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Tuesday, Apr 23, 2002

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`Speculative' deals to be redefined

K.R. Srivats
Hema Ramakrishnan

NEW DELHI, April 22

CHANGES in the definition of a "speculative transaction" and the tax treatment on such transactions are on the cards.

The high-level panel appointed by the Finance Ministry to examine a host of tax-related issues pertaining to speculative transactions has decided to recommend changes in Section 43 (5) of the Income-Tax Act 1961 in view of the ongoing developments in the capital market.

"The existing definition of a speculative transaction in Section 43 (5) is fairly obsolete when viewed against the latest developments in the capital markets, including the introduction of derivatives trading. The committee has veered around the view that this definition, along with the set-off provisions for losses in speculation business, ought to be changed," said official sources.

The committee is yet to take a final view on the exclusion of trading in certain derivative instruments from the ambit of a speculative transaction. However, given the Government's commitment to deepen and modernise capital markets, indications are that the panel may recommend their exclusion.

The Securities and Exchange Board of India (SEBI) has already permitted individual stock options in 31 scrips, apart from allowing individual stock futures in these scrips.

A speculative transaction is defined in the Income-Tax Act as a transaction in which a contract for the purchase or sale of any commodity, including stocks and shares, is periodically or ultimately settled otherwise than by the actual delivery or transfer of the commodity or scrips.

However, contracts relating to stocks and shares entered into by a dealer or investor to guard against loss in his holding of stocks and shares through price fluctuations would not be construed as a speculative transaction. Commodity hedging by manufacturers is also out of the purview of the definition of a speculative transaction.

Currently, losses computed from a speculation business carried on by an assessee cannot be set off except against profits or gains, if any, of another speculation business.

The panel, chaired by a senior Revenue Department official, was set up immediately after the Budget and was asked to submit its report by this month-end. Officials from SEBI and the Central Council of the Institute of Chartered Accountants of India (ICAI) are members of this panel.

According to Revenue Department officials, the review of the tax treatment of speculative transactions follows the introduction of new instruments in the capital markets, including individual scrip-based options.

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