Budget 2020: These 2 reforms by FM Nirmala Sitharaman can boost commodity market participation

Budget 2020-21: The bygone year was steeped with uncertainties for India’s commodity markets.

Budget 2020: These 2 reforms by FM Nirmala Sitharaman can boost commodity market participation
  • By Narinder Wadhwa

Budget 2020 India: The bygone year was steeped with uncertainties for India’s commodity markets. A slackened growth of the economy, US-China trade war, weak currency due to frequent monetary easing and downgrades by multiple agencies, and a firm dollar as compared to rupee and now aggravated US-Iran war-like conditions, are some of the factors which have led to the commodity markets’ lacklustre performance. While some of these uncertainties are expected to spill over into the current year, commodity market participants are looking at the upcoming Union Budget at the end of January 2020 to address the challenges facing India’s commodity markets today. Given below are a few concerns which market participants would want the government to address during the Budget 2020 for putting India’s commodity markets back on the growth trajectory.

Critical review of CTT

Levy of Commodity Transaction Tax (CTT) in 2013 severely impacted liquidity and volumes on India’s commodity exchanges, and it’s been a constant slide ever since. Commodity trading volumes have decreased by more than 60% from Rs.69449 crore per day in the Financial Year 2011-12 (FY12) to Rs.27291 crore per day in the financial year 2018-19 (FY19).  Annual volumes also fell from Rs 1,81,26,103 crore in FY12 to Rs 71,22,841 crore in FY19. This downslide was despite other commodity markets across the world growing at a healthier pace.

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In fact, India’s commodity market has one of the highest ‘cost-per-trade’ in the world as market participants are levied with myriad taxes and charges such as GST, stamp duty, Exchange Charges, and any applicable Capital Gains Tax and Income Tax, besides CTT. The high trading cost is the primary reason for the steep fall in volumes since CTT came into effect as it led to further increase in impact cost and proved to be a dampener for hedgers.

The fact is, Commodity Market is the backbone for an economy as it allows price discovery and price risk hedging in economically crucial commodities, besides generating large-scale employment. With India having a large consumer base, it has the potential of becoming a ‘price setter’ in the world for many crucial commodities which are produced and consumed in the country.

However, this can be only achieved if impact costs for market participants are kept low to attract more hedgers and traders, leading to improvement in volumes and liquidity on exchanges.

Stimulating the commodity market to attain its full potential will be also crucial for meeting the ambitious target of turning India into a $5 trillion economy by 2024. This year’s Budget proposals, hence, should ensure measures to substantially enhance the depth of the commodity derivative segment, primarily by rationalising CTT.

Exemption of Long-Term Capital Gains (LTCG) tax on Securities held for 1 or more years

Any conventional investor is typically risk-averse with the propensity to invest in instruments that are less risky such as in fixed deposits, Gold or Real Estate. India, however, needs to foster an equity culture for enabling the economy to raise risk capital for financing its faster growth. Aggressive measures are required to channelise retail investors’ savings into equity markets by instilling in them the understanding of the fact that returns from equities outperform inflation in the long term. Exemption of Long term Capital Gain on securities held over one year or more is a measure which merits consideration in this Budget to achieve the purpose of improving liquidity and volumes on commodity exchanges.

Levy 10% DDT on the recipient of dividend
Dividend Distribution Tax (DDT) has been another dampener for investors. Dividends earnings are currently slapped with a 15% DDT, and this effectively goes up to 20% after being grossed up and applying surcharge and education cess.

For those earning dividends above Rs 10 lakh, typically the rich investors, require to pay an additional amount of 10%, which sums up to a total 30% tax. The peak income tax rate of 42.7% for the rich is also much higher than the rest. The policymakers in the current Budget must consider streamlining DDT for all investors and levy a flat rate of 10% tax on the recipient of the dividend.

Relax LRS norms for residents at the International Financial Center at Gift City

Liquidity begets liquidity – this is a rule of the thumb for ensuring the success of any trading destination. Hence, in order to boost liquidity on the International Financial Center at the Ahmedabad’s GIFT city, the government must consider easing norms for resident investors.

Firstly, residents should be allowed a lower capping of USD 1,00,000 under the Liberalised Remittance Scheme (LRS). Liquidity triggered by local investors would then begin to attract offshore investors and enhanced liquidity for GIFT city can only help position IFSC on the lines of financial centers in Dubai and London.

Secondly, a provision may be inserted for carving out special zones like Gift City from the ambit of Stamp Duty, which is a tax incidence at the time of transaction and is collected by Stock Exchanges.

Special Mutual Funds for attracting long-term investors

In order to inculcate an equity culture in the country and channelizing long-term investments into the capital markets, the policymakers must consider notifying specific Mutual Funds where investors can park proceeds of the sale of any long-term investment asset and claim tax exemptions. Such MFs would enable those who may have made a long-term capital gain from the sale of any long-term capital asset to claim tax deductions by investing within a maximum limit of Rs 50 lakhs (or any other amount as decided by policymakers) with a lock-in period of 5 years, in line with Section 54 EC of Income Tax.

Revised tax structure for individual and partnership firms

Recently, the government has announced relaxation in corporate tax structure for domestic companies as part of a slew of measures for taxation reforms. In order to complete its reforms agenda, the Government now needs to also revise the tax structure for individual and partnership firms as the income tax rate of 42.7% is out of line with rates in several competing countries.

Moreover, the current tax structure encourages an anti-dividend mindset as corporate promoters may be tempted to keep profits within their companies instead of distributing them to shareholders in the form of dividends as these are highly taxed.

Moreover, under the current tax structure, the large gap of 17.7% between the top income tax rate and the corporate tax rate is not in sync with the larger objective of attracting new investments and talents.

Scrap extra surcharge on Alternative Investment Funds (AIF)

Similar to the relief given to foreign portfolio investors (FPIs) recently, the enhanced surcharge levied on alternate investment funds (AIF) should also be withdrawn. Further, SEBI had allowed Category-III AIFs to participate in Commodity Derivatives Segment to deepen the market. By doing away with the additional surcharge, they will now no longer feel disincentivized to do so.

(The author is President CPAI. The views expressed are the author’s own)

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