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  • Commodity Transaction Tax (CTT): Introduction, Necessity and Effects

Commodity Transaction Tax (CTT): Introduction, Necessity and Effects

Commodity Transaction Tax, CTT, Calculations, Types, STT, Commodities, Agriculture, Gold,

Imagine you're watching the news, and a headline flashes: "Gold prices surge!" The world of commodities – from precious metals like gold to agricultural products like wheat – is a dynamic and exciting space. But have you ever wondered about the taxes involved in trading these commodities? This blog sheds light on the Commodity Transaction Tax (CTT), a crucial aspect of commodity trading in India.

Introduction to Commodity Transaction Tax (CTT)

The Commodity Transaction Tax (CTT) is a tax levied on the purchase and sale of commodity derivatives traded on recognised Indian commodity exchanges. Indian economy thrives in various sectors, and the commodity market plays a vital role.  Just like a sales tax applies when you buy something at a store, the CTT applies when you trade commodities like gold, silver, or crude oil on an exchange. To ensure transparency and regulate this market, the government introduced the CTT.

What is CTT or Commodity Transaction Tax?

Think of the CTT as a small fee you pay when you buy or sell a commodity through a futures contract on a recognised exchange. It's similar to the Securities Transaction Tax (STT) levied on stock market transactions. CTT acts as a contribution to the government collected through each commodity trade. 

Objectives of Commodity Transaction Tax (CTT)

It was introduced in the Union Budget of 2013-2014 with the primary objectives of:

Increasing Government Revenue

The CTT generates additional income for the government, contributing to various public welfare initiatives.

Reduce Speculation

Excessive speculation in the commodity market can lead to volatile price fluctuations. The CTT discourages excessive trading, promoting a more stable market environment.

Promoting Transparency

The tax discourages speculative trading and encourages genuine participation in the commodity market.

Reducing Volatility

By introducing a cost factor, the CTT aims to minimise excessive price fluctuations in the commodity market.

How is Commodity Transaction Tax (CTT) Calculated?

The CTT is a flat rate tax, meaning the tax rate remains constant regardless of the trade value. Currently, the CTT is levied at a rate of 0.01% on the value of the commodity contract.

Calculating Commodity Transaction Tax (CTT) 

Imagine you buy a gold futures contract with a value of ₹5 lakh. To calculate the CTT, follow these steps:

Contract Value: ₹5,00,000

CTT Rate: 0.01%

CTT Calculation: ₹5,00,000 * 0.0001 = ₹50

Therefore, the CTT for this gold futures contract would be ₹50.

Important Note: The CTT is a two-way tax, meaning it applies to both the purchase and sale of a commodity contract. So, in the above example, you would pay ₹50 CTT when you buy the contract and another ₹50 CTT when you sell it.

Types of Commodity Transaction Tax (CTT)

There are several types of CTT applicable to different categories of commodity contracts:

Type of CTT

Applicable to

Description

Example

Turnover Tax

Non-agricultural commodity derivatives

Levied on the total transaction value of the contract.

Applies to gold, silver, crude oil, copper, etc.

Delivery Tax

Agricultural commodity derivatives

Levied only on the delivery value of the contract, not the entire value.

Applies to wheat, cotton, pulses, etc.

Futures Tax

Commodity Futures contracts

Levied on futures contracts, which are agreements to buy/sell a commodity at a predetermined price on a future date.

Applies to futures contracts in both agricultural and non-agricultural commodities, including coffee, corn, oil, and metals like silver and copper.

Options Tax

Commodity Options contracts

contracts Levied on options contracts, which give the right (but not the obligation) to buy/sell a commodity at a predetermined price.

Commodity options for agricultural commodities (e.g., soybean, corn) or non-agricultural commodities like oil, gold.

Intraday Tax

Intraday Commodity Trading

Applied on intraday trades, where buying and selling happen within the same day.

Intraday trading of crude oil, gold, or agricultural commodities like rice or wheat.

Speculative Tax

Speculative Commodity Contracts

Levied on speculative trades that don’t involve the actual delivery of commodities but aim to profit from price fluctuations.

Applicable to speculative trading in gold futures, silver futures, or crude oil options, etc.

Impact of GST on Commodity Trading

The Goods and Services Tax (GST) introduction in 2017 significantly impacted commodity trading. While earlier, commodities attracted various indirect taxes, GST brought some uniformity and clarity. However, the CTT remains a separate tax levied specifically on commodity derivatives traded on exchanges.

  • Exempt Commodities: Some commodities like agricultural products are exempt from both GST and CTT.
  • Taxable Commodities: Commodities like gold attract both GST and CTT. However, the CTT is levied on the value excluding GST.
  • Processed Commodities: These are generally subject to GST.
  • Raw Commodities: These might be exempt from GST but still attract CTT.

How Commodity Transaction Tax is Levied

The CTT is not directly paid by the investor. Instead, it is collected by the broker and deposited with the exchange. The exchange then forwards the collected CTT to the government. This ensures smooth tax collection and minimises administrative burdens on individual investors.

Conclusion

The Commodity Transaction Tax plays a dual role in the Indian commodity market. It generates revenue for the government, while also aiming to promote stability and transparency in this dynamic sector. While the CTT adds a cost factor to trading, it can also be seen as a measure to discourage excessive speculation and ensure a more balanced market environment.

Frequently Asked Questions

1. What is the CTT charge on commodities?

Ans: The Commodity Transaction Tax (CTT) is a tax that traders need to pay when they buy or sell commodity derivatives like gold, silver, or crude oil on the commodity exchanges. It works like the Securities Transaction Tax (STT) for stocks. The tax is added to every trade in commodities to regulate speculation and raise revenue for the government.

2. What is CTT tax?

Ans: CTT (Commodity Transaction Tax) is a government tax applied to the buying and selling of commodity derivatives. This tax is similar to the tax you pay when trading shares (STT). It helps regulate the market and prevents excessive speculation in commodities like metals, oil, and agricultural products.

3. How is CTT calculated?

Ans: CTT is calculated as a percentage of the trade value of the commodity derivatives. For example, if the CTT rate is 0.01% and you buy a commodity worth ₹1,00,000, then the CTT charged would be ₹10. The specific rates can vary depending on the type of commodity.

4. Who collects commodity transaction tax?

Ans: The Government of India collects the CTT through exchanges where commodities are traded, like the Multi Commodity Exchange (MCX). The tax is deducted automatically during each transaction and is paid by the trader.

5. What are STT and CTT charges?

Ans: STT (Securities Transaction Tax) is a tax applied on trading shares in the stock market, while CTT (Commodity Transaction Tax) is a tax on trading commodity derivatives like gold, silver, or oil. Both taxes are collected by the government to regulate market trading and generate revenue.

 

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