The Union Budget for 2007-08 is expected to spring a few positive surprises for the commodities market. Approval of various proposals including a much-awaited amendment of the Forward Contracts Regulation Act (FCRA) could give a fillip to the commodities market.
The amendment of FCRA, apart from imparting more powers to the market regulator FMC (Forward Markets Commission), would also enable trading in esoertic products like weather derivatives and index futures. As of now, the FCRA considers only moveable articles as commodities. Contracts on intangibles are forbidden.
"Amendment of the FCRA is the major expectation that we have. We have requested that the investor protection fund be exempt from tax. We have also made a few other proposals and hope they are approved in the budget this time," FMC Director Anupam Mishra said.
The amendment could also see the introduction of options and the entry of institutional investors into the commodities market in a phased manner.
Introduction of options would make commodities a safer asset class as positions can be taken to minimise the downside risks, while not limiting the upside potential, trading experts say.
Further, experts are of the view that options are a better mode of hedging price risks for farmers. The entry of institutional investors in the commodities business is expected to make the marketplace more vibrant.
"To start with, institutional investors can be allowed to trade in commodities that have good liquidity and depth. Precious metals and crude are such commodities," said CG George, managing director of Geojit Financial Services.
Some of the other proposals made by the FMC include allowing losses to be set off against profits made in the respective assessment year, as in the case of equity derivatives. Currently, gains from commodities are treated as speculative income and losses cannot be set off, unlike in equity derivatives where the net taxable income is calculated after deducting the losses incurred from the total income.
Meanwhile, commodity exchanges are pitching for tax exemptions on expenses incurred towards building infrastructure facilities that aid commodity trading.
"We request the government for tax exemptions for activities towards enriching the system. We need tax exemptions on expenditure incurred on research and development, training and warehousing," said V Shanmugam, Chief Economist, Multi Commodity Exchange.