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Monday, May 27, 2002

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`Derivatives trading not to be considered speculative for I-T'

K.R. Srivats
Hema Ramakrishnan


THE high-level panel constituted by the Finance Ministry to review the existing definition of speculative transaction is set to make out a case for treating derivatives trading as a normal business activity rather than a speculative transaction.

The panel, which will submit its report shortly to the Revenue Department, has veered around to the view that trading in derivatives should be excluded from the definition of a speculative transaction under the Income-Tax Act, 1961, said official sources.

As per the provisions of the Income-Tax Act, losses computed from a speculation business can be set off only against profit or gain from another speculation business.

If the Finance Ministry accepts the panel's suggestion to treat derivatives trading as a normal business activity, then the set off provisions for normal business losses (and not of losses from speculative business) would apply.

A speculative transaction is now defined 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 do not come under the ambit of a speculative transaction. The same applies to commodity hedging by manufacturers as well.

The committee will also make recommendations on a new definition of a speculative transaction after factoring in the recent developments in the capital market including the introduction of new system of trading and settlement.

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.

Senior Revenue Department officials said that amendments, if any, in the Income-Tax Act would be done only in the next Budget after the Ministry receives a feedback on the recommendations.

The total turnover of the derivative segment in the National Stock Exchange for April 2002 stood at Rs 21,674 crore.

The total traded value of individual stock futures last month stood at over Rs 15,000 crore.

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