government requires no explanation here. The govt, prior to the budget had increased the import duty on gold from 4% to 6% in a bid to arrest the widening Current Account Deficit.
“The CAD continues to be high mainly because of our excessive dependence on oil imports, the high volume of coal imports, our passion for gold, and the slow down in exports.” the speech read. Noting that the household sector must be incentivised to save in financial instruments rather than buy gold
the minister proposed the following schemes:
the minister proposed the following schemes:
Liberalisation of the Rajiv Gandhi Equity Savings Scheme(RGESS) that was launched in FY 2012-13 with substantial tax savings. The first time investors will now be allowed to invest in mutual funds as well as listed shares.
This investment can be done not in one year alone, but in three successive years . The income limit is also being proposed to be raised from Rs.10 lakh to Rs.12 lakh.
Now, that could see a quantum jump in equity trading.
Inflation-indexed Bonds
In consultation with RBI, the minister has also proposed to introduce instruments that will protect savings from inflation, especially the savings of the poor and middle classes. These could be Inflation Indexed Bonds or Inflation Indexed National Security Certificates.
The measure of introducing inflation indexed bonds, if it succeeds in gaining currency can kill gold investment demand in futures. Gold has always been a traditional hedge against inflation.
Infrastructure Debt Funds
Infrastructure Debt Funds (IDF) will also be encouraged. These funds will raise resources and, through take-out finance, credit enhancement and other innovative means, provide long-term low-cost debt for infrastructure projects.
“I am happy to report that four IDFs have been registered with SEBI so far and two of them were launched in the month of February, 2013.” the minister noted.
Thus a new platform has been created in the stock exchange that can significantly boost investor participation.
This is apart from a deluge of measures to incentivize the capital markets in India and to strengthen the SEBI (Securities and Exchange Board of India—equity market regulator of the country) apparatus.
And alas, the name of Forward Markets Commission, the commodity market regulator, does not feature anywhere in the speech!
