Commodity Transaction Tax

Commodity Transaction Tax (CTT) is a tax levied in India on domestic commodity futures exchange transactions. 

It is similar to a Financial Transaction Tax (FTT), which is commonly associated with transactions done in the Financial sector.

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.

Benefits:

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.