The Hindu Business Line : Do not treat financial derivative transactions as speculative: ICAI

THE Institute of Chartered Accountants of India (ICAI) has urged the Finance Ministry to clarify in the Income-Tax law that all financial derivative transactions in the nature of hedging would only be treated as normal business transactions and not as speculative transactions.

Informed sources said that the apprehension that financial derivative transactions would generally be construed as speculative transactions by tax authorities has impeded the overall growth of the derivatives market, especially commodity derivatives market, in the country.

The main issue is that, under the I-T law, the losses from a speculative transaction cannot be set off against other income of the assessee. Such a loss can only be set off against speculative income of the assessee in the year in which the loss was incurred or carried forward and then set off against speculative income in the subsequent years. The carry forward is allowed up to a maximum of eight years.

Currently, the I-T law does not have a specific provision governing the taxation of financial derivatives. However, Section 43(5) and Section 73(1) have an indirect bearing on taxation of financial derivatives.

An ICAI official told Business Line that the institute has suggested in its pre-budget submissions to the Finance Ministry that a new proviso be added in Section 43(5) to specify that the transactions entered into in the derivative segment of any exchange would not be treated as a speculative transaction.

Such a clarification from the tax department, according to industry circles, may help allay apprehensions that transactions in index futures (which are essentially cash settled) would only be treated as speculative transactions by the tax authorities.

More Stories on : Derivatives Markets | Income Tax

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