The Securities and Exchange Board of India (SEBI) has approached the GST Council to resolve long-standing tax complexities impacting investors trading in physically settled commodity derivatives.

Key Highlights

• SEBI proposes integrated GST mechanism to resolve tax issues in physically settled commodity derivatives trading.
• Regulator seeks broader participation but RBI and IRDAI remain cautious on commodity derivatives exposure.

Speaking at the IMC Capital Markets Conference 2026, SEBI Chairman Tuhin Kanta Pandey highlighted that the current GST framework creates operational hurdles, particularly for contracts involving physical delivery.

To address this, SEBI has proposed the introduction of an integrated GST mechanism, replacing the existing state-level tax structure. The move is aimed at simplifying compliance, as traders currently need to register across multiple states where warehouses are located, making the delivery process cumbersome.

The regulator noted that while many derivative contracts are squared off before delivery, the option of physical settlement plays a critical role in reducing market risk and ensuring price stability. A streamlined tax regime could therefore enhance efficiency and encourage broader participation, particularly in agricultural commodities.

SEBI is also pushing to deepen the commodity derivatives market by enabling participation from institutional players such as banks and insurance companies. However, progress on this front remains limited, as key regulators-including the Reserve Bank of India and the Insurance Regulatory and Development Authority of India-have expressed reservations about allowing such entities to enter the segment.

In parallel, SEBI is advancing reforms in investor onboarding through the development of CKYC 2.0, a revamped central know-your-customer system aimed at simplifying and digitising verification processes across financial markets. The upgraded system is expected to be ready by July, following coordination with the Central Registry of Securitisation Asset Reconstruction and Security Interest of India.

The push for regulatory reforms follows guidance from Finance Minister Nirmala Sitharaman, who has urged SEBI to accelerate efforts toward standardised and digitised KYC norms across the securities ecosystem.

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Overall, SEBI’s proposal to overhaul the GST framework for commodity derivatives reflects a broader strategy to enhance ease of doing business, reduce compliance burdens, and deepen India’s commodity markets, while maintaining regulatory safeguards.