Commodity Transaction Tax

What Is Commodity Transaction Tax?

Commodity Transaction Tax (CTT) is a tax levied on the trading of commodities futures contracts in India. It is similar to the Securities Transaction Tax (STT) levied on equity transactions. Commodities Transaction Tax is applicable on the seller at the time of the sale of the commodity futures contract and is aimed at discouraging speculative trading in commodities.

On February 28, 2013, India introduced a transaction tax on the commodity futures trading under the direct tax provisions in the Union Budget 2013-14. 

CTT is levied at 0.01 per cent (Rs.10 for transactions worth Rs.1 lakh). CTT is levied only on non-agricultural commodities futures contracts (e.g., gold, copper, and oil) traded in the Indian markets. 

While agricultural futures contracts are exempted from CTT. The tax is payable by the seller of the futures contract. 

The Finance ministry’s rationale for introducing CTT was to bring commodity markets on par with the securities market, where a securities transaction tax has been levied since 2004. India is the second country to introduce a tax on commodity futures trading. 

In 1993, Taiwan imposed a transaction tax of 0.05 per cent on the value of the commodity futures contract.

 

Understanding Commodity Transaction Tax (CTT)

CTT is a tax levied on the seller at the time of the sale of a commodity futures contract. It is applicable to both the buyer and the seller in futures contracts, with the seller being responsible for paying the tax. The rate of CTT varies depending on the commodity being traded and is specified by the government.

Objectives of CTT

The primary objective of CTT is to curb speculative trading in commodities futures. By imposing a tax on such transactions, the government aims to discourage short-term and excessive trading in commodities, which can lead to price volatility and manipulation. CTT is also intended to generate revenue for the government from the commodity market, similar to how STT generates revenue from the stock market.

Impact of CTT on the Commodity Market

The introduction of CTT has had a significant impact on the commodity market in India. One of the immediate effects was a decrease in trading volumes, especially in the short term. Traders who engage in frequent and speculative trading found the tax to be a deterrent and reduced their trading activities. This led to a decrease in liquidity in the commodity market and increased bid-ask spreads, making trading more expensive for market participants.

Another impact of CTT was a shift in trading patterns. Traders who were previously engaged in speculative trading shifted their focus to longer-term strategies to avoid the tax. This change in trading behaviour has led to a more stable and less volatile commodity market in India.

Challenges Posed by CTT

While CTT has achieved its objective of reducing speculative trading, it has also posed certain challenges. One of the main challenges is the impact on hedging activities. Hedging is an essential risk management tool used by farmers, producers, and consumers to protect against price fluctuations. The imposition of CTT has made hedging more expensive, especially for small and medium-sized players, thereby affecting their ability to manage price risks effectively.

Another challenge is the impact on the competitiveness of Indian commodity exchanges. The imposition of CTT has made trading on Indian exchanges more expensive compared to international exchanges that do not levy such taxes. This has led to a decrease in the competitiveness of Indian exchanges and has encouraged traders to explore trading opportunities on international exchanges.

How CTT is Levied on Commodity?

CTT is levied at 0.01 per cent (Rs.10 for transactions worth Rs.1 lakh). CTT is levied only on non-agricultural commodities futures contracts (e.g., gold, copper, and oil) traded in the Indian markets. While agricultural futures contracts are exempted from CTT. The tax is payable by the seller of the futures contract. The Finance ministry’s rationale for introducing CTT was to bring commodity markets on par with the securities market, where a securities transaction tax has been levied since 2004. 

India is the second country to introduce a tax on commodity futures trading.  In 1993, Taiwan imposed a transaction tax of 0.05 per cent on the value of the commodity futures contract.

 

List of Agricultural Commodities exempt from CTT as on 10th March, 2024.

Benefits of CTT

Based on the current trading value of non-agricultural commodities in the Indian exchanges, a back-of-the-envelope calculation suggests that CTT (at 0.01 per cent) could fetch Rs. Fifteen thousand nine hundred fifty million (about $300 million) to the cash-starved exchequer every year. 

This is a substantial amount in the present times when tax revenues are under severe pressure. The government’s attempts to reduce the fiscal deficit through other measures are not yielding positive results.

The revenue raised through CTT could be utilized in several ways. Since the central government is concerned over the deteriorating fiscal situation, it could use a part of this tax revenue to reduce the fiscal deficit. 

Equally important, a portion of the proceeds of CTT should be utilized to enhance the regulatory and supervisory capacities of the Forward Markets Commission (FMC), which is grossly understaffed and underfunded.

The proceeds could also be deployed to install price ticker boards at local markets and post offices to display commodity futures prices. 

This would help farmers and producers to access information on a real-time basis in their local languages and benefit from the futures price movement.

CTT would enable authorities to track transactions and manipulative activities that undermine market integrity. 

Significant information gaps exist, and a centralized money flow database is nonexistent.

With the implementation of CTT, the government would be better equipped to track the inflows and outflows of money into the commodity derivatives markets. 

This could be particularly valuable to the Indian tax authorities as there are no effective mechanisms to track the flow of illicit money that was finding its way into the commodity futures markets.

The audit trail is considered a key factor behind the prevailing opposition against CTT. 

Another critical benefit of CTT lies in its progressive outlook. It would only affect speculators and non-commercial players who often use algorithmic trading to transact commodity futures contracts at breakneck speeds. 

In contrast, a sales tax is generally regressive because it disproportionately burdens poor people. 

In addition, the CTT would be a more efficient revenue source than other taxes.

It would be collected by the commodity futures exchanges from the brokers and passed on to the exchequer. This enables the authorities to raise revenue systematically, transparently, and efficiently. 

Conclusion

Commodity Transaction Tax (CTT) has been a significant development in the Indian commodity market. It has achieved its objective of reducing speculative trading but has also posed challenges, especially for hedgers and the competitiveness of Indian exchanges. Moving forward, it will be crucial for policymakers to strike a balance between curbing speculative trading and ensuring the smooth functioning of the commodity market.

Frequently Asked Questions

When Was CTT Tax Introduced in India?

Commodity Tax was introduced in India in July 2013. It was implemented as part of the Finance Act, 2013, and is applicable to transactions in commodity futures traded on recognized commodity exchanges in India.

How is CTT different from Securities Transaction Tax (STT)?

CTT is levied on commodity futures contracts, while STT is levied on equity transactions. Both taxes are aimed at discouraging speculative trading but apply to different types of instruments.

Is CTT applicable on physical commodity trading?

No, CTT is applicable only on trading of commodity futures contracts on recognized commodity exchanges in India. It does not apply to physical commodity trading.

What are commodity trading apps? 

Commodity trading apps are mobile applications that allow users to trade commodities futures contracts directly from their smartphones or tablets. These apps provide real-time market data, trading tools, and account management features. For a secure commodity trading app, consider Enrich Money.

Can I trade physical commodities using commodity trading apps? No, commodity trading apps are designed for trading commodity futures contracts only. Trading physical commodities requires a different set of arrangements and is not typically facilitated through these apps.