Anytime you buy a product or service, you must pay a tax to the government. Similarly, you must pay a tax while trading commodities, commonly known as Commodity Transaction Tax (CTT). Introduced within the Budget 2013-14 by the Government of India, the tax came into effect on 1st July 2013. It is similar to the Securities Transaction Tax, a direct tax on stock market trade. Exploring the CTT in India will help you understand its scope, impact and significance in the commodity derivatives market.
Commodity transaction tax refers to the tax levied on commodity derivatives trading. The tax applies only to sellers of commodity derivatives and is derived from the actual size of the contract. Moreover, the tax is levied on commodities other than agricultural products, like natural gas, crude oil, copper, silver, aluminium, gold, lead, nickel and zinc.
However, agricultural commodities are exempted from this tax. Apart from commodity transaction tax in India, commodity derivatives also attract SEBI charges, exchange transaction charges, stamp duty and Goods and Services Tax (GST) from the respective state governments where the investor resides.
The commodity transaction tax rate in India varies according to the commodity being traded. For instance, gold, silver, and crude oil are taxed at 0.01%, whereas agricultural commodities are exempt. The tax is only applicable on the sell side of futures contracts.
In addition, the tax aims to level the playing field between commodity derivatives trading and securities. It seeks to regulate the market and raise revenue for the government by taxing non-agricultural commodities. However, the exemption of agricultural commodities protects the farmers’ interests and related sectors.
For traders, this CTT increases the trading cost in all non-agricultural commodities, which may generally affect the general profitability of trading, especially with short-term or high-frequency trades. It can be very useful in trading commodity markets and significant in crafting trading strategies with the tax.
Commodity transaction tax in India is calculated as a percentage of the transaction value of certain commodities. You multiply the rate by the contract value you are selling to calculate CTT. For instance, if you sell a gold futures contract of ₹1,00,000, the CTT at a rate of 0.01% will be ₹10. The tax is collected only from the seller.
However, you must note that CTT varies depending on commodity types. Hence, it influences traders regarding which commodity they must trade against the additional amount charged by the tax.
The following table explains the rate of commodity transaction tax levied on the sale of different commodities:
Types of Commodity Transaction Taxes |
|||
Taxable Commodities |
Payable On |
Rate |
Payable By |
Sale of a commodity derivative |
Price at which the commodity derivative is traded |
0.01 per cent |
Seller |
Sale of commodity derivatives based on prices or indices of prices of commodity derivatives |
Price at which the commodity derivative is traded |
0.01 per cent |
Seller |
Sale of an option on commodity derivative |
Option premium |
0.05 per cent |
Seller |
Sale of option in good |
0.05 per cent |
Seller |
|
Sale of an option on commodity derivative, where option is exercised. |
Settlement Price |
0.0001 per cent |
Purchaser |
Sale of option in goods, where option is exercised resulting in actual delivery of goods |
Settlement Price |
0.0001 per cent |
Purchaser |
Sale of option in goods, where option is exercised resulting in a settlement otherwise than by the actual delivery of goods |
Difference between settlement price and strike price |
0.125 per cent |
Purchaser |
After understanding the commodity transaction tax meaning, you must go through the following pointers to learn about its purpose and objectives:
CTT primarily emphasises the public revenues for the Indian government. It considerably contributes to the overall collection of taxes, which helps in fiscal management and the provision of fundamental public services. The government will tax commodity transactions to provide additional resources for development projects.
Commodity transaction tax discourages speculation in non-agricultural commodity trading. Since these transactions will be taxed, CTT aims to make commodity trading more organised and stable, curtail volatility and encourage responsible trading, benefiting traders and the greater economy.
The commodity transaction tax also creates a level playing field across asset classes by putting commodity trading on the same taxation lines as equity trading under arrival in STT. It will harmonise and create a level playing field regarding taxation with similar treatment for all classes of investors across different markets.
Apart from generating income for the state, CTT also aims to provide a regulatory mechanism and empower the authorities to improve surveillance and monitoring of all commodity transactions. In addition, it will augment support for various stakeholders, including policymakers, regulators, market participants and investors concerning various government initiatives.
The following are the impacts of commodity transaction tax on traders and investors in India:
The commodity transaction tax increases the overall cost of trading in commodities. Traders must pay this tax on every transaction, which can significantly reduce profit margins, especially for high-frequency and short-term traders who execute numerous trades regularly.
The introduction of CTT may decrease trading volumes in commodity markets. Many traders, particularly high-frequency and speculative traders, might exit the market due to the added costs, resulting in lower liquidity and reduced market activity overall.
Traders and investors must incorporate CTT into their trading strategies and risk management plans. The tax influences decisions regarding position sizing, trading frequency, and holding periods, necessitating adjustments to maintain profitability in light of increased transaction costs.
CTT can adversely affect market liquidity in commodity markets. As trading activity decreases due to higher costs, bid-ask spreads may narrow, making it more challenging for traders to enter or exit positions without incurring significant expenses.
Market participants must adhere to CTT regulations and reporting requirements to avoid penalties. Ensuring compliance can add a layer of complexity to trading activities, requiring traders to invest time and resources into understanding their obligations under the tax framework.
Disclaimer: This blog is solely for educational purposes. The securities/investments quoted here are not recommendatory.