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Commodity derivatives exchanges have seen remarkable growth in participation over the last eight years, evident in the rise in trade, both in volume and value terms, and increase in open interest.
Going forward, commodity exchanges would continue to focus on increasing participation in derivatives trade.
Commodity exchanges are hoping that the Government would introduce some changes in taxation norms on derivative trade gains that could bring in many companies and traders as hedgers.
Today, gains made in commodity derivatives cannot be offset against losses made in physical trade.
“In the equity market, gains and losses can be offset because they are treated as business income. In the commodities market that facility has not been provided,” said Mr Vijay Kumar, Chief Business Officer, National Commodity and Derivatives Exchange Ltd.
If an entity, a trader or a company, has a physical exposure and ends up with profit in its futures trade but loss in physical trade, the entity will not be able to offset the loss against the gains.
“So he has to pay 30 per cent tax on gains and the loss is a loss anyway,” Mr Vijay Kumar said.
If this anomaly is rectified, participation in commodity derivatives exchanges would rise.
“This issue has been brought up time and again. The Forward Markets Commission has also taken up this matter with the Government many times,” said Mr Ramesh Abhishek, Chairman of the Commission, the regulator for commodity exchanges.
“The change in taxation norms would be an incentive for people to trade in commodity derivatives,” Mr Abhishek said.
Commodity exchanges are hoping the Finance Bill for 2012-13 (April-March) would address it.
“In this trade, there is an exposure and an equivalent hedge. Therefore, the two should be considered business and offset. If the profit is taxed then the very purpose of the hedge is defeated,” Mr Vijay Kumar said.
NCDEX believes that as companies and traders become aware of the need for risk management tools participation in commodity derivatives, trade will increase primarily because it offers the possibility of hedging for entities which have exposure in the physical side.
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