The Hindu Business Line : ‘Commodity transaction tax to hit price discovery’

The Budget for the year 2008-09 is a mixed bag. It is a populist and pragmatic one, conducive to growth. The Finance Minister is clearly focusing on balanced growth while addressing primary concerns of the slowdown in GDP and inflation, keeping in mind the impending elections.

However, expected changes in the sphere of commodity markets were left unattended.

The previous Budget saw the setting up of the Abhijeet Sen Committee in the wake of delisting of trading in wheat and rice on commodity exchange platforms. It is a year since the committee was set up and it is a pity that the committee is yet to see the light of the day.

Further, the commodity markets were looking forward to essential changes/ facilities akin to those extended to stock markets such as making income and expenditure on hedging activities in commodity exchanges a permissible business activity under the Income-Tax Act and allowing set-off of losses from trading in commodity futures against profits from the business as a trader, manufacturer or processor, consumer (as raw material) of the same or similar commodity.

CTT, a disappointment

The definitions of long term/ short term capital gains was also expected to be extended to the commodity markets.

While these have not happened, it is disappointing to note that the FM has introduced commodity transaction tax (CTT) along the lines of STT as in stock markets.

Commodity markets are still in the nascent stage (4 years) and are a fraction of the size (1/5th) of the securities markets. The markets have simply no capacity to bear this tax.

The irony is that the Budget refers to options which are still to be introduced in the commodity markets.

It must be understood that unlike securities markets, commodity markets perform the essential function of price discovery and the CTT will adversely affect the price discovery process. If and when CTT is to be introduced in commodity markets in future, it has to be done only with the related benefits already extended to the securities markets.

The FM has also put commodity exchanges, along with the stock exchanges, under the purview of service taxes and plans to introduce service tax on services provided by them. This measure is unlikely to have severe impact on the commodity exchanges.

Integrated farm policy needed

On the agricultural front, the measures currently stipulated are one-time measures.

The need of the hour is to have an integrated policy approach to make India self-sufficient in three to five years in wheat, edible oils and pulses. Not a single reference has been made to this effect in the Budget. In future, repetition of the proposed loan waiver scheme to small and marginal farmers (Rs 60,000 crore allocated in the Budget) can be avoided if quick measures are taken to reach market prices to farmers in order that production becomes market-oriented.

Given the large food subsidy bill, this would have been the right time to introduce options in the commodity segment.

Entities like FCI should begin running reverse auctions on commodity exchange platforms and using the commodity exchange futures for procurement. These efforts will substantially reduce their costs and thus the subsidy bill.

In all a disappointing Budget insofar as strategic direction is concerned.

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