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More tax on forex derivative loss
April, 03rd 2010

Forex derivatives are back in the news and this time, for tax trouble! An internal circular issued last week by the Central Board of Direct Taxes (CBDT) will result in higher taxes for companies that have unrealized foreign exchange derivative losses, reports.

Last week, the CBDT issued a circular which said the outstanding losses are 'contingent'.  They are not deductible and have to be added back to taxable income.

Rostow Ravanan, CFO, MindTree, said, "Many of us in the industry -- IT and non-IT companies -- and many of the export-oriented industries have taken a huge hit on the portfolio and have made mark-to-market provisions. Now, if I have to go back and add that back, returns for that year have already been filed, advance tax for that year has already been paid so on and so forth.

Now, if I got back and do the calculation and my tax liability increases, will I be in default? Will I be accused of having short paid my taxes? Would interest and penalties apply? Those are all the problems you are now trying to grapple with."

As per the CBDT's maxim, a forex derivative transaction is 'speculative' and cannot be set-off against business income.

Commenting on the CBDT circular, experts stated that it is not binding on tax payers. They expect significant litigation going forward.

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