Analysis of proposed commodity transaction tax on derivative trading in India

There has been considerable debate on the proposed commodity transaction tax (CTT) in the commodity derivative market. While the CTT was proposed to generate revenues and discourage speculative trading, however the benefits are likely to be outweighed by its potential costs because it would increase the cost of capital and reduce market liquidity. Empirical evidence suggests that when a government levies or increases transaction tax on domestic markets, investors shift their trading to overseas markets. This study makes an attempt to assess the impact of proposed transaction tax on liquidity, volatility, prices and efficiency of commodity derivative markets in India.