Articles

The Union Budget 2013 has (re)-introduced Commodities Transaction Tax (‘CTT’) on nonagricultural commodities futures contracts amidst strong resistance from the various commodity exchanges and market participants alike. CTT is to be levied on taxable commodities transactions, being sales of commodity derivatives, at the rate of 0.01 percent on the value of such transactions and such tax is to be paid by the sellers. Although the Finance Minister remarked that there is no difference between derivative trading in the securities market and derivative trading in the commodities market, the grouse (inter-alia) has been that commodity markets have peculiar costs such as octroi, value added tax, etc which affect commodity prices, which is not the case with the securities markets. Moreover, most institutional investors are not permitted to participate in the commodity derivatives market and the increased transaction cost, due to the levy of CTT, may discourage the retail investors as well.

Having once repealed the introduction of CTT in 2008 on the basis of inputs received from the Prime Minister’s Economic Advisory Council, this time round, the levy of CTT seems to be here to stay. To counterbalance the impact of CTT, (a) the Finance Bill proposes to allow CTT as a tax deductible expenditure from the computation of business income, and (b) the amendments recently proposed to the Finance Bill 2013 propose to exclude transactions in commodity derivatives from the ambit of the term ‘speculative transactions’.

The current proposal

Historically, loss from speculative transactions has been considered distinctly and can be offset against income from speculative transactions only; not against normal business income. Separately, in 2005, the period for which speculative losses could be carried forward period was also reduced to 4 years (from 8 years). The concern arose from the lack of audit trail in such transactions, which enabled taxpayers to claim fictitious losses against their usual business income, thereby reducing their overall income-tax outgo. Section 43(5) of the Income-tax Act, 1961 defines the term ‘speculative transaction’ to mean a transaction in which a contract for the purchase or sale of any commodity, including stocks and shares, is periodically or ultimately settled otherwise than by the actual delivery or transfer of the commodity or scrips.