Need clarity on tax treatment

Speculation & Hedging In Commodities Mkt Have Not Been Defined Properly

The more you earn, the less you keep,

And now I lay me down to sleep.

I pray the Lord my soul to take,

If the tax-collector hasn’t got it before I wake.  Ogden Nash 

As far as commodity futures are concerned, the grey area on the treatment of income for “speculation” or “business” remains discretionary in the hands of income tax officials. According to income tax laws, commodity exchanges are not notified derivative exchanges unlike stock exchanges. The income from commodities futures is considered speculation income in normal course. The roles of regulators, exchanges and participants in taking a collective initiative has been inadequate for lobbying with the ministry. While focused representation has resulted in corrective actions in several countries, the initiative by the industry in India on this account has been near negligible.

It has often been argued that in case a transaction done on a commodity exchange is in the nature of a hedging transaction, then the transaction will not fall in the ambit of speculative nature. In some cases when a transaction has been backed by stocks of the relevant commodity or a purchase order and the futures transaction has been entered with an intention to hedge the loss on account of price fluctuations, then the “speculative income” criterion has not been imposed on the parties.

If bidders in tenders enter a hedge transaction during the price bid on a commodity futures exchange to protect their bid price, the treatment of a successful bidder and an unsuccessful bidder may be interpreted in two ways while the intention of both had been to protect the price risk.

One of the significant differences between stock futures and commodity futures is that commodity futures may be converted into delivery while stock futures is compulsorily closed out without any conversion into delivery. However, the commodity futures market should not be seen as a delivery platform. Based on the intention of the parties entering into such transactions, one can say whether it is speculative or not.

The confusion in the current scenario is due to the lack of definition of speculation. Speculation is inevitable in any market but problems emanate from the fact that the commodity regulator in India does not seem to acknowledge in public posturing that such activity exists in this market. The speculative and the hedge profiles of the participants have not been defined properly. Some of the hedge limit-exempted entities have in the past indulged in speculative activity and have gone scot-free because of the lack of the regulatory monitoring. But why blame our regulators, even the activities of the “Wall street refiners” have gone unnoticed by CFTC.

We are talking of multiple exchange scenarios. Is it not the time for the industry to have clarity on tax treatment? Who will bell the cat? If death and tax are only the certainties in life then let us ascertain how income tax laws should be distinguishing between speculation and genuine hedging in the commodities market. Unless the mystery is resolved soon, the futures market will continue to be treated as speculative activity which will be unfortunate.

Published in The Economic Times