Tax on Commodity Trading

What is Commodity Transaction Tax (CTT)?

Commodity Transaction Tax (CTT) is a tax levied on the trading of commodity derivatives. It was introduced in the Union Budget of 2013-14 by the Indian government, with the objective of regulating the commodity derivatives market and increasing the government's revenue. The tax is similar to the Securities Transaction Tax (STT) levied on the stock market, but it specifically applies to non-agricultural commodity derivatives traded on Indian commodity exchanges.

CTT is applicable to futures and options contracts based on non-agricultural commodities. It is imposed on the buyer and the seller of the commodity derivative, with the amount being determined by the size of the transaction. Agricultural commodities, however, are exempted from CTT.
 

What Is the Rate of CTT?

The Commodity Transaction Tax rate varies depending on the type of transaction. For non-agricultural commodities like gold, silver, and crude oil, the CTT is set at 0.01% of the transaction value. This rate is comparable to the Securities Transaction Tax (STT) levied on equity futures contracts.

Here’s a breakdown of the CTT rates:

• For the sale of commodity derivatives (non-agricultural commodities): 0.01% of the trade value (payable by the seller)
• For the sale of an option on a commodity derivative (if exercised): 0.0001% of the settlement price (payable by the buyer)
• For the sale of an option on a commodity derivative: 0.05% of the option premium (payable by the seller)

How Is CTT Calculated?

CTT is calculated as a percentage of the transaction value. The value is determined by multiplying the quantity of the commodity being traded with its price. For example, if you sell a gold futures contract worth ₹1,00,000, the CTT will be calculated as 0.01% of ₹1,00,000, which equals ₹10.

It is important to note that the tax is applicable only to the sell side of futures contracts. If you are involved in buying a commodity, you do not pay CTT on the buy side.
 

Why Was CTT Introduced?

The primary reason for the introduction of CTT was to level the playing field between commodity trading and securities trading. In the past, the lack of taxes on commodity trading made it a more attractive option for traders compared to stocks and bonds. With CTT in place, the government aimed to regulate speculative trading and bring the commodity derivatives market under a similar taxation framework as the stock market.

Another important objective behind the introduction of CTT was to enhance the government's financial resources. Tax revenues generated from CTT are used for developmental projects and other public services.
 

Which Commodities Are Subject to CTT?

CTT is applicable to non-agricultural commodities, which include:

• Precious metals like gold and silver
• Base metals such as copper, lead, and zinc
• Energy products like crude oil and natural gas

Agricultural commodities, including crops, grains, and vegetables, are exempted from CTT. This exemption ensures that the tax does not impact the interests of farmers and the agricultural sector.

Impact of CTT on Traders and Investors

Increased Trading Costs
The introduction of CTT has led to an increase in the cost of trading commodities. Traders who engage in frequent or high-volume trades may find that the tax reduces their profit margins. This additional tax burden can particularly affect short-term traders who rely on quick trades to generate profits.

Reduced Market Liquidity
As the cost of trading increases due to CTT, it may lead to a decrease in trading volumes. High-frequency traders and speculative traders may exit the market to avoid the additional cost, which could reduce overall market liquidity. Lower liquidity can result in wider bid-ask spreads, making it more difficult for traders to enter or exit positions without incurring additional costs.

Strategic Adjustments
Traders need to adjust their strategies to account for CTT. It may impact their decision-making when it comes to trade frequency, position sizing, and holding periods. To offset the impact of CTT, traders may need to modify their trading strategies and factor in this additional cost when calculating potential returns.

Encouraging Organised Trading
The introduction of CTT is expected to encourage more organised and responsible trading in the commodities market. By imposing taxes on speculative trades, the government aims to curb excessive speculation, which has often been a concern in the commodity markets. This, in turn, could lead to more stability and long-term growth in the sector.
 

GST and Its Impact on Commodity Trading

In addition to CTT, Goods and Services Tax (GST) also plays a role in the taxation of commodities in India. The introduction of GST has streamlined the tax process by consolidating various taxes into one unified tax. Under GST, tax is levied at each stage of the production and supply chain, and traders can claim input tax credits for taxes paid earlier in the chain. This has reduced the cascading effect of taxes and made commodity trading more efficient.

GST has also created a more seamless market for commodities by eliminating state-specific levies. This allows commodities to flow more freely across state lines, fostering a more integrated and efficient market. The uniform tax rate across states is expected to increase participation in the commodity market and improve price discovery.

Conclusion

The Commodity Transaction Tax (CTT) has reshaped the landscape of commodity trading in India. While it has added an extra layer of cost to trading, its primary objective is to bring the commodity market under a structured regulatory framework and create a level playing field with the securities market. By imposing this tax, the government aims to curb speculation, ensure financial stability, and generate revenue for public services.

Traders and investors must understand the implications of CTT and incorporate it into their trading strategies. With proper planning and awareness of the tax rates and regulations, traders can continue to participate in the commodity markets while staying compliant with the law. As the market evolves, it is crucial to stay updated on any changes in tax laws and regulations to maximise trading efficiency and profitability.