Commodities Transaction Tax (CTT)

The Commodities Transaction Tax (CTT) is a tax levied by the Finance Act, 2013 on transactions involving the trading of non-agricultural commodities on recognized exchanges in India. It applies specifically to futures and options in commodities markets, mirroring the concept of the Securities Transaction Tax (STT), which is applicable to equity markets. The Commodities Transaction Tax (CTT) plays a significant role in India’s commodities market by generating revenue and controlling speculation. With the Finance Act 2024, the government continues to refine CTT regulations, emphasizing compliance and possibly expanding its scope.

1. Meaning of Commodities Transaction Tax

CTT is a tax charged on the value of trades made in non-agricultural commodities like gold, silver, crude oil, and other metals and minerals on commodity exchanges. This tax is primarily aimed at regulating speculative trading in commodity markets while providing a steady revenue stream for the government.

2. Salient Features of Commodities Transaction Tax

The followings are the features of Commodity Transaction Tax;

(a) “Taxable Commodities Transaction” means a transaction of sale of commodities derives or sale of commodity derivatives based on prices or indices of prices of commodity derivatives or option on commodity derivatives or option in goods in respect of commodities, other than agricultural commodities , traded in recognized stock exchange.

(b) Commodities transaction tax shall be payable by seller/ purchaser.

(c) Every recognized stock exchange shall collect the commodities transaction tax from the seller/purchaser who enters into a taxable commodities transaction in that recognized stock exchange (such stock exchange will also be known as assesse for this purpose).

(d) The assesse will deposit commodities transaction tax within 7 days immediately after the end of the month in which such tax is collected. For non-payment or short payment or payment after due date, interest would be charged at the rate of 1 per cent per month (or part thereof)

3. History and Background of CTT in India

• Introduction: The idea of a tax on commodity transactions was first floated in the early 2000s, in line with the introduction of STT in the securities market. However, CTT was formally introduced in 2013 under the Finance Act, 2013, with effect from July 1, 2013.
• Initial Scope: Initially, CTT was levied only on non-agricultural commodities like gold, silver, and other metals. Agricultural commodities were exempted to avoid burdening farmers and essential industries dependent on agricultural inputs.
• Implementation: The introduction of CTT was controversial. While the government argued it would generate revenue and curb excessive speculation, some market participants felt it would reduce liquidity and hurt the commodities market.

4. Commodities Transaction Tax in a Global Context

Globally, taxes on financial transactions, including commodities, vary widely. Some countries, like the United States and Japan, have refrained from imposing direct transaction taxes on commodity trades. Other countries, like the UK and France, have different versions of financial transaction taxes, but these mostly target equity trades rather than commodity markets.

India is among the few countries that directly levy a specific tax on commodity trading, following the footsteps of the STT imposed in equity markets. However, there is no universal model of CTT, and the effectiveness and acceptance of such taxes depend on local market conditions and regulatory frameworks.

5. Objectives of Commodities Transaction Tax

The Commodity Transaction Tax (CTT) is a tax levied on the trade of commodities in recognized exchanges. The main objectives of imposing CTT are as follows:

• Revenue Generation: CTT serves as a source of revenue for the government by taxing commodity transactions in organized markets, similar to the Securities Transaction Tax (STT) in the equity markets.
• Regulating Speculative Trading: By levying a tax on the trade of commodities, CTT helps to curb excessive speculative trading, which can lead to volatility in commodity prices.
• Promoting Transparency: Imposing CTT helps to ensure that trades on recognized commodity exchanges are documented, promoting transparency in the trading system.
• Discouraging High-Frequency Trading: CTT discourages high-frequency and speculative trading practices that could disrupt market stability by adding a cost element to each transaction.
• Creating a Level Playing Field: It ensures parity between different asset classes, like equities and commodities, by imposing a similar kind of tax structure.

CTT is typically applied to non-agricultural commodities, and agricultural commodities are often exempt to support the agriculture sector.

6. Security Transaction Tax (STT) Vs. Commodities Transaction Tax (CTT)

The following is a comparison between Securities Transaction Tax (STT) and Commodities Transaction Tax (CTT) in tabular form with four key differences:

7. Current Rates of Commodities Transaction Tax

The rate of CTT is applied differently depending on the type of commodity and the nature of the transaction. As of recent updates, the tax is primarily applied to non-agricultural commodities such as:

Note: Agricultural commodities remain exempt from CTT, as per the original provisions.

8. Conclusion

The Commodities Transaction Tax (CTT) plays a significant role in India’s commodities market by generating revenue and controlling speculation. Though its introduction faced opposition, it has since become an established component of India’s taxation landscape, particularly concerning non-agricultural commodities. With the Finance Act 2024, the government continues to refine CTT regulations, emphasizing compliance and possibly expanding its scope.