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FMC seeks I-T Act amendment to offset speculative losses

Harish Damodaran

NEW DELHI, July 10

THE Forward Markets Commission has sought amendments to the Income Tax Act, 1961, to enable speculative losses incurred in commodity futures trading to be set-off against profits from `normal' trading activity during the same year.

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 i s 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 set-off against profits from normal business during the same year, even though profits from speculation is treated as part of the assessee's taxable income. Instead, the assessee ca n 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.

``We have written to the Finance Ministry that if losses from hedging can be set off against profits from other normal trading activity, there is no reason why this cannot be extended to losses from speculation as well. After all, hedging and speculation are two sides of futures trading and in the absence of speculators, the market will not be liquid enough,'' an FMC official told Business Line.

The official said the only way for traders to set-off losses from speculation now was to show that these were incurred due to hedging. ``But that is obviously not easy. In fact, it is very difficult to prove to IT officials that one has derived income fr om hedging and not speculation. What we want is 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,'' he added.

FMC feels that once this distinction goes, there would be a pickup in trading volumes, where are rather poor in most futures exchanges in the country. The official said the inability to treat income from speculation as part of normal business income was mainly a `hangover' of the past regime, ``when speculation was in general considered to be bad and something that is to be discouraged''.

Meanwhile, speaking at a National Conference of Commodity Exchanges here, the Secretary, Department of Consumer Affairs, Mr S. Bandopadhyaya, noted that trading volumes in most exchanges were very low and not growing. There were only a few exceptions as the Kochi domestic pepper exchange, the Muzaffarpur and Hapur exchanges for gur (jaggery), the S-BOT exchange in Indore for soya oil and the Ahmedabad and Rajkot exchanges for castorseed.

In some of these, the volume of trading was as high as 300 per cent of production of the particular commodity (pepper), whereas in others, such as potato, the trading volume was hardly one per cent of output.

The FMC Chairman, Mr Anand Kumar Bhatt, said the Government was contemplating options trading in commodities, which is banned under Section 19 of the Forward Contracts Regulation Act, 1952. A Bill amending the Act to facilitate options trading is current ly pending in the Rajya Sabha. The Bill also seeks to increase the number of members in the FMC from the existing four (including the Chairman) to seven.

Besides, it is also sought to clearly define `futures trading' in the Act. As of now, the Act only defines `forward contracts', which, in turn, are sub-divided into `specific delivery contracts' and `other than specific delivery contracts'. It is the lat ter that is in normal trade parlance referred to as `futures contracts' though the Act does not explicitly define it so.