The proposal for stamp duty exemption for trading in commodity derivatives has suddenly found many supporters. The Forward Markets Commission (FMC), under the ministry of consumer affairs (MCA), has strongly recommended to the ministry of finance that futures trading in commodities should be exempted from stamp duty completely.
“We have written to the finance ministry to fully exempt commodity futures trading from all types of stamp duty,” said a senior FMC official.
Despite strong opposition from commodity exchanges, the broking fraternity, FMC and many chambers of commerce, the finance ministry has moved a Cabinet note suggesting a uniform stamp duty of Rs 300 per crore (0.003 per cent) of transactions in all kinds of derivatives, including commodities, stocks and electricity. Understandably, the finance ministry has proposed an amendment to the existing Indian Stamp Act to align it with new requirements of the market and also to ensure substantial increase in revenue collection for states.
It is worth mentioning that when the Maharashtra government in March this year proposed a 150 per cent increase in stamp duty to Rs 500 from Rs 200 on every crore rupees of transaction effective June 1, FMC spearheaded representations from commodity exchanges and had engaged the state finance ministers in dialogue. Consequently, the government deferred the move indefinitely.
“The commodity futures market is currently used as a hedging tool in India. In many states, the stamp duty currently prevails at Rs 100 on every Rs 1 crore (0.001 per cent) of transaction. A 200 per cent rise in stamp duty will add to the overall cost of commodity and result in additional inflationary burden,” the official added.
The commodities trade in India is passing through multiple taxations including value-added tax, excise duty, mandi tax and many other levies. Hence, additional duty would add pressure on prices.
“Commodities futures are risk management tools and help corporates, farmers, co-operative societies of farmers, importers and exporters to hedge against their price risk. Stamp duty will increase the transaction cost of trading, thereby adding to the cost of risk management and thus will negatively affect and discourage all those participants who use the exchange platform to manage their price risk,” said D K Agarwal, national president of the Commodity Participants Association of India.
Differentiating between equity and commodity derivatives, Agarwal further said investment in stocks is considered an asset class which cannot be equalised with commodity derivatives. Such a proposal would only add to the existing menace of “dabba trading”. In this case, the entire objective of the commodity futures exchange would go for a toss, thereby posing a systemic risk to the markets as well as economy, he added.
The Associated Chambers of Commerce and Industry of India (Assocham), feels that imposing a uniform stamp duty on all types of exchange-traded transactions appears a step to rationalise the tax structure in the country. A close scrutiny of the proposal, however, indicates that it would impose a high tax burden on transactions in the nascent commodity derivatives market, thereby increasing the cost of transactions manifold.
What farmers and consumers actually need are stable commodity prices. An active commodity futures market seeks to achieve that by reducing seasonal and abnormal cyclical swings. Hence, what might be applicable for stocks or investment asset classes should not be applicable for commodity derivatives, it added.