CTT - How it affects trading and what you need to know

Starting July 1, 2013, the government has decided to levy a CTT tax on commodity traders. CTT stands for Commodity Transaction Tax. The actual tax is 0.01% which is applied to the sell side transactional value. This will apply to all non-farm products (such as gold, oils, and sugar). CTT was first proposed by Finance Minister Chidambaram on Finance Bill 2013. Let's go over the quick details:

Why was this introduced?

Let's look at some of the positives that come out of the introduction of CTT.

Revenue Generation

The government already levies STT (Securities Transaction Tax) on all equities, futures, and options transactions. When it was first introduced back in 2004, many experts claimed that it would dry up the liquidity and market participants would flee elsewhere. However, none of this came true. In fact, market volumes and participation have increased since 2004 and contributed significantly to the central government's revenue stream. There is good reason expect to see the same with CTT.

Transparent Tax Collection

CTT is levied by the central government but collected by the exchange. The exchange collects it from the broker who collects it from the client. From the central government's perspective, this is a much easier and transparent method of levying a tax. Additionally, the central government now has a record of which broker/client has traded what. In the case that they suspect market manipulation or illicit trading activity, finding the source of such abnormal transactions just became easier.

It benefits hedgers

Certain market participants such as hedgers will not be affected by CTT. They will have to continue buying and selling commodities to offset their actual risk. Big players who intend to run up the price or speculate heavily will have to adjust their trading activity. In the end, this may actually end up creating a better price discovery model.

What you can do next

Do you actively trade in the commodity markets? The next step is to find out how your strategies will play out with the introduction of CTT. Here's a quick checklist of things you can do:

1. What kind of breakevens are you looking for? Our calculator can help you here.
2. Will the CTT tax of 0.01% on the transaction value heavily affect the profitability of your trading pattern?
3. Look to move your trading patterns to a slightly longer-term horizon to offset CTT
4. Instead of buying at market price, place a passive limit order. This can reduce your transaction costs and increase your profit margin at the risk of not getting filled immediately

Happy trading!