Taxes are part and parcel of trading. Investors often perform meticulous research to identify investments that attract minimal taxation and pull out all the stops to make the most tax-effective choices. Chartered accountants are engaged by not only businesses, but also individuals to help them make the most out of their gains.
One asset whose trading was, for the longest time, exempt from taxation is commodities. However, that changed with announcements in the Union Budget 2013-14. The government brought into effect a Commodity Transaction Tax (CTT) which has since become applicable to transactions of all non-agricultural commodities. Before we get into the details of CTT, let’s take a look at a brief history of the tax.
Introduced in the 2013-14 Union Budget, the CTT was added to give a boost to the central government's financial resources. In that Budget document, it was noted that there was no distinction between derivative trading of commodities and securities, except for the underlying asset. It was proposed that a CTT of the same rate as that levied on equity futures – at 0.01% - be imposed on non-agricultural commodities. This tax, imposed on equities, is called the securities transaction tax (STT). This move, its proponents argued, would make commodities trading more transparent.
Taxing transaction of commodities was earlier proposed in the Finance Act of 2008-09 at 0.017% for the sale of options in goods or commodity derivates. However, it was dropped following the Prime Minister's Economic Advisory Council's advice against it. The idea behind reintroducing it in 2013 was to equalise the rules for traders of both equity and commodities trading.
The commodity transaction tax is imposed on the buyer and seller of a commodity carrying out the transaction through a futures contract. It is levied based on the size of the contract. Commodities covered under the ambit of CTT include non-farm goods like metals (gold, silver and copper) and energy products (crude oil and natural gas).
The STT that traders on the stock market pay for each transaction is between 0.1% and 0.25%. There have been significant concessions in this tax rate for investors as well. They must now pay only Rs 1 per lakh upon redeeming an exchange-traded fund (ETF) or mutual fund, instead of Rs 250 per lakh. With non-redemption of an ETF, they must pay only Rs 1 per lakh instead of Rs 100.
However, despite these measures, there was a marked shift from equity to commodities trading because it levied no transaction charges. The CTT can also be shown as a deduction if income from commodities transactions can be proven as business income. The rate at which these transactions are taxed is the same at STT for equity futures, i.e., 0.01% of the price of the trade.
Although levied with the intention of increasing government revenue and checking speculation, commodity transaction tax has increased the transaction costs for traders. It poses an additional burden on traders who are already required to pay brokerage charges, transaction fees and deposit margins.
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