What is Commodity Transaction Tax (CTT)?

In a move to differentiate the derivatives of the commodities traded in the market, the Government of India introduced Commodity Transaction Tax applicable to all individuals trading in non-farming commodities.The article highlights the process of how the Commodity Transaction Tax came into existence and the non-agricultural commodity rates that come under it.

Introduced by the erstwhile Finance Minister Mr. P. Chidambaram in the 2013-14 Union Budget, the new levy is introduced to enhance financial resources. The primary reason to introduce the tax was to draw a distinction between derivative trading in the commodities market and securities market. Quite similar to Securities Transaction Tax which is a tax imposed on purchase and sale of securities, Commodities Transaction Tax is a tax levied on exchange-traded non-agricultural commodity derivatives in India.

Let us understand what this new levy termed as Commodity Transaction Tax entails.CTT is applicable to those individuals who are trading in commodities. It taxes the commodity trading in India wherein both parties - buyer and seller - are taxed depending on the contract size. While agricultural commodities are exempted from CTT, non-agricultural commodities such as gold, silver, and other non-ferrous metals including copper will be taxed. Apart from this, energy products like crude oil and natural gas will also be taxed under the Commodity Transaction Tax.Currently, STT is levied on stock market transactions at 0.1% - 0.25%. In fact, securities transaction tax has been reduced to ₹1 from ₹250 per lakh on any redemption of a mutual fund or exchange-traded fund. Additionally, there is a reduction from ₹100 to ₹1 per lakh of exchange-traded fund/mutual fund with non-redemption of ETF.Despite the reduction, investors prefer commodities trading as there are no transaction charges levied on commodities trading . In fact, the Commodity Transaction Tax will be allowed as a deduction if the income from such transactions can be shown as business income.The Commodity Transaction Tax is to be at 0.01 per cent of the price of the trade on non-agricultural commodities futures contracts which is the same rate on equity futures. Till now, the brokers were paying brokerage on the purchase and sale of commodities. However, with the implementation of the commodities transaction tax, there will be an increase in the transaction cost on trading commodities. The Commodity Transaction Taxacts as a burden on traders who are already paying deposit margins, brokerage, transaction charges, and brokerage.Just like all other financial transaction taxes, the Commodity Transaction Tax aims to discourage speculation, which is quite existent in the market. Additionally, the implementation of tax plans to bring parity between the securities market and the commodities market. The proposal of Commodity Transaction Taxappears to also have stemmed out to widen the tax base.

Commodity transaction tax (CTT) is imposed on the purchase & sale of commodity contracts in Indian commodity exchanges in the same way that security transaction tax (STT) is set on the purchase & sale of securities in Indian secondary markets.Commodities derivative contracts were the first to be subject to the commodity transaction tax in July 2013. The CTT, or commodity transaction tax, is taxed at 0.01% of the trade price on non-agricultural commodity derivative contracts.All transactions involving the trade of commodities are subject to CTT. The tax is applicable to the buyer & the seller. The actual contract size determines the tax.
Trading in agricultural commodities is not subject to the CTT. Natural gas, silver, Brent oil, crude oil, & gold are examples of commodities that are taxed.Commodities exchanges were furious when the CTT was initially implemented, claiming that it would harm the growing community of commodity trading & dampen its excitement for the markets. But according to the government's justification, the purpose of the commodities tax was to rein in excessive speculation as well as treat the commodity market similar to the stock market.In FY20, the commodities exchanges once more made a petition to have the transaction tax on commodities repealed. Their appeal was ignored, nevertheless. CTT is now charged for the sale of index futures as well as options as of April 1, 2020.

The buyer & seller of a commodity who conducts the transaction through a futures contract is subject to the commodity transaction tax. Based on the scope of the contract, it is assessed. Non-farm items, including metals such as gold, silver, copper, & energy products like natural gas & crude oil, are among the commodities covered by the CTT.The STT that stock market traders pay for each transaction ranges from 0.1% to 0.25%. This tax rate has made considerable accommodations for investors too.
Instead of paying Rs. 250 per Lakh when redeeming a mutual fund or exchange-traded fund (ETF), they now must pay just Rs. 1 per Lakh. If an ETF is not redeemed, then they will be liable to pay only Rs. 1 per Lakh instead of Rs. 100.Despite these efforts, commodities trading far outpaced stock trading since there were no transaction fees. If the proceeds from commodity transactions can be demonstrated as company revenue, then the CTT can also be claimed as a deduction. Such transactions are taxed at STT at the same rate as stock futures, or 0.01% of the trade's price.

Agriculture-related goods will not be subject to the CTT, but non-agricultural goods like gold & silver, non-ferrous metals like copper, & energy items such as crude oil as well as natural gas will.
Take a look at all the types of CTT.

GST aims to create "One India - One Tax - One Market,". A wider pan-Indian market for commodities is being formed by eliminating disparate state-specific levies. This is already making it possible for commodities to move almost seamlessly across state lines, creating more effective connections between the spot & derivatives markets.Simply put, by establishing a nationwide market, the degrees of price correlation between spot markets & between the spot & their derivatives traded on exchanges are rapidly improving. Additionally, as the logistics capacity develops, the tax is assisting in connecting the exchanges' delivery with additional purchasers from across the country. Hence, promoting commodity derivatives trading.Consider bullion as an example. Prior to the introduction of the GST, only intrastate transfers of gold or silver qualified for VAT setoff. The smooth flow of tax credits & tax uniformity made possible by the GST regime now encourage the free flow of gold & silver from delivery to the final destinations.The core of the GST programme , the input tax credit, ensures a more thorough involvement of taxpaying citizens of India in the supply chain. The chain from primary sellers to end customers inherently disincentivises under-invoicing, & there is limited possibility for tax evasion, leading to an increase in the proportion of organised participants.

Creating & running electronic spot markets for commodities, such as the e-NAM, can be greatly aided by the amalgamation of all the various state taxes under the GST. The ease of transporting agricultural products, especially across state lines, can enhance interstate commerce in physical commodities as well as assist the expansion of the market for commodity derivatives. The largely disorganised warehousing & logistics industries are being revamped & becoming much more structured.The fundamental idea behind various programmes, such as GST & e-NAM, is to establish a single national market for commodities to facilitate commerce & transparency throughout the nation. These measures should create a solid foundation for the creation of an integrated national commodity market as they gain greater traction.

Losses from commodity trading are not taxed according to your income tax bracket, but earnings from speculative as well as non-speculative income are. You are able to offset your losses against your profits under Indian income tax legislation. However, the treatment of speculative versus non-speculative losses varies. For a period of four years following the fiscal year during which the losses were incurred, you may carry forward losses from speculative trading. However, you cannot use non-speculative gains to offset the losses from speculative trades.Imagine, for instance, that you lost INR 50,000 on speculative trading while making INR 50,000 on non-speculative trades. In that instance, you are unable to report a net profit of zero by offsetting the speculative loss with the non-speculative gain. In such cases, it is advisable to carry the speculative loss forward in order to offset it with any future speculative gains, paying taxes solely on the non-speculative gains.But you can use speculative gains to offset non-speculative losses. It's interesting to note that you have up to eight years to carry over non-speculative losses and make up the difference with gains, either speculative or non-speculative.

The information contained herein is generic in nature and is meant for educational purposes only. Nothing here is to be construed as an investment or financial or taxation advice nor to be considered as an invitation or solicitation or advertisement for any financial product. Readers are advised to exercise discretion and should seek independent professional advice prior to making any investment decision in relation to any financial product. Aditya Birla Capital Group is not liable for any decision arising out of the use of this information.