Government mulling changes in Securities Transaction Tax and Commodities Transaction Tax

The government is mulling changes in the transaction tax levied on trading in stocks and securities, a levy that is generally considered regressive and its removal can spur the markets further by lowering transactions cost and increasing liquidity. 

Although the market has been demanding a complete withdrawal of the Securities Transaction Tax (STT) and the Commodities Transaction Tax (CTT), the government may initially settle for their removal only on delivery-based trades, a senior government official hinted. 

At least two regulators — the Securities & Exchange Board of India and the Forwards Markets Commission — have also sought removal or rationalisation of these taxes. 

"Indian securities markets are being exported outside of the country and this is largely due to high transaction costs....There is a need to relook at these if the country is keen to become an attractive financial centre," the official said on condition of anonymity. However, given the country's high fiscal deficit, the government will consider the revenue implications of the proposal before taking a call. 

STT earns nearly Rs 6,000 crore revenue a year. The tax was introduced by the then finance minister P Chidambaram. In lieu, the long-term capital gains tax was abolished and the tax on short-term gains lowered. 

Market participants and commodity exchanges have pointed out that these taxes were coming in the way of markets gaining depths as as they increase transactions cost, which reduces market participation and lowers liquidity. 

In case of stocks, STT is levied at the rate of 0.1% on both the seller and the buyer. On derivatives, the tax ranges from 0.01% to 0.125% and is levied on the seller only. 

Sebi has demanded removal of STT on at least one leg of transaction, stock purchases, as also CTT on delivery-based transactions. FMC has also asked the government to remove CTT on such transactions besides on some processed foods such as coffee and guar gum. 

"Transaction taxes hurt volumes....World over, the trend has been to reduce transactions costs for market participants," the official quoted earlier said. 

CTT is levied at the rate of 0.01% of the transaction value on the seller for trading in all non-agricultural commodities such as gold, silver, crude, zinc, copper and aluminium. 

A high-level expert panel headed by senior economic advisor in the finance ministry D S Kolamkar has pitched for allowing banks, financial institutions and foreign firms participate in commodity futures trading to deepen domestic markets. 

Exchanges should explore new ideas in contract design, to more tightly define the product with a narrower set of grades and locations, so as to reduce the frictions of arbitrage and, thereby, improve hedging effectiveness wherever the movement of prices of the commodities across grades and locations are not aligned, the panel had said. 

"Commodities markets need a whole set of reforms as also reduction in transaction costs," 

Abolish CTT, restore investor confidence in commodity market

While the stock market is expecting that Jaitley would remove STT—at least partially, a similar tax under the name of CTT implemented in commodity futures market needs to be abolished to help the industry grow.

As the Narendra Modi government gets ready to present its first national budget, there is an urgent need for the apex commodities regulator—the Forward Markets Commission (FMC)—to pitch for the abolition of Commodities Transaction Tax (CTT) and plead before Finance Minister Arun Jaitley to save the commodity futures market.

Reports in the media say that the apex stock market regulator—the Securities and Exchange Board of India (SEBI)—officials have met with the Finance Minister to demand the removal of Securities Transaction Tax (STT). Stock exchanges and traders are hoping that abolition of STT would be a major announcement in the budget that Jaitley would present a few days from now.

Currently, an investor buying shares through a broker is charged 0.1 percent STT at the time of buying and selling. Ever since the introduction of STT a few years back, volumes in India’s two national stock exchanges—BSE and NSE—have considerably come down on account of the increased transaction costs.

SEBI, stock exchanges, brokers and investors have been complaining that transaction costs of buying and selling shares in India are huge compared to other financial markets in the world. This has hurt investor sentiments and reduced liquidity, turning Indian stock markets less attractive in the emerging markets.

While the stock market is expecting that Jaitley would remove STT—at least partially, a similar tax under the name of CTT implemented in commodity futures market needs to be abolished to help the industry grow faster and better.

Former finance minister P Chidambaram introduced CTT in commodity futures trading in last year’s budget. It was then strongly opposed by commodity exchanges, traders, brokers and investors. Commodity trading in India is just 10-year old, and the government is yet to open up the futures trading sector with the result that banks, FIIs and mutual funds are not allowed entry into commodities trading market.

In India, more than 80% of the trade volumes take place in bullion, metals and energy and hence CTT has resulted in a significant drop in trade volumes in these segments that drove commodity futures business. Unlike in stocks or agri commodities, daily movements in the above mentioned commodities are generally very low, resulting in most of the profits that a trader makes are lost in the existing charges. Bullion, metals and energy prices are closely linked to international price movements and hence trade volumes have shifted to such global exchanges as hedgers try to minimise risk in commodities trading. This could result in India losing its place of pride in the international markets- that of having one of the top gold, silver and energy online exchanges in the world.

In Indian stock markets, STT was introduced after the market matured and attained huge trading volumes while electronic trading in commodity futures were introduced only 10 years back and the sector is still suffering from growth pangs. Hence the broking community is of the view that CTT should be abolished until the market attains sufficient trade volumes and depth.

Ever since CTT was introduced, in the last one year, volumes in commodity exchanges have drastically come down. To be specific, volumes at MCX and other national commodity exchanges are just a third of what it used to be an year ago.

Commodity futures market began losing steam in July 2013 when the government introduced CTT. CTT of 0.01 per cent on the sell side on all volume commodities in bullion and metals ensured that cost of trading shot up by at least 20 per cent. Many traders and intra-day players left commodities market as CTT virtually capped any arbitrage profit booking in trading. It is therefore essential that the new government should review CTT and remove or relax the taxing burden on the market participants.

In the last few years, the government has been debating amendments to the Forward Contract Regulation Act (FCRA) under which FMC is overseeing futures trading in India. The debate has not yet translated into action, with the results that commodity trading is still a restricted sector with banks, mutual funds and foreign institutional investors out of its ambit.

It was the BJP government under former prime minister Atal Behari Vajpayee who gave approval to set up national commodity exchanges in India in 2003. Now, a decade later, a new BJP government with a massive political mandate is in chair to the rule the country. India—one of the world’s largest consumers and producers of the largest varieties of commodities including the glittering precious metal gold—needs a more vibrant commodities futures market.

FMC needs to take up with the Finance Minister on the need to abolish CTT to bring liquidity and market depth the commodity futures trading in the country.

Bombay High Court refuses to stay MCX resolution

 The Bombay High Court has refused to stay a resolution by commodity exchange MCX to amend its articles, which, if approved by its shareholders, will empower the bourse to transfer promoter Financial Technologies' shareholding in it to an escrow account and sell the same on its behalf. 

The court, which was hearing Financial Technologies (India) Ltd's plea against the resolution on Friday, said a delay in selling stake by the petitioner cannot be a reason for it to oppose a resolution to comply with the regulator's declaration of December 17. 

However, the judge gave FTIL, which said it was in the process of divesting its 24% stake in MCX, the liberty to move court if its shares are transferred to an escrow account while its stake sale exercise is on. 

The voting rights of FTIL, which holds 26% in MCX, have already been extinguished by MCX after commodity market regulator Forward Markets Commission (FMC) on December 17 declared it not 'fit and proper' to hold more than 2% stake in any commex after a Rs 5,600-crore scam hit its subsidiary National Spot Exchange Ltd (NSEL) in July last year. 

FTIL had challenged FMC's order in the high court in February but failed to get a stay on it. After being informed of this, Justice SJ Vazifdar, who was hearing FTIL's plea, said, "We must proceed that the December 17 order (of FMC) is valid as on date." On Friday, FTIL's share closed 4.9% lower on the Bombay Stock Exchange at Rs 259.45, while MCX ended 2.4% lower at Rs 565.95. 

FTIL filed a petition against MCX and FMC after the latter, on May 6, revamped shareholding norms for commexes, stating that an entity or a person declared not "fit and proper" by it could not hold any stake in a recognised commodity exchange. 

The norms, among others, also empower exchanges to ensure FMC's orders in respect of an "unfit" shareholder are complied with. On May 9, after FMC's revised norms, MCX undertook a process of amending its articles of association, which,by a three-fourths majority of voting shareholders, empower it to transfer FTIL's shares in MCX to an escrow account, and sell the same on FTIL's behalf to comply with FMC's declaration. 

Multiple commodity Exchange has sought the approval of its shareholders, including IFCI, Nabard and Blackstone, for amending the AoA through postal ballot. The results of the ballot will be declared on June 18. 

Automakers' increasing use and Alcoa, Rusal production cut may lift Aluminum

Automakers' increasing use of aluminum use and production cut from Alcoa, UC Rusal cut may boost Aluminum.

According to BMO Research, market sentiment toward aluminum has improved. The potential for better demand growth fueled by Ford’s announcement of the F-150 aluminum body, combined with producers such as Alcoa and UC Rusal announcing production cuts, has lifted prospects for the light metal.

BMO Research sees increasing use of aluminum in auto production going forward, with 20% of auto production in the United States, Europe and China seen substituting aluminum for steel, based on estimated incremental metal use in the F-150.

Production curtailments are positive but it took four years of surplus markets and weak prices. The biggest downside risk to the positive momentum is the potential for idled capacity to restart as prices improve.

BMO upped its average base-case aluminum price forecasts to 80 and 85 cents a pound this year and next, respectively, compared to 79 and 83 cents previously.

The forecast increase is weighted toward premiums, expected to remain higher for longer due to the backlog of metal at key London Metal Exchange warehouses.

BMO revised its forecast for the U.S. Midwest premium to 19 and 17 cents this year and next from 17 and 12 cents previously.

With Mines Exhausted, Zinc Prices Might Be Ready to Break Out

Zinc has enjoyed one of the most positive fundamental pictures of all the base metals. The looming closure of major mines such as Century in Australia and Lisheen in Ireland next year due to mineral depletion has most analysts predicting the deficit of this year only getting worse in the years to come.

The three-month Lead price on the LME closed on Monday at $2113/ton and the picture is starting to look more bullish than bearish for zinc.

The fundamentals point to market tightness and the chart pattern is quite bullish. It looks like Zinc might be able to finally break above $2,200/t. In that case, Zinc will reach an almost 3-year high which translates into high price risk.

The right moment to go long is if Zinc breaks above $2,200/t. This might seem contradictory as you might be asking: why not buy now when prices are cheaper? Well, the reason is that there are many chances of seeing Zinc bounce back down, which is what happened in the beginning of 2013. However, if prices manage to break above resistance levels, that’s the moment with the highest probability of Zinc surging, therefore, the best time to buy/hedge.

What This Means For Metal Buyers

Zinc is showing more strength than weakness. We might see Zinc reach a three-year high this year. We recommend zinc buyers to watch the market closely and take long-term positions if prices break above $2,200/t.

MCX hopes to launch new contracts after transferring Financial Tech stake to escrow account

MCX may move the commodity market regulator Forward Markets Commission to lift the ban on launch of new contracts after amending the Articles of Association and transferring the promoters’ stake to an escrow account.

The exchange has proposed a special resolution to make the amendment and sought shareholders’ approval through postal ballot. The entire process is expected to be completed by June 18, said MCX in a written response to a questionnaire from Business Line.

Upon implementing the amendment, MCX is hopeful of getting approval for its contract launch for 2015 from FMC, the exchange said. However, FMC had said the promoter’s stake in the exchange should come down to two per cent from 26 per cent for it to lift the ban.

Time ticking

The exchange has next two to three months to abide by FMC order as it launches new contracts in different commodities three to four months in advance. The exchange clarified that it has approval from FMC for all contracts across commodities for the calendar year 2014.

“The exchange is making all efforts to comply with regulatory directives and would request for the approval of the 2015 calendar,” it said.

Meanwhile, Financial Technologies (FTIL) has moved the Bombay High Court challenging the authority of FMC to amend shareholding norms for commodity exchanges. It has also made MCX, which is amending its articles of association, a respondent in the case. The case is slated to be heard by the Bombay High Court on Friday.

Audit hits divestment

FTIL’s attempts to divest its 24 per cent stake in MCX have been hit after PricewaterhouseCooper audit revealed major discrepancies in MCX. The special audit was ordered by FMC.

Late last year, FMC declared Financial Technologies and its promoter Jignesh Shah as not ‘fit and proper’ to own stake in commodity exchange after National Spot Exchange, a subsidiary of FTIL, failed to settle trade worth ₹5,600 crore.

Turnover on MCX has fallen sharply in last few years due to settlement scam at its subsidiary NSEL and sharp fall in bullion prices. In May, MCX turnover was down 67 per cent at ₹397,780 crore against ₹1,219,271 core recorded in the same period last year.

Oil Rallies as Extremist Advance in Iraq Threatens Crude Supply

West Texas Intermediate crude headed for the biggest weekly advance since December and Brent gained as escalating violence in Iraq threatened supplies from OPEC’s second-largest oil producer.

Futures rose as much as 1.1 percent in New York, extending a 2 percent rally yesterday, the most in two months. Iraqi Oil Minister Abdul Kareem al-Luaibi speculated that U.S. planes may bomb his nation’s north as militants linked to al-Qaeda, who captured the city of Mosul this week, moved south toward Baghdad. The member of the Organization of Petroleum Exporting Countries produced 3.3 million barrels a day last month, data compiled by Bloomberg show.

“There’s potential for disruption to spread around the Middle East and we’re talking about significant amounts of daily supply,” Michael McCarthy, a chief strategist at CMC Markets in Sydney who predicts Brent may climb to $125 a barrel if there’s an attack on Baghdad. “The market got concerned about potential disruption in Libya; Iraq is a much more serious situation.”

WTI for July delivery gained as much as $1.15 to $107.68 a barrel in electronic trading on the New York Mercantile Exchange and was at $107.02 at 2:52 p.m. Sydney time. The contract rose $2.13 to $106.53 yesterday, the highest close since Sept. 18. The volume of all futures traded was four times the 100-day average. Prices have advanced 4.3 percent this week.

Brent for July settlement, which expires today, increased as much as 73 cents, or 0.7 percent, to $113.75 a barrel on the London-based ICE Futures Europe exchange. The August contract climbed 19 cents to $112.61. Front-month prices are up 4.4 percent this week, the most since July. The European benchmark crude was at a premium of $6.23 to WTI.

Iraq Fighting

The group that calls itself the Islamic State in Iraq and the Levant, know as ISIL, seized Mosul on June 11, forcing a halt to repairs at the main pipeline from the Kirkuk oil field to the Mediterranean port of Ceyhan in Turkey. There were conflicting reports that Baiji, the site of Iraq’s biggest refinery, had been captured.

Prime Minister Nouri al-Maliki’s Shiite-led government is struggling to retain control of Sunni-majority regions as his army units in northern Iraq collapsed amid the extremist advance. U.S. President Barack Obama said he won’t rule out using air strikes to help the government in Baghdad.

The fighting hasn’t spread to the south, which the U.S. Energy Information Administration estimates is home to three-quarters of Iraq’s crude output. The country shipped 5.43 million barrels from the Basrah terminal on the Persian Gulf on June 11, according to al-Luaibi, the oil minister.

Libya, Iran

OPEC, responsible for 40 percent of global oil supply, maintained its production target at 30 million barrels a day at a June 11 meeting in Vienna, leaving output below projected demand for the rest of this year. Group member Libya is pumping at about 10 percent of its capacity because of unrest while Iran next month faces an end to relief from international sanctions, which could curb exports.

WTI may rise next week on concern the conflict in Iraq will disrupt shipments, according to a Bloomberg News survey. Seventeen of 26 analysts and traders, or 65 percent, forecast futures will increase while three said prices will decline.