Commodities Transaction Tax

Commodities Transaction Tax (CTT) refers to a tax system in India that is applicable for transactions pursued on exchange-traded commodity derivatives. As commodity derivatives are included under the ambit of financial contracts, CTT is also considered as a type of financial transaction tax. It draws its similarities with the Securities Transaction Tax (STT), which is levied on the purchase and sale of securities and their derivatives traded on the stock exchanges. This article is an overview of the concept.

Rejection and Renewed Interest

CTT was first introduced in the Union Budget of 2008-09, only for it to be withdrawn the same year due to nascent market conditions. The then governing authorities presumed that the levy of CTT at this stage would hamper the growth of organized commodities derivative markets in the country. The Union Budget of 2013-14 re-introduced the concept; making it applicable for non-agricultural commodity futures at a rate of 0.01%, which is equivalent to the rate of equity futures. Furthermore, transactions in commodity derivatives have been declared as non-speculative, which enables the traders in the commodity derivative segment to set off any losses arising from such transactions against income from other sources.

What is a Futures Contract?

The term ‘futures contracts’ refers to financial instruments which facilitate the provision of price risk management and price discovery of the underlying asset, which could be a commodity (as in this case), currency, stock or interest.

Reasons for Implementation

The tax system was introduced in the country for augmenting its financial resources. Para 149 of the Budget speech of 2013-14 states the following: “There is no distinction between derivative trading in the securities market and derivative trading in the commodities market, only the underlying asset is different. It is time to introduce Commodities Transaction Tax (CTT) in a limited way. Hence, I propose to levy CTT on non-agricultural commodities futures contracts at the same rate as on equity futures that is at 0.01% of the price of the trade”. The Government, through this mechanism, intends to discourage excessive speculation as it could have a negative impact on the market. Moreover, it seeks to bring parity between the securities and the commodities market in a way that abates any tax arbitrage.

Applicability and Exemptions

As already observed, CTT is applicable for traders who are involved in the trading of commodities. It will be imposed on the buyers and sellers of such contracts based on the size of the contracts. The tax system is imposed in lieu of the brokerage system, which prompted the traders to remit brokerages while buying and selling the commodities. Commodities Transaction Tax (CTT) bears a resemblance to the Securitie Transactions Tax (STT), which is imposed on the purchase and sale of equities in the stock market. Though agricultural commodities are exempted from this provision, non-farm commodities like gold and silver; non-ferrous metals like copper; and and energy products like crude oil and natural gas fall under its purview.

Projections

The estimates of the Finance Ministry suggest that Commodities Transaction Tax (CTT) is likely to generate a revenue of around Rs.45 billion to the government. It is also expected to inculcate a culture of transparency in the commodities exchange market. On the downside, the tax system would raise the cost of transactions of the commodities traded on exchanges.

Manner of Levy

CTT is imposed on the value of taxable commodities as:

Sale of an option in goods or commodity derivative.
Sale of an option in goods or commodity derivative, where the option is exercised.
Sale of any other commodity derivative.

Company Registration

OPC Registration