The Central Board of Direct Taxes (CBDT) has rejected the National Stock Exchange’s request to grant ‘recognised association’ status to the commodity derivatives segment, citing violation of certain Securities and Exchange Board of India (SEBI) norms and Income Tax rules.
The approval was sought by exchanges so that traders could get tax benefits by using theplatform. Derivatives trading in recognised exchanges is not treated as speculation. According to Sec 43(5) of the Income Tax Act, any derivative transaction entered into at a recognised stock exchange is not treated as speculative, and losses can be set off against normal business profit. According to sources, the CBDT observed that certain changes are required to ensure client code modification in genuine cases. To be eligible recognised exchanges, they should satisfy the conditions prescribed in the Income Tax rules, which essentially say they should be SEBI-compliant, should ensure client code modification in genuine cases only as they have a significant tax evasion potential, and that vigilance mechanism should be strong.
“The applicant is not fulfilling the conditions mentioned at rule 6DDC(i) (non-fulfilment of conditions as specified in SEBI’s approval letter dated 19.09.18 and rule 6DDC(v) (lack of mechanism in place to verify whether only genuine errors are modified) and the applicant is also in the process in implementing changes in its system which has to be completed first for the purpose of effective surveillance of transactions happening in its platform,” a communication from CBDT to NSE said.
Rule 6DDC deals with recognised exchange status. NSE launched commodity derivatives trading in October 2018 and currently offers contracts in gold, silver and brent crude.
“Therefore, it may not be appropriate to grant recognition to the applicant as a ‘recognised association’ for the purpose…at this stage,” it said.
Following the CBDT’s decision, NSE has decided to re-file the application.
“We have filed the application. It is under process,” a NSE spokesperson said.
NSE has also discussed the matter with other exchanges and SEBI. All the exchanges are expected to issue a circular shortly in which brokers will be asked to mention the reason for client code modification in institutional trades as well. In April 2012, SEBI had warned NSE “to be more cautious and perceptive in discharge of its regulatory duties” after a regulatory probe, initiated at the behest of the Department of Revenue, found that there were very high instances of client code modifications, with March 2010 alone accounting for such modifications to the tune of nearly ₹55,470 crore.
“NSE has taken a laid-back attitude towards the problem and either totally ignored or perfunctorily imposed minor penalties to the brokers. It failed to apply its mind to the unusualness of the happenings. I therefore find that NSE acted negligently in discharge of its regulatory duties,” stated the SEBI order issued on April 2, 2012.
