What is commodity transaction tax?
Finance Minister P Chidambaram introduced the commodities transaction tax (CTT) on recognised exchanges in the Union Budget 2013-14. This is a new levy proposed in the Finance Bill, 2013 for augmenting financial resources. The reason for introducing this tax as stated in para 149 of the Budget speech is as under:
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’s.
Let’s cut through the business jargon to help you understand in simple terms what CTT means.
0.01% CTT on non-agro commodity trades
CTT is applicable for those dealing in trading of commodities. It is introduced to tax the commodity trading in India where both parties—buyer & seller of contract—will be taxed depending on the amount of contract size. CCT will be similar to the securities transaction tax (STT) levied on the purchase and sale of equities in the stock market. So far, commodity transactions have been exempted from any levy.
While agricultural commodities will be exempted from CTT, non-farm commodities like gold, silver and non-ferrous metals such as copper and energy products like crude oil and natural gas will be taxed. Currently, STT of 0.1%-0.025% is levied on stock market transactions. STT has been reduced to Rs. 1 from Rs. 250 per lakh on redemption of exchange traded fund / mutual fund from fund houses and to Rs. 1 from Rs. 100 per lakh on redemption of ETF/MF from exchange.
The tax led many investors to shift to commodity exchanges as there is no transaction charges levied on commodity trading. CTT will be allowed as a deduction if the income from such transactions form part of business income.
What is CTT?
| Taxable commodities transaction | Rate | Payable by |
|---|---|---|
| Sale of commodity derivative | 0.01% | Seller |
CTT shall be levied 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.
According to the finance ministry estimate, CTT will bring revenues of around Rs.45 billion to government. It is also aimed at bringing transparency in the commodity exchange market. However, CTT would raise transaction costs of the commodities traded on the exchanges.
If CTT is imposed, Multi Commodity Exchange, National Commodities and Derivatives Exchange, National Multi Commodity Exchange, Indian Commodity Exchange and Ace Derivatives and Commodity Exchange would be affected.
CTT is levied on the value of taxable commodities transaction as:
- Sale of an option in good or an option in commodity derivative
- Sale of an option in goods or an option in commodity derivative, where option is exercised
- Sale of any other commodity derivative
CTT is not new. The Finance Act 2008-09 proposed a levy of CTT at 0.017% for sale of an option in goods or an option in commodity derivative and sale of any other commodity derivative and 0.125% for sale of an option in goods or an option in commodity derivative, where option is exercised.
Till now, traders have to pay brokerage on buying and selling the commodities. But from now on CTT will be charged which will increase the transaction cost of trading in non-agri commodities. The CTT will be additional burden on traders because they already pay deposit margin, brokerage, stamp duty and transaction charges.