Widening the scope of Commodity Transaction Tax (CTT)
The Finance Act, 2013 had introduced Commodities Transaction Tax (CTT) on the sale of commodity derivatives based on non-agricultural commodities traded in recognised associations. The intention behind introducing CTT was to bring parity between the derivative trading in the securities market and the commodity market. The CTT was levied at the rate of 0.01 per cent, which was also the rate of Securities Transaction Tax (STT) levied on sale of ‘futures’ (a contract, which derives its value from an underlying asset and is settled by physical delivery) in securities. Subsequently, the scope of CTT was expanded vide the Finance Act, 2018 by also including the sale of options on commodity derivatives as taxable commodity transactions.
Trading in derivatives including commodity derivatives is regulated by the Securities Contract (Regulation) Act, 1956 (SCRA). Prior to 2015, derivative trading in commodities was regulated by the Forward Markets Commission (FMC) under the Forward Contracts (Regulation) Act, 1952 (FCRA). In 2015, the FCRA was repealed and the FMC was merged with the SEBI. As a result, the recognised associations defined in the FCRA were replaced by the recognised stock exchange defined in the SCRA. Subsequently, the scope of “commodity derivatives” was expanded vide notification dated 27th September, 2016, which notified a number of goods for the purpose of its definition in clause (bc) of section 2 of the SCRA. These goods included cereals and pulses, oil seeds/ oil cakes and oils, spices, metals, precious metals, gem and stones, fibres, energy, sweeteners, plantation, dry fruits and others.
Presently, as per SCRA regulations, derivative trading in commodities is limited only to commodity ‘futures’ and ‘option on commodity futures’. The underlying asset in the ‘option on commodity futures’ is a ‘commodity future’. This means that upon expiry, if the ‘option’ is exercised, the option-holder gets a right to buy or sell a ‘commodity future’ and not the right to buy or sell the goods directly. However, vide notification dated 18th October, 2019, ‘option in goods’ has also been included in the definition of ‘derivatives’ in clause (ac) of section 2 of the SCRA. This has paved the way for new derivative product ‘options in goods’ with goods notified on 27.09.2016 directly as the underlying asset. Moreover, ‘commodity futures’ based on prices or indices of prices of ‘commodity futures’ is also likely to be introduced as a new product in the commodity derivative market.
Necessary changes are, therefore, proposed in Chapter VII of the Finance Act, 2013, to align the provisions of CTT with the changes in commodity derivative market. Moreover, in order to encourage the commodity transactions , settled by physical or actual delivery of goods, it is proposed to charge CTT on the new commodity derivative products at following rates: –
Further, the following changes are also proposed in the Finance Act, 2013–
(a) The definition of taxable commodities transaction in clause (7) of section 116 is proposed to be amended to –
(i) include the transactions of “sale of option in goods” and “sale of commodity derivatives based on prices or indices of prices of commodity derivatives” and
(ii) substitute “recognised stock exchange” in place of “recognised association”.
(b) The reference to FCRA in clause (8) of section 116 is proposed to be changed to SCRA.
(c) The table in section 117 to be amended to incorporate the taxable commodities transactions referred to in (a) above, specify the rate of CTT and specify the person by whom CTT is payable.
(d) The value of taxable commodities transactions defined in section 118 is proposed to be amended to incorporate the taxable commodities transaction referred to in para (a) (i) above.
This amendment will take effect from 1st April, 2020.
Extract of Relevant Clauses of Finance Bill, 2020
“Clause 147 of the Bill seeks to amend section 117 of the said Act relating to charge of commodities transaction tax.
It is proposed to substitute the Table of the said section with a new Table.”
Extract of Relevant Amendment Proposed by Finance Bill, 2020
147. Amendment of section 117.
In section 117 of the principal Act, for the Table, the following Table shall be substituted with effect from the 1st day of April, 2020, namely:–
|Sl. No.||Taxable commodities transaction||Rate||Payable by|
|1.||Sale of commodity derivative||0.01 per cent.||seller|
|2.||Sale of commodity derivatives based on prices or indices of prices of commodity derivatives||0.01 per cent.||seller|
|3.||Sale of option on commodity derivative||0.05 per cent.||seller|
|4.||Sale of option in goods||0.05 per cent.||seller|
|5.||Sale of option on commodity derivative,
where option is exercised
|0.0001 per cent.||purchaser|
|6.||Sale of option in goods, where option is exercised resulting in actual delivery of goods||0.0001 per cent.||purchaser|
|7.||Sale of option in goods, where option is exercised
resulting in a settlement otherwise than by the actual delivery of goods
|0.125 per cent.||purchaser.”.|