Just in the same manner as Security Transaction Tax (STT) is levied on the sale and purchase of securities in Indian secondary markets, commodity transaction tax is levied on the sale and purchase of commodity contracts in Indian commodity exchanges.
The commodity transaction tax was first levied on commodity derivative contracts from July 2013. CTT is levied on a non-agricultural commodity derivatives contract. It is taxed at 0.01% of the price of the trade.
Let us have a deeper look at precisely what is commodity transaction tax?
CTT is applicable on all transactions that revolve around trading in commodities. The tax is levied on both the parties, the buyer and the seller, and the tax is determined by the actual amount of the contract size.
Meanwhile, the Agri commodity trading have been kept outside the purview of the CTT. On the other hand, commodities like gold, silver, crude oil, brent oil, natural gas have been taxed.
When the CTT was first introduced, commodity exchanges were in uproar against the tax arguing that its introduction will hurt the incipient commodity trading community and its enthusiasm for the markets. However, the government’s rationale was that commodity tax was introduced to control excessive speculation and to treat the commodity market as being no different than the stock market.
The commodity exchanges, once again, raised an appeal in FY20 to repeal the commodity transaction tax. However, their request was unheeded. In fact, CTT since April 1, 2020 is levied on the sale of index futures and options as well.
- Impact of the introduction of CTT
Since the introduction of the CTT in commodity exchanges, trading volumes have fallen drastically in the exchanges. Some commodity indexes have seen volumes fall by massive margins of 50-60%. It has also led to an exodus of small traders who earlier used to pump up the trading volumes in the exchanges. Trades like scalping and jobbing have now become unviable for the smaller traders.
- Commodities exempted from CTT
As per information put up by MCA, currently, a total of 61 food commodities are exempted from payment of CTT. They include almond, barley, cardamom, castor seed, cloves, cotton and many others.
Final word:
While it is true that commodity trading has been dented after the introduction of CTT in India, market experts are hopeful that it might be recalled in the coming years. Commodity trading has witnessed tremendous growth in the last decade and markets experts foresee stronger growth going forward as online trading takes deeper roots in India. It is easier than ever before to get started in commodities trading by opening a demat account with Motilal Oswal.
Related Blogs: Beginners Guide to Commodity Trading | Tips for Online Commodity Trading | Understanding the economics of Nickel trading on the MCX | MCX Meaning - Learn What is MCX, Its Advantages, and More