'Derivative trading is not speculation'

With systemic and technological changes lending adequate transparency in stock exchanges, the Budget 2005-06 proposed to amend the income tax act to provide that trading in derivatives in recognised bourses will not be deemed as a speculative transaction.

The proposed amendment, to take effect from April 1, 2006, also sought to notify relevant rules regarding conditions to be fulfilled by recognised stock exchanges in this regard.

Under the existing provisions under clause 5 of section 43 of the act, a transaction in any  commodity, including sale and purchase of shares, is deemed to be a speculative trading if it is not settled through actual delivery.

The budget also proposed to amend sub-section (4) of section 73 of the act to reduce the period of carry forward of speculation losses from eight assessment years to four.

Under the existing provisions, the unabsorbed speculation losses are allowed to be carried forward for 8 years for set-off against speculation profits in subsequent years.

These restrictions were essentially designed as an anti-evasion measures to prevent claims of artificially generated losses in the absence of appropriate institutional infrastructure.

Recent systemic and technological changes introduced by stock markets have resulted in sufficient transparency to prevent fictitious losses through artificial transactions or shifting of incidence of loss from one person to another.

The screen-based computerised trading provides for an excellent audit trail, according to the Budget document.

"Therefore, the present distinction between spectualtive and non-speculative transactions, particularly relating to derivative, is not required," the document said.