Impact of Commodity Transaction Tax on Liquidity and Volatility of Gold Futures Traded at MCX

This paper tests the impact of the commodity transaction tax (CTT) introduced in Indian commodity market since July 2013, particularly on market liquidity and volatility aspects. We rely on a distinctive design of the tax, which is imposed only on non agri-commodities. Here, we considered Gold as a proxy for non agri-commodities and MCX agri-index as a proxy for agri-commodities. This provides one control group and one treatment group which allows us to use Difference in Difference approach in order to isolate the impact of the tax from other economic changes that have happened simultaneously. We find that CTT significantly reduces trading and turnover in Gold futures market. The test for conditional variance using GARCH (1,1) model, reveal that CTT did not significantly contributed to volatility contradiction as expected by policy makers. As the results expressed increased volatility in treatment commodity introducing CTT, similar to that of control group, this paper suggests repealing of CTT on non-agri commodities