The study explores on the effect of transaction taxes on the commodity futures market through Commodity Transaction Tax (CTT) - a unique tax introduced to the Indian commodity futures market in 2013 levied on the sellers of non-agricultural commodity futures. We begin by examining the impact of CTT on trading volume from 2010-16, utilizing an ARIMA-GARCH technique to isolate the effect of transaction tax on trading activity and market efficiency in the context of commodity futures which is scarcely explored in extant literature. Additionally, a brief study is conducted on the impact of transaction taxes on intra-day liquidity measures (both spread and depth-based measures) using a non-Gaussian signed Wilcoxon Rank test. Furthermore, using data spanning from 2009-2018 we examine other dimensions of transaction taxes, namely the revenue-generating capability and determine an optimal transaction tax rate using a novel model utilizing demand elasticities that considers pre-tax period data. Finally, we examine a global sample of the top crude oil futures trading exchanges and study the aggregate interaction among trading activities namely speculation, hedging, arbitrage and their impact on spot market volatility in the commodity futures market by employing a Vector Auto-Regressive (VAR) model. While most studies consider the standalone impact of each trading activity on the spot market volatility, we differ by examining an aggregate impact of trading activity on spot market volatility in the context of commodity futures.

Overall, this study primarily unearths the detrimental effects of the inception of CTT in the context of commodity futures trading in India, an emerging market. In the post-CTT period, we observe a significant reduction in trading volume volatility, increased persistence and a decline in market depth implying lower market participation and market efficiency. We also note that the levels of trading activity interaction in crude oil futures are unique to each country. Our findings suggest that the revenue generated by the tax is unable to offset the loss of tax-induced lack of participation. The study reinforces that a thorough understanding of the market microstructure is appropriate before the introduction of any policy. Moreover, while a considerable body of literature exists for developed economies and the stock market, we highlight the rarely explored commodity futures market and its response to taxation in the context of an emerging economy like India.