Duty-free Sikkim, a haven for commodity market speculators

mumbai

Sikkim, a small state with a population of 6.58 lakhs, is now an abode for commodity market speculators thanks to its special tax haven status. . In February, Sikkim-based traders’ market share on the Multi Commodity Exchange (MCX) in Mumbai rose to 5.5 percent from zero just over a couple of years ago. Data shows that MCX witnessed a total volume turnover of over $110 billion on its platform during February, of which Sikkim’s share exceeded $6 billion. The number of state merchants, according to the unique customer code, has increased to 2,217 compared to 674 in February 2020.

By comparison, other densely populated states see much lower volume despite having a higher number of merchants. Bihar, for example, has 2.88 lakh traders but accounts for only 1.51 per cent of trading volumes. Kerala has 2.04 lakh traders, but the state’s volumes are around 1.45 per cent. Even Madhya Pradesh, which has 4.67 lakh merchants, accounted for just 3.2% of volumes in February.

The experts said Line of business that Sikkim’s newfound love of commodity speculation could be due to the exemption its residents get from the mandatory requirement for a Permanent Account Number (PAN), which allows them to skip filing tax returns.

More than 95 percent of MCX’s trading volume is concentrated in crude oil, gold, silver and other base metals, the price of which is determined primarily abroad. Thus, the activity of Sikkim-based traders on MCX was mainly speculative, experts say that traders in other states may be using Sikkim-based residents as a proxy to conduct these trades.

indian tax haven

Sikkim, an ancient kingdom, was merged with India on the condition that its ancient laws and special status, as provided for in Article 371(f) of the Constitution, remain intact. Therefore, the state followed its own Sikkim Income Tax Manual of 1948, which governs the tax laws. Under it, no resident was supposed to pay taxes to the Center.

However, when Sikkim’s tax laws were repealed in 2008, the Union Budget of that year exempted state residents from taxes by inserting section 10 (26AAA). Since an old law was being superseded by India’s Income Tax Act 1961, a section was inserted into the Act protecting the special status given to Sikkim and “Sikkimese” under Article 371(f). Therefore, under 26AAA, income earned by Sikkimen individuals in the State or in the form of dividends or interest on securities elsewhere was exempt. This, combined with the exemption from PAN requirements and the lack of tax returns, makes it almost impossible to assess Sikkim market speculators.

SEBI exempt PAN

After 2008, the market regulator SEBI exempted Sikkim residents from the mandatory PAN requirement for investments in the Indian stock market and mutual funds. They gave proof of residence to custodians and exchanges in Mumbai.

The SEBI circular to waive the PAN requirement for Sikkim people was issued following an order from the Sikkim High Court in 2007. In September 2015, the former commodity market regulator, the Advance Market Commission which supervised MCX, merged with SEBI. Therefore, PAN exemption SEBI rules for Sikkim residents could also have been available to commodity traders on MCX. Experts say this easing of the PAN requirement has now come in handy for Sikkim-based commodity market traders, who do not face the urgency of tax filings and thus enjoy status akin to that of Sikkim. a tax haven.

After the demonetization in 2016 and the imposition of GST in 2017, the flow of money to Sikkim has been higher than before, which seems to have renewed speculative trading activities in Sikkim. Tax experts say that many gray areas, including practical and technical odds, have clouded Sikkim’s Income Tax Law.

Published in

April 03, 2022

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