Shocked by the sharp fall in the trading volume at commodity exchanges, or COMMEX as they are called, participants have sought Finance Minister Nirmala Sitharaman’s intervention for certain policy initiatives.

The Commodity Participants Association of India (CPAI), the apex body of commodity market participants, met Sitharaman on Thursday and tabled their concerns pertaining to current challenges and hurdles that the industry is facing, contributing to diminishing liquidity on Indian commodity exchanges.

CPAI representatives have sought amendment to the provisions of the Integrated Goods and Services Tax (IGST), which is the tax collected on interstate transactions, when the seller and the consumer are located in different states.

CPAI said that all trades which result in delivery on the exchange platform are covered under IGST except for where the buyer and the seller are located in the same state. If the buyer and seller are located in different states from the place of delivery, challenges are faced by market participants on IGST registrations, which increases their compliance burden.

It urged the minister to amend the IGST Act to allow sellers of commodities to raise the tax invoice from the state where they are registered. It has also urged her to do away with the need to obtain a casual taxable person registration in the state where the accredited warehouse is located.

CPAI further submitted that the place of supply of goods should be the registered address of the buyer and not the physical location of the goods at the time of delivery – either actual or constructive.

In order to maintain market depth and turnover, CPAI also urged her to rationalise the peak margin requirement. The Securities and Exchange Board of India (Sebi), which also regulates commodity exchanges in India, after the Forwards Markets Commission (FMC) was dismantled, implemented a peak margin requirement for all clients from December 1, 2020.

Under the plan, clients were to be allowed reduced leverage on intraday positions in phases. According to the schedule, peak margin obligation of client was 25 per cent from December 1, 2020, 50 per cent from March 1, 2021, 75 per cent from June 1, 2021 and 100 per cent from Sepetember 1, 2021. With margins slated to increase, markets are likely to witness a significant drop in volumes and participation, it says.

The same can also be observed from the trend in equity markets where volumes, especially intraday volumes have shifted from equity and futures markets (down 19 per cent and 14 per cent month on month) where the margin is higher to options markets (up 16 per cent month on month) where the margin is lower, particularly when options are purchased.

“Our markets are already saddled with higher costs as compared to global markets. A large part of the costs is regulatory costs. Further with the increased margin requirements on day trades, overall liquidity and depth could go down further, says the CPAI memorandum submitted to the finance minister.

“In today’s pandemic times, when the government is supporting industries with schemes like production-linked incentive (PLI), commodity market participants have also urged the finance minister for policy support to improve market depth and liquidity, and enable India to emerge as a price setter of commodities. Implementing our suggestions will reduce the cost of hedging in commodity markets, bring ease of doing business,” says CPAI President Narinder Wadhwa.

The industry body also urged the minister to rationalise the cost of transactions carried out on the exchanges. It says the cost of transaction began to increase from 2004, when the securities transaction tax (STT) was introduced and incidentally the Turnover to Market Ratio began to fell, more steeply when, Section 88E was withdrawn in 2008 and STT started getting treated as an expense instead of a tax.

The Section 88E of the Income Tax Act applies where the total income of an assessee in a previous year includes any income, chargeable under the head ‘profits and gains of business or profession’, arising from taxable securities transactions, he/she shall be entitled to a deduction, from the amount of income-tax on such income arising from such transactions.

Although the market capitalisation (M-Cap) of the equity markets increased by 194 per cent in a decade (from Rs 51.38 lacs crore in 2008-09 to Rs 151.08 lacs crore in 2018-19), the ratio of turnover to M-Cap fell. The government revenue and cash market trading volumes did not keep up the same pace. The daily spot volume grew by 72 per cent – much below its potential, especially when M-Cap has grown much higher. STT collection grew by merely 28 per cent from Rs 8,576 crore to Rs 11,000 crore.

The introduction of commodity transaction tax (CTT) in 2012 led to a sharp fall in commodity market volumes as well. The volumes on MCX fell 60 per cent from 2012 to 2019. The government collected a meagre Rs 667 crore as CTT in 2018-19 as against its target of Rs 2,000 crore.

The volumes of Indian commodity exchanges have been falling over the last decade due to challenges on ease of doing business, taxation, costs and compliance norms. Since the commodity exchange industry in India is still in its nascent stage, CPAI says, “The FM’s intervention to address the existing hurdles will go a long way in changing the future of this industry.”