Tax on Commodity Derivative Trading

The tax treatment of Commodity Derivative is a topic that every trader delves into before dipping his feet in the world of derivatives trading. While the Derivative enjoyed exemption from taxes for a long time, the Commodity Transaction Tax was brought in by the Government to tax all non-agricultural derivatives.

What is Commodity Transaction Tax?

To regulate the taxes, the Indian Government introduced the Commodities Transaction Tax (CTT) in 2013. The primary objective is to reduce the speculative volumes in the Commodity Derivative markets, generate more revenue for the Government, and equalize the tax rules for Equity and Commodity Trading.

In its 2013 budget documents, the Finance Ministry specifically noted no distinction between the trading of Commodity derivatives and securities other than the underlying asset. It fixed the CTT rate at 0.01%, the same rate as the Equity Futures, on non-agricultural commodities. 

The same tax when imposed on Equities is the Securities Transaction Tax. CTT gets levied on the buyer and seller trading Commodity Derivatives through a Futures Contract and depends on the size of the contract.  It only gets levied on non-agricultural commodities such as gold, silver, copper, crude oil, and natural gas. The Derivative on agriculture gets exempted from the payment of CTT.

Many feel that the implementation of CTT has raised the cost of trading in Commodity derivatives and increased the burden as traders also need to deposit margin, brokerage, and transaction charges.

CTT Rates

The tax gets imposed on the value of taxable commodities of transaction. Currently, the tax on Commodity Derivative are as follows:

Payment of CTT and penalties

CTT gets collected by the trading exchange from the members who trade in the Commodity Derivative. It happens on a T+1 basis, depending on timelines stipulated for the funds pay-in daily from the settlement account of the traders. Non-payment of CTT is termed as non-fulfilment of settlement obligations on the part of the trader.

At present, the Income Tax Act sets out the following penalties:

Failure to collect CTT, whether wholly or party, attracts a penalty of an amount equal to 100% of CTT not collected. This is payable by the trading exchange. Failure to pay CTT at the specified rate attracts a penalty of Rs. 1,000 every day of default.

Conclusion

Even though Commodity Transaction Tax does not achieve the intended purpose, it is still a mandatory obligation to discharge while trading the Derivative. If you are keen trading in Commodity Derivative, it’s time to open a trading account with your broker and get started.