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Tax on Commodity Derivatives: Income Tax on Commodity Trading in India

Introduction

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 equalise 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 Derivative 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 Derivative 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 Derivative 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:

Taxable commodities transaction

Rate

Payable On

Payable by

Sale of a Commodity Derivative (except agricultural commodities)

0.01%

Price at which they get traded

Seller

Sale of an option on Commodity Derivative

0.05%

The option premium

Seller

Option sale on Commodity Derivative, where the former gets exercised

0.0001%

The settlement price

Purchaser

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.

Keywords:

Derivative: 3 times

Commodity Derivative: 7 times

Tax on Commodity Derivative: 1 time

Disclaimer – ICICI Securities Ltd. ( I-Sec). Registered office of I-Sec is at ICICI Securities Ltd. - ICICI Venture House, Appasaheb Marathe Marg, Prabhadevi, Mumbai - 400 025, India, Tel No : 022 - 6807 7100. The contents herein above shall not be considered as an invitation or persuasion to trade or invest.  I-Sec and affiliates accept no liabilities for any loss or damage of any kind arising out of any actions taken in reliance thereon. The contents herein above are solely for informational purpose and may not be used or considered as an offer document or solicitation of offer to buy or sell or subscribe for securities or other financial instruments or any other product. Investments in securities market are subject to market risks, read all the related documents carefully before investing. The contents herein mentioned are solely for informational and educational purpose.

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