Impact of Commodities Transaction Tax on Indian Commodity Futures

The Commodity Futures Market is an instrument to achieve price discovery of commodities. The Government of India introduced the Commodities Transaction Tax of 0.01 per cent payable on seller for derivative transactions on 1 July 2013. This tax in line with the earlier tax imposed on transactions in the Securities Market, the Securities Transaction Tax. The difference between the two taxes (STT and CTT) in India is that STT is imposed on both buyers and sellers whereas CTT is levied on non-farm commodity derivatives and the tax is payable by the seller. The aim of imposition of these taxes is to reduce the price volatility and increase tax revenue, whether it will actually be able to achieve the objectives is debatable. It is debatable since the levy of the tax adversely affects the traded volume of the contracts. Currently, the CTT is applicable to non-farm commodity derivatives traded in commodity exchanges of India. The current study uses bootstrap methodology to assess the impact of commodities transaction tax on the trading volume on commodity exchange (overall) and trading volume of chosen commodities. A first order autocorrelation model is also utilised to study the impact of the imposition of CTT on returns and volatility of commodity portfolios.