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Distinction between online & other exchanges unwarranted
February, 22nd 2007

Pre-Budget recommendation for set-off facility in `online exchanges'

Pre-budget representations have been made to the Union Government to allow market participants in commodity futures to set-off speculative profits and losses against normal business profits and losses.

At present, such facility is not available.

Stock market participants enjoy the benefit though; and commodity players want it extended to them.

Interestingly, trading on stock exchanges is fully online, and there is no "open outcry" system anymore.

On the other hand, most regional exchanges continue to follow open outcry system and in some cases, the exchange operations are partially computerised.

Belief is gaining ground that there could be a possible hidden agenda in the representation that could go unnoticed.

In what is seen or interpreted as a design to virtually kill the existing commodity-specific or regional exchanges, the pre-Budget representation to the Government recommends a restriction, that is extending the profit/loss set-off facility to only those trading on `online exchanges'.

In other words, traders in exchanges that are not online will be denied the benefit of set-off.

This is a sure recipe to finish off regional exchanges that have catered to the specific needs of market participants.

Interestingly, it is believed that commodity futures market regulator - Forward Markets Commission - is supporting the recommendation to allow set-off facility restricted to online exchanges.

If the recommendation is indeed accepted by the Finance Ministry and acted upon in the forthcoming Union Budget, it would be discriminatory.

The distinction between online exchanges and others based merely on the mechanics of recording trade transactions would be wholly artificial and create unwarranted distinction in the matter of taxation. It may be open to legal challenge.

Special tax treatment

It may be necessary to recall that all commodity futures exchanges are recognised by the Government and regulated by FMC.

There is no "natural" distinction between online and other exchanges.

All exchanges provide platforms for buyers and sellers to enter into trade transactions. The only difference is the nature of platform, technology driven or otherwise.

Treating transactions in online exchanges differently and allowing them special tax treatment would be highly discriminatory and not in the interest of market participants.

One of the reasons for treating online exchange transactions as special or different is that they allow audit trail. But this argument is specious. It is for the regulator to ensure that appropriate systems for creating an audit trail are put in place in regional or commodity specific exchanges also; and online system need not be a pre-condition for creating an audit trail.

On several occasions, senior FMC officials have repeatedly talked about their commitment to strengthening the traditional exchanges. But the proposed discriminatory tax treatment could further enervate them.

It can lead to a lot more "dabba" or unauthorised futures trading.

But that is not all. The set-off facility could prove to be counter-productive, and indeed, politically suicidal.

In addition to loss of revenue, the policymakers should be prepared to face an explosion of speculative activity on the bourses, if the set-off facility is allowed.

Already the Government is in the defensive over galloping inflation and sharply rising prices of essential food products.

It has completely failed to check the price rise or appropriately augment indigenous output in time.

Encouraging unchecked speculation on commodity futures exchanges with tax sops is the last thing New Delhi should be looking at.

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