Tax on Commodity Trading

Commodity trading is a complex but rewarding avenue for your investments. It is a great way to diversify your portfolio. No wonder then, it has gained momentum among retail investors. Owing to its growing popularity, in 2013 the Government of India introduced the concept of Commodities Transaction Tax or CTT.

Impact of CTT

Since commodity trading is a niche tier of trading, retail investors used to keep a distance from it. It was mostly undertaken by speculators, who entered the market for a short while, made profits on commodity price fluctuations and exited. However, with the emergence of commodity exchange bodies such as Multi Commodity Exchange (MCX), National Commodity and Derivatives Exchange (NCDEX), retail investors started showing increased interest in commodity trading. This was precisely the reason why the exchange bodies opposed CTT in 2013, stating that it would hurt investor sentiment. And true to their assumption, with the imposition of 0.01% CTT on non-agricultural commodities future contract price, the trading volumes dipped.

Commodity Transaction Tax

Tax is levied on income. In the case of commodity trading, the taxation rules change, depending on the kind of income. Before understanding commodity trading transactions, you need to know that levying of tax will depend on the contract’s nature. There are two kinds of income that you can make in commodity trading:

• Speculative income:

  This income arises in commodity derivative contracts wherein the actual physical trading of commodity will never take place. The entire settlement takes place in cash.

• Non-speculative income:

  This income arises in commodity derivative contracts wherein the buyer side will take actual delivery of the commodity sold by the seller.

It is also important to note here, that the rules regarding carrying forward and setting off losses would also differ, basis the type of income you earn, speculative or non-speculative.

Spot trading and derivative trading

In commodity trading, there are two categories of trading. They are spot trading and derivative trading.

• Spot trading:

  Under this category, the commodity is transacted with the intention of physical delivery taking place immediately or within a few days. These transactions are typically settled within a timeframe of two days, and, therefore, are more exposed to price fluctuations. This category of trading doesn’t come under the purview of commodity trading taxation.

• Derivative trading:

  Derivative trading implies the contract value arising out of a derivative commodity price. It consists of futures and options contract which are specialised contracts to transact, basis a particular commodity’s price, on a future date, at a pre-decided price. CTT is applicable to derivative trading contracts.

Mechanics Behind CTT

At this point, the Commodity Transaction Tax is levied at 0.01% of the trade value of non-agricultural commodity contract. For example, if you were to trade in a non-agricultural commodity such as copper, through a derivatives contract, CTT would be imposed on both sides of the transaction. The CTT rate would be 0.01% of the notional value of the trade, that is based on the lot size and the applicable transaction price. Say, if the buyer and seller turnover is 30 lakh and 40 lakhs, respectively, by way of CTT, Rs. 300 and Rs. 400 would be charged to the buyer and seller side, respectively.

Conclusion

While there was initially an adverse impact of tax on commodity trading on the trading volumes, it has also served certain crucial purposes. It has kept a check on the volume of speculative build-up in the commodities market. By way of CTT, the transactions are routed through rightful, legitimate mediums. It helps in maintaining a record for audit purposes, hinders fraudulent practices and protects investors.

URLs Used for Research

What is Commodity Trading - Definition, Advantages & History (samco.in)
What is commodity transaction tax? (indiainfoline.com)