Is commodity trading no longer speculative?

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One of the amendments made by the 2013 budget was the introduction of the commodity turnover tax (CTT), which entered into force on July 1, 2013. At the same time, the budget changed the definition of operations. speculative under tax laws to exclude commodity derivative transactions carried out in a recognized market. commodity association (“recognized commodity exchange”). The exclusion would apply to all transactions in agricultural and non-agricultural derivatives, and not just non-agricultural derivatives, which are subject to the TTC.

This amendment would, however, come into force as of the 2014-15 tax year – it would apply to all transactions as of April 1, 2013. Does this mean that all your commodity derivatives transactions do not should no longer be treated as speculative transactions? Unfortunately, our tax laws do not believe in the simplicity of things.

Some conditions have been set in order to benefit from the exclusion. These are similar to the conditions for excluding securities derivative transactions from the definition of speculative transaction. The commodity derivatives transaction must be carried out electronically on a screen system on a recognized commodity exchange through a member or intermediary registered under the statutes, rules and regulations of a commodity exchange recognized in accordance with the Law on Futures Contracts (Regulation) (FCRA) and in accordance with the rules, regulations or orders made or instructions issued under the FCRA. The transaction must also be supported by a time-stamped contract note, issued by that member or intermediary indicating the customer’s unique identity number assigned under the FCRA, or rules, regulations or statutes, unique business number and number. permanent account.

Another requirement is that the recognized commodity exchange complies with conditions which may be prescribed by the central government and be notified by the central government for this purpose. On July 4, 2013, the conditions and procedure to file a request for notification as a recognized commodity exchange were published. Therefore, it will take some time before a commodity exchange is notified as a recognized commodity exchange.

For comparison, when a similar concept was introduced for recognized exchanges to be notified to exclude securities derivative transactions from the definition of speculative transactions, the conditions and procedure were notified in August and the first approvals were no. ‘were only granted in the following January from the date of notification of approval.

At the time, the tax administration took a hyper-technical stance leading to litigation as to whether transactions prior to the date of approval in that year would be treated as speculative, while transactions after the date of approval. approval of the same year would not be treated as such. Fortunately, most decisions have held that the exclusion from the definition of speculative trading would apply for the entire year to these approved exchanges, regardless of the date of approval during the year. We hope that history will not repeat itself and that the approvals will be granted with effect from April 1, 2013 to avoid unnecessary litigation. Until the approvals are granted, one would have to wait and watch.

What would be the impact of treating commodity derivatives transactions as non-speculative? Losses in commodity derivative transactions would now be treated the same as any other business loss and could therefore be deducted from any other income except wages. Losses on commodity derivatives can therefore now be deducted from profits from securities derivatives, income from equity trading and income from trading physical commodities on a delivery basis.

What happens to past losses in commodity derivative transactions that were considered speculative losses in previous years? Can such losses now be offset by current profits from trading in commodity derivatives? It may be possible to argue that since losses result from identical transactions in years prior to those transactions in which profits are now being made, the benefit of the compensation should be available. However, it may not be possible to offset losses from trading commodity derivatives from previous years with other trading profits from the current year, such as trading profits from securities derivatives, as the nature of transactions were different in previous years.

While the decision to exclude commodity derivative transactions from the definition of speculative transactions is welcome, the question arises as to whether it is necessary to treat any exchange-based transaction as a speculative transaction. For example, equity trades on recognized stock exchanges settled without delivery continue to be treated as speculative trades, although equity derivative trades are not. Speculation on stock exchanges or commodity exchanges certainly adds to the depth of the market and is encouraged around the world. Improved oversight by regulatory authorities reduces possibilities for manipulation. With electronic trading and electronic audit trails readily available, isn’t it now time to exclude all exchange traded transactions from the scope of speculative trading? It is hoped that the Direct Tax Code, which is supposed to be the tax law of the new millennium, and which will be introduced during the monsoon session, incorporates such a business-friendly measure.

Gautam Nayak is a chartered accountant.

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