What is Commodity Transaction Tax?
- 6 min read
Do you know that you have to pay tax for commodity trading in India? Just like the income tax and the Goods and Services tax (GST), you are liable to pay taxes for commodity derivatives trading.
After being introduced in the 2013-14 budget by the Government of India, the commodity transaction tax (CTT) came into effect from 1st July 2013.
Read this blog to know the commodity transaction tax meaning, what the current rate is, and how it is calculated.
Meaning of the Commodity Transaction Tax
The commodity transaction tax is a tax that is levied on commodity derivative trading. This tax is derived from the actual size of the futures and options contracts. However, it only applies to sellers of commodity futures or options by the Multi-Commodity Exchange (MCX).
CTT is only applicable for agricultural commodities like gold, silver, lead, crude oil, natural gas, nickel, and zinc.
In addition to CTT, commodity derivatives also include exchange transaction charges, regulatory charges by the Securities and Exchange Board of India (SEBI), GST, and stamp duty from respective state governments where the investor resides.
What is the CTT Rate in India?
The commodity transaction tax rate in India varies depending on the types of commodities traded. For example, the CTT rate for gold, silver, and crude oil is 0.01%, but the agricultural commodities are exempt from taxation. CTT’s main objective is to regulate the market and raise funds for the government. However, the exemption of agricultural commodities safeguards farmers’ interests and other relevant sectors.
The CTT makes trading costs higher in all non-agricultural commodities. This can affect the profitability of traders, mostly for short-term or high-frequency trades.
How to Calculate Commodity Transaction Tax?
Since you have understood what is CTT, let us help you learn how these taxes are calculated. Commodity transaction tax is calculated or charged as a percentage of the transaction of particular commodities. The formula is:
CTT x contract value you are selling
For example, if you sell a gold futures contract of INR 50,000, then CTT of 0.01% will be:
INR (50,000 x 0.01%) = INR 5
However, it is important to note that the CTT rate varies according to the types of commodities.
Types of Commodity Transaction Tax
The CTT rates levied by the MCX vary based on the type of commodity transaction tax, which are highlighted in the table below:
| Taxable commodities (Sold) | Payable on | Rates | Payable by |
| Commodity derivative | Commodity derivative trading price | 0.01% | Seller |
| Commodity derivatives according to indices or prices of commodity derivatives | Commodity derivative trading price | 0.01% | Seller |
| Options in goods | Option premium | 0.05% | Seller |
| Options on a commodity derivative | Option premium | 0.05% | Seller |
| Options in goods, where the option is exercised, resulting in the actual delivery of products | Settlement Price | 0.0001% | Buyer |
| Options on a commodity derivative, where the option is exercised | Settlement Price | 0.0001% | Buyer |
| Option in goods, where the option is exercised, resulting in a settlement other than by the actual delivery of goods | Difference between settlement price and strike price | 0.125% | Buyer |
Purposes of Commodity Transaction Tax
The commodity transaction tax might increase your expenses while selling a commodity. However, there are numerous reasons for levying CTT. These are:
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Revenue Generation
The CTT contributes to the total collection of taxes, which improves fiscal management. This collected tax provides additional funding for developmental projects of the government.
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Level Playing Field
The CTT sets up a level playing field among various asset classes by putting them on the same taxation line. For instance, CTT makes the commodity market and the stock market run by similar rules.
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Discourage Speculation
The CTT also discourages speculation in the commodity market, especially in non-agricultural trading. CTT has a purpose to organise commodity trading by levying taxes on transactions, and encourage responsible trading.
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Regulatory Oversight
Commodity transaction tax also aims to offer a regulatory mechanism and empower financial institutions to improve surveillance and track all commodity transactions. This can provide support for all stakeholders, from policymakers to investors.
However, if you are looking for a platform for commodity trading, you can download the PL Capital Group – Prabhudas Lilladher application. By opening a trading account with PL, you do not have to pay any annual maintenance charge.
How GST Affects Commodity Trading?
Introduced in 2017, GST plays a role in bringing taxation to Indian commodity trading. GST has streamlined the taxation process by integrating different taxes into one tax. From production to supply chain, tax is levied at each stage under GST.
Commodity traders can also claim input tax credits for taxes they have paid earlier in the chain. This has made commodity trading more efficient.
GST has also made the commodity market seamless by removing state-specific levies. This has streamlined the flow of commodities across state lines. The uniform tax rate across various states can increase participation in commodity trading and improve price discovery.
Final Thought
While investing in the commodity market, you should know about the commodity transaction tax. It is levied on the sale transactions of commodity trading. The primary objectives of CTT are to bring the commodity market under a regulatory framework and discourage speculation in the commodity market, and so on.
Download the PL Capital application and open a trading account to trade in commodities. PL offers you to avail numerous features like smart alerts and an advanced option chain.
Frequently Asked Questions
1. How is the commodity transaction tax calculated for commodity trading?
You can calculate the commodity transaction tax by multiplying the CTT rate by the selling value of a contract.
2. What are CTT charges?
CTT charges are charges levied on the transaction value of non-agricultural commodity trading.
3. Who pays the commodity transaction tax?
Both the buyer and seller of a particular commodity trade pay the commodity transaction tax to the broker, which gets deposited into the MCX.
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Disclaimer: This blog has been written exclusively for educational purposes. The securities mentioned are only examples and not recommendations. It is based on several secondary sources on the internet and is subject to changes. Please consult an expert before making related decisions.
