In this article, you will get to know everything about Commodity Trading Tax or CTT. Check out the various types of tax levied & more.
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About Commodity Trading Tax or CTT
In 2013, the commodity transaction tax was introduced by the finance minister P Chidambaram stating the below-mentioned para from his budget speech.
“There is no distinction between derivative trading in the securities market and derivative trading in the commodities market, only the underlying asset is different.
It is time to introduce Commodities Transaction Tax (CTT) in a limited way. Hence, I propose to levy CTT on non-agricultural commodities futures contracts at the same rate as on equity futures that is at 0.01% of the price of the trade”.
As a result, the CTT came into existence. The government tried implementing CTT in the year 2008 as well.
But the commodity exchanges opposed it as they felt that commodity trading was at an emerging state, and most people didn’t even know about its existence.
In such cases, implementing commodity tax can affect them. When CTT came into existence, the nation’s commodity exchanges saw a dip in trading volumes by nearly 50-60%.
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Implementation of Commodity Trading Tax and its effects
As discussed earlier, the authorities introduced the commodity transaction tax at a rate of 0.01%. Let us now try to understand how it works while trading.
For instance, you are trading in a non-agricultural commodity like steel. The buy turnover is ten lakhs while the sell turnover is 20 lakhs.
In this case, the CTT charged will be Rs 200, i.e., 0.01% of 20 lakhs on the sell-side while 100 on the buy-side.
It is important to note that CTT is not charged on spot commodity trading, which means that you end up paying CTT only while trading in commodity derivatives.
Due to the implementation of CTT, the trading game in the commodity market changed a lot. Not only was there a drop in the volume by 50-60%, but there were other downsides too. The smaller segments were affected as well.
This means that the retail traders who used to buy in less quantity and applied strategies like scalping stopped doing so, as it became an expensive deal for them.
Positive Aspects of Commodity Trading Tax
However, it does not mean that there was no positive side to the CTT. The government implied the commodity transaction tax because of four major reasons:
- It acted as a source of revenue for both central as well as state governments. For a long time, the regulators have been trying to ensure that commodity trading gains equal recognition as equity trading. Therefore, it becomes mandatory to charge the taxes in a manner like equity.
- The taxes can also act as a tool to direct the volume in the market. By charging higher taxes, the authorities ensure that the speculative buildup of volumes is under control.
- The CTT follows a similar structure to other forms of taxes in terms of proportionality. This means that the authorities tend to charge higher taxes from those who are earning higher profits.
- The implementation of taxes also ensures that all the transactions are channelized through the right medium. It also helps in maintaining a record in the books for audit and avoids fraudulent practices.
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Income Tax provisions on profit from Commodity Trading
India’s tax system can be a little complex to understand, and so is the income tax on profit from commodity trading.
Before getting more into the tax provisions, we need to understand the two types of incomes, which depend on the contract’s nature.
The first one is speculative income, where the entire settlement takes place in cash, and the actual delivery does not occur.
The opposite of this is non-speculative income, where the buyer gets the delivery of the specified commodity.
The type of contract you get into also decides the method through which you can set off losses. We will be discussing this in detail.
As a trader, you can show the profits from commodity trading under two heads that are short term capital gains or business income.
If your transactions are limited in the number, you can choose to put the gains under short term capital gains.
But if your transactions and profits are of high volume, you should prefer putting it under business income.
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Carrying Forward and setting off losses from Commodity Trading
Trading is not a guarantee of profit. Therefore, on some days, you might end up bearing losses as well.
But as per the provisions of income tax, the authorities allow the traders to carry forward their losses and adjust them in the coming years.
Doing this helps in reducing the amount of profit earned in the year in which the losses are adjusted. Due to a reduction in the profits, the amount of tax payable decreases too.
But the Income Tax authority of India has made separate provisions for setting off losses. These provisions change as per the nature of the contract.
If the losses incurred are speculative, i.e., the transaction did not involve the delivery of a commodity, the trader has an option to adjust the losses in the coming four years.
It is also important to note that the speculative losses can only be adjusted against speculative gains.
On the other hand, the losses incurred can be non-speculative and involve the delivery of the commodity.
In such cases, the trader gets an option to carry forward these losses for up to eight years, which is double what you get in speculative transactions.
Moreover, the trader has the option to adjust these losses against both speculative and non-speculative gains.
Commodity Trading Tax – Conclusion
While trading in a commodity market, you must always keep in mind the below-mentioned pointers regarding tax provisions:
- The commodity trading tax is charged at the rate of 0.01% on both sides of a transaction.
- Commodity trading tax is not charged on spot trading and is only applicable to derivative trading.
- The two types of income from commodity trading are speculative and non-speculative, depending upon the settlement’s nature.
- In the case of a speculative transaction, the trader has an option to carry forward losses for four years. While in case of a non-speculative transaction, the provision allows eight years.
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