One of the amendments carried out by the 2013 budget was the introduction of commodities turnover tax (CTT), effective 1 July 2013. Simultaneously, the budget amended the definition of speculative transaction under income tax laws to exclude commodity derivative transactions carried out in a recognized commodity association (“recognized commodity exchange”). The exclusion would apply to all commodity derivatives transactions in agricultural as well as non-agricultural commodities and not just non-agricultural commodity derivatives, which are subject to CTT.
This amendment would, however, be effective from assessment year 2014-15—it would apply to all transactions on or after 1 April 2013. Does this mean that all your commodity derivative transactions are no longer to be treated as speculative transactions? Unfortunately, our tax laws do not believe in keeping things simple.
A few conditions have been laid down in order to qualify for the exclusion. These are similar to the conditions laid down for exclusion of securities derivative transactions from the definition of speculative transaction. The commodities derivatives transaction should be carried out electronically on a screen-based system on a recognized commodity exchange through a member or intermediary registered under the by-laws, rules and regulations of a recognized commodity exchange in accordance with the Forward Contracts (Regulation) Act (FCRA) and in accordance with the rules, regulations or by-laws made or directions issued under FCRA. The transaction should also be supported by a time stamped contract note, issued by such member or intermediary indicating the unique client identity number allotted under FCRA, or rules, regulations or by-laws, unique trade number and Permanent Account Number.
A further requirement is that the recognized commodity exchange should comply with such conditions as may be prescribed by the central government and should be notified by the central government for this purpose. On 4 July 2013, the conditions and the procedure for making an application to be notified as a recognized commodity exchange were issued. Therefore, it will be some time before any commodity exchange is notified as a recognized commodity exchange.
Just for the sake of comparison, when a similar concept was introduced for recognized stock exchanges to be notified for exclusion of securities derivatives transactions from the definition of speculative transactions, the conditions and procedure were notified in August and the first approvals were granted only in the subsequent January with effect from the date of notification of the approval.
At that time, the tax authorities had taken a hyper technical stand leading to litigation as to whether transactions before the date of approval during that year would be treated as speculative, while transactions after the date of approval in the same year would not be treated as such. Fortunately, most of the decisions held that the exclusion from the definition of speculative transactions would apply for the full year in respect of those approved stock exchanges, irrespective of the date of approval during the year. One hopes that history does not repeat itself and that the approvals are granted with effect from 1 April 2013 to avoid unnecessary litigation. Till the approvals are granted, one would have to wait and watch.
What would be the impact of treatment of commodity derivative transactions as not being speculative? Losses in commodity derivative transactions would be now treated in the same manner as any other business losses and would, therefore, be capable of being set off against any other income, except salaries. Commodity derivative losses can, therefore, now be set off against security derivative profits, share trading income and income from trading in physical commodities on a delivery basis.
What happens to past losses in commodity derivative transactions which were regarded as speculative losses in earlier years? Can such losses be now set off against current commodity derivative trading profits? It may be possible to argue that since the losses arose out of identical transactions in earlier years as the transactions in which the profits are now being earned, the benefit of set off should be available. However, it may not be possible to set off commodity derivative trading losses of earlier years against other business profits of the current year, such as securities derivatives trading profits, since the nature of the transactions was different in the earlier years.
While the move to exclude commodity derivatives transactions from the definition of speculative transactions is a welcome one, the question arises as to whether there is any need to treat any exchange-based transaction as a speculative transaction. For instance, share trading transactions on recognized stock exchanges settled without delivery continue to be treated as speculative transactions, though share derivative transactions are not. Speculation on stock exchanges or commodity exchanges certainly adds to the depth of the market and is encouraged the world over. Improved monitoring by regulatory authorities reduces the scope for manipulation. With electronic trading and electronic audit trails readily available, is it not time now to exclude all exchange-traded transactions from the ambit of speculative transactions? One hopes that the Direct Taxes Code, which is supposed to be the tax law for the new millennium, and to be introduced in the monsoon session, incorporates such a business-friendly measure.
Gautam Nayak is a chartered accountant.