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FMC seeks changes in I-T Act to set off speculative loss

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CHENNAI, Nov. 17

THE Forward Markets Commission (FMC) has told the Prime Minister's Office (PMO) that the Government should allow losses incurred in the commodity futures market through speculation to be set off against profits from `normal' trading activity.

This would ensure better participation by the trade in the commodity futures, the FMC has said.

According to sources in the Consumer Affairs Ministry, under which the FMC functions, the market supervisory body has said that it is necessary to make amendments to the Income-Tax Act, 1961 for this.

"We have told the PMO that not allowing loss from speculation to be balanced against profits from normal trade is one of the impediments in commodity futures taking off in the country," the sources said.

The FMC Chairman, Mr Anand Kumar Bhatt, when contacted, confirmed that it was one of various issues discussed with the PMO.

The PMO had held a meeting a couple of weeks ago with regard to the 15-point agenda announced by the Prime Minister, Mr Atal Bihari Vajpayee, during his Independence Day speech. "One of the items announced by the Prime Minister was establishment of the national multi-commodity exchange," the sources said.

The issue of setting-off the speculation losses is expected to be followed up with the Finance Ministry and the Central Board of Direct Taxes.

Besides, a panel of income-tax officials are also looking into the issue, according to the sources.

During the middle of last year, the FMC had sought amendments to the Income-Tax Act, 1961.

Currently, a corporate assessee, who is engaged in diverse businesses, can set off profits or losses from say, exports during any year against profits or losses from spot trading or any other `normal' business activity for the same year. Such setting-off is also permitted against losses on account of futures trading to the extent it is limited to just hedging.

But on the other hand, losses from speculation during any year cannot be adjusted against profits from normal business during the same year, even though profits from speculation are treated as part of the assessee's taxable income. Instead, the assessee can carryforward his losses from speculation for any year to set off against speculative profits for the subsequent year (thereby reducing his taxable income for the latter year). This carryforward of speculative losses is permitted for up to eight years.

The FMC wrote to the Finance Ministry that if losses from hedging could be set off against profits from other normal trading activity, there was no reason why it could be extended to losses from speculation as well. The FMC views hedging and speculation as two sides of futures trading and in the absence of speculators, the market would have liquidity.

Currently, the only way for traders to set off losses from speculation was to show that these were incurred due to hedging. But that is not easy and it is difficult to prove to IT officials that one has derived income from hedging and not speculation.

The FMC wants an end to this distinction between hedging and speculation and treat both as normal trading activity for the purposes of computing taxable income of an assessee.

FMC feels that once this distinction goes, there would be a pickup in trading volumes, which are poor in most futures exchanges in the country.

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