Tax breaks likely for derivative trade

Derivative transactions are likely to get tax breaks in the Budget. This implies allowing losses booked in trading to be set off by an individual or firm, against profits made in other business activity.

At present, under the Income Tax Act 1961, losses under speculative businesses cannot be set off against business profits. The Securities and Exchange Board of India, which had been asked by the department to examine the feasibility of establishing such losses accurately, has also agreed to the proposal.

The department had also asked the Sebi to decide the nature of scrips which should enjoy the tax benefit, and also whether the ambit of such losses can be extended beyond the National Stock Exchange.

An internal committee of the department, which had examined the issue in 2002-03, had also given in its report recommending that the benefit should only be allowed for shares listed on the NSE, since they were heavily traded.

The committee had argued that since only NSE was fully online, there would therefore be very little opportunity to book fraudulent losses to earn the tax relief.

But tax officials said they did not agree with the recommendations. They said the distinction between less and heavily traded was difficult to implement in practice.

In its pre-Budget recommendations, the Institute of Chartered Accountants of India has supported the proposal for a tax-break against derivative trading.

The ICAI has argued that such trading is a normal part of modern business to protect against losses arising out of exchange fluctuations.

It has asked for the amendment of Section 43(5) of the Income Tax Act, to treat profit and loss from derivative trading as normal profit and loss in business. The section allows some leeway for hedging transactions, and the memorandum says derivatives also qualify as hedging operation.

The proposal was mentioned in Budget 2002-03, but the Central Board of Direct Taxes has not been able to move on it any further.

Market participants have argued that not allowing the benefit increases the cost of borrowing for them, which in turn affects the growth of the derivatives market.