Commodity markets trading expanded in a big way in the last few years. Although volumes have taken a hit in the aftermath of the imposition of the commodity transaction tax (CTT) in 2013, there has been a gradual pick up in the last few years. Also, with the regulation of commodity markets being brought under the ambit of SEBI effective from 2016, there is likely to be an adoption of best practices with respect to commodity futures trading in India. Let us now look at the all important aspect of how the commodity markets transactions are taxed in the Indian context.
Speculative versus non-speculative transactions
The taxation of commodity trading profits will be largely on the lines of F&O trading in terms of classification between speculative and non-speculative. However, there is a minor difference. In case of the cash markets, only intraday cash transactions are classified as speculative whereas transactions in futures and options on stocks and indices are classified as non-speculative. There is a slight complication when it comes to commodity markets. In this case, you are permitted to speculate on commodities and also take physical delivery on these commodities. Therefore, any transaction without the intention of taking delivery in commodities will be classified as a speculative transaction while any transaction with the intention of taking delivery will be classified as business income.
Can one show commodity profits as capital gains?
When it comes to commodities there is no question of long term capital gains since there are no transactions beyond one year in commodities trading. However, technically one can show profits from commodities trading as short term capital gains. However, there are few basic conditions here. Firstly, this rule does not apply to speculative transactions and only to non-speculative delivery transactions in commodities. Secondly, like in the case of equities whether one can show this short term capital gains depends on factors like the total volumes done, share of commodity trading in your overall activity etc. If your transactions in commodities are few and far between, then you can show the occasional transaction as capital gains/losses. However, if the transactions are frequent and if the income from commodity trading is a major chunk of your total income then it is better to show that as your business income rather than as capital gains.
Benefits of showing commodity income as your business income
One of the major benefits of showing commodity trading income as business income is that it gives you the benefit of writing off relevant expenses. For example, if you have employed a dealer and if you are incurring administrative expenses on commodity trading, the same can be charged to the account. Even depreciation on the equipment like servers, routers and computers can also be charged to the income statement. More importantly, such business income can also get the relief for the CTT paid, which is not available in case you show the income as short term capital gains. There is also the aspect of writing off losses and carrying them forward, but we will see that point in greater detail in the next point.
Setting off losses and carrying forward to future years
Generally, trading profits from commodities are shown as business income and the only difference is whether it is shown as speculative business income or non-speculative business income. That makes a difference to your tax treatment. Here is how! Speculative losses can only be written off against speculative gains. On the other hand, non-speculative losses can be written off against non-speculative gains and also against speculative gains. There is also a restriction on carry forward of the losses. For example, non-speculative business losses can be carried forward for a period of 8 years following the assessment in which the loss arises. But speculative losses can be carried forward only for a period of 4 years following the assessment year in which the loss has arisen.
The finer point in taxation of commodities trading is that the transaction is classified into speculative and non-speculative business transaction depending on whether the transaction result in delivery or square off. That is the key!
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