Commodity derivatives were introduced in India with a dual purpose of promoting price discovery and enhancing risk management in the commodities market. A transaction tax (of 0.01 per cent) on commodity futures trading was introduced in the Union Budget 2013-14. This study examines the rationale behind such a tax. It also checks for the validity of the proposition that such taxes generate additional revenue. We conduct a 50-day and 120-day event study to assess the impact of CTT imposition on the total volume traded of a few select commodity futures as well as on the overall efficiency of the commodity market. Results for the event study suggest a significant drop in traded volumes of commodity futures such as gold, copper, crude oil and menthe oil.
