Revenue Potential and Trading Volume Impact of Commodity Transaction Tax: Emerging Market Context

This study examines the revenue potential and impact of imposing tax and develops a novel method to arrive at an optimal commodity transaction tax (CTT) in an emerging commodity market. Based on data on nine non-agricultural commodity futures contracts from 2009- 2018, we estimate the demand elasticity (relative to changes in tax) using simultaneous equations model and arrive at the optimum transaction tax. We find that commodity transaction tax (CTT) has an inverse impact on trading volume and metals like silver, nickel and zinc are more sensitive to changes in taxation. We further develop a revenue model to determine the profits realized by the government post-taxation. Our model elucidates succinctly that the revenue earned from CTT does not offset the loss associated with the tax-induced reduction in traded volumes. We also estimate the ideal CTT rate for the Indian scenario and project the future growth of revenue.