India Set to Tax Non-Farm Commodities Futures for First Time

India, the world’s largest user of gold, will tax commodities futures contracts for the first time after trading surged five fold in five years.

The levy will be 0.01 percent of the value of trade of all non-farm commodities, Finance Minister Palaniappan Chidambaram said today while presenting the annual budget for 2013-2014. “There is no distinction between derivative trading in the securities market and derivative trading in the commodities market, only the underlying asset is different,” he said.

The proposal may curb trading on the Multi Commodity Exchange of India Ltd., the nation’s biggest bourse, and 19 others even as the value of trade is poised to decline for the first time since electronic trading in futures started in 2003. Bullion futures accounted for 46 percent of the total value of commodities traded between April and January in India, while base metals and energy products comprised 41 percent, data from the Forward Markets Commission, the industry regulator, showed.

The tax “will be a detrimental step for the growing popularity of commodity futures as a hedging instrument,” said D.K. Aggrawal, managing director of SMC Investments & Advisors Ltd. “Commodity derivatives profit and loss will now be considered as business income as against speculative income and this is a welcome step.”

Arbitrage Traders

Commodities worth 181.3 trillion rupees ($3.35 trillion) were traded in 2011-2012, compared with 36.8 trillion rupees in 2006-2007, according to the Forward Markets Commission. The value of trade fell 5.1 percent to 144.18 trillion rupees in the 10 months ended January, it said.

“Many in non-agri commodities have been bogged down by weak international prices and some have even shifted to equities on the hope that returns will be higher there,” said Gnanasekar Thiagarajan, a director at Commtrendz Risk Management Services Pvt. “The most hit could be the arbitrage traders who arbitrage between spot and futures, and their cost will rise.”

Gold is poised for a fifth monthly decline in the longest run of losses since 1997 as investors reduced holdings on concern that U.S. stimulus may be curtailed as the economy recovers. Spot gold has lost 4.4 percent this month, the most since May, while copper in London is heading for a 3.6 percent decline this month, the most since October.

Shares of MCX, as the Multi Commodity Exchange is known, closed 2.7 percent higher at 1,148.90 rupees in Mumbai, rebounding from a 8.5 percent intra-day drop. The exchange accounted for 86 percent of the Indian commodity futures market in the year ended March 31, MCX said on its website.

India proposed a transaction tax on futures for the first time in the 2008-2009 annual budget and scrapped the proposal after protests from investors and exchanges. Overseas funds are barred from trading commodity futures. Copper, crude oil and natural gas are among the top non-farm commodities traded, according to the market regulator.

A futures contract is an obligation to buy or sell a commodity at a set price for delivery by a specific date.

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