To differentiate between the derivatives traded in the commodities market and in the securities market, the government has introduced the Commodity Transaction Tax. This tax is applicable to all individuals who trade non-farming commodities.
Commodity transaction tax was introduced by P Chidambaram, the Former Finance Minister of India, in the 2013-14 Union Budget. The new levy was proposed in the 2013 Finance Bill to enhance financial resources. The main reason as to why the tax was introduced is to draw a distinction between derivative trading in the commodities market and derivative trading in the securities market. Although the underlying asset is distinctive, the imposition of Commodity Transaction Act on non-agricultural commodities futures contracts is expected to make a distinction between the aforementioned trading activities.
Non-Agricultural Commodity Rates: 0.01% CTT
Commodity Transaction Tax is applicable to individuals and firms that trade commodities. The size of the contract will determine how much tax both parties, viz. the seller and the buyer of contract will have to pay towards tax. Commodity Transaction Tax is similar to Securities Transaction Tax imposed on the sale and purchase of equities in the stock market. As of now, no tax has been levied on commodity transactions. Though agricultural commodities are exempt from Commodity Transaction Tax, non-farm commodities such as silver, gold, and non-ferrous metals like copper as well as energy products such as natural gas and crude oil will be subject to tax.
At the moment, the Securities Transaction Tax of 0.1% to 0.025% is imposed on transactions in the stock market. Securities Transaction Tax has been lowered from Rs.250 per lac on redemption of mutual fund / exchange traded fund from fund houses to Re.1, and from Rs.100 per lac on redemption of mutual fund / exchange traded fund from exchange to Re.1.
Many investors were led to move to commodity exchanges since there commodity trading does not involve the levy of transaction charges. Commodity Transaction Tax can be regarded as a deduction provided the income from these transactions include part of business income.
The Finance Ministry forecasts that Commodity Transaction Tax will help the government in generating revenues of approximately Rs.45 billion. The aim of the tax is also to introduce transparency to the commodity exchange market. The imposition of Commodity Transaction Tax will affect Multi Commodity Exchange, National Multi Commodity Exchange, Ace Derivatives and Commodity Exchange, National Commodities and Derivatives Exchange and Indian Commodity Exchange.
Commodity Transaction Tax is far from a new concept in India. The 2008-09 Finance Act proposed an imposition of Commodity Transaction Tax at 0.017% for sale of an option in goods or 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. So far, traders have had to incur expenses on brokerage for selling and purchasing commodities, but going forward, Commodity Transaction Tax will be levied to up the transaction costs related to trading in non-agricultural commodities. The tax will be an extra burden on traders as they already incurred costs on transaction charges, stamp duty, brokerage and deposit margin.
Commodity Transaction Tax Rate
Commodity Transaction Tax will be imposed on non-agricultural commodities at 0.01%, which is the same rate applicable to taxes on equity futures.