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Jan 11, 2013, 10.04 AM IST | Source: CNBC-TV18

Equities vs commodities: Tussle between exchanges!

There's a battle of sorts brewing between stock exchanges and commodity exchanges. And it appears that disparity in tax policies, especially transaction tax, is the bone of contention. CNBC-TV18's Sajeet Manghat and Archana Shukla report.

Sajeet Manghat

Chief of Bureau, CNBC-TV18

There's a battle of sorts brewing between stock exchanges and commodity exchanges. And it appears that disparity in tax policies, especially transaction tax, is the bone of contention. CNBC-TV18's Sajeet Manghat and Archana Shukla report.

The three national stock exchanges — NSE, BSE and MCX-SX — are on one side of the fence and five commodity exchanges led by MCX are on the other -- with neither side seeing eye-to-eye on the issue of transaction tax.

While the stock exchanges want a level playing field on transaction tax for all financial products from currencies to commodities to bonds, the commodity exchanges don't want any transaction tax at all. The argument peaked at a recent Assocham conference, when the BSE, in the presence of the Finance Ministry's Joint Secretary capital markets, questioned the discrimination in tax policy.

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Ashishkumar Chauhan, managing director and chief executive officer, BSE says, "The stock markets have been consistently, over last five-seven years, discriminated against in the taxation framework by imposing a Securities Transaction Tax (STT) against other similar organised markets who do not have similar taxes. I have been told that in stock markets the STT has been put in lieu of long-term capital gain abolition, but actually it was for the stock market, but not for derivatives in stocks."

The stock exchanges are now pushing for a uniform transaction tax across financial products.

Chauhan says, "All commodities future, options, electricity or currency are financial instruments and still they attract speculative gains tax.  So, there is no lieu that has happened, it is just that by accident or by design that has happened. We need to correct it for people to come to the right market. For me, stock market is the only market that provides capital formation, and job creation."

Transaction tax is just the tip of the iceberg. The bigger issue is a disparity in tax policies, which equity exchanges want resolved immediately to keep the markets healthy.

Joseph Massey, managing director and chief executive officer, MCX-SX says, "Where ever the incidence of taxation is the smallest that is where the markets have migrated. So, we have seen cash market migrate to futures, futures gave better leverage and futures are now migrating to options because the incidence of tax is low."

Now, commodity exchanges agree on the need for parity, but not on the imposition of transaction tax.

They say the imposition of such a tax will make life more difficult— after all, the commodity markets are already shallow as institutions like FIIs, DIIs, banks, mutual funds and insurance companies are not allowed in these markets.

Apart from the creation of an autonomous regulator in the FMC, which is awaiting Parliamentary approval, commodity exchanges are asking that commodity exchanges be allowed to open a cash market, an options market, and set up indices.

They also want a slew of tax exemptions at par with equity exchanges. These include:

  • Allowing companies to set-off business losses against profits in stock trading.
  • Zero long-term capital gains tax, and a concessional 15 percent short-term capital gains tax.

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