*Tax-free Sikkim, a haven for commodity market speculators – The Hindu BusinessLine

Clipped from: https://www.thehindubusinessline.com/todays-paper/tax-free-sikkim-a-haven-for-commodity-market-speculators/article65288019.ece

Many grey areas have clouded the Income Tax Act in the tiny State: experts

Sikkim, a tiny State with a population of 6.58 lakh, is now an abode for commodity market speculators, thanks to its special tax haven-like status.

In February, the market share of Sikkim-based traders on the Multi Commodity Exchange (MCX) in Mumbai climbed to 5.5 per cent from nil just over a couple of years ago. Data show that MCX witnessed a total volume churn of over $110 billion on its platform during February, of which Sikkim’s share stood at over $6 billion. The number of traders from the State, based on unique client code, increased to 2,217 in February compared with 674 in February 2020.

In comparison, other densely populated States are seeing much less volume despite having a larger number of traders. Bihar, for example, has 2.88 lakh traders, but accounts for only 1.51 per cent of the trading volumes. Kerala has 2.04 lakh traders but the volumes from the State are around 1.45 per cent. Even Madhya Pradesh, which has 4.67 lakh traders, accounted for only 3.2 per cent of volumes in February.

PAN exemption

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

More than 95 per cent of the trading volume on the MCX is concentrated in crude oil, gold, silver and other base metals, the price discovery of which mainly happens abroad. Hence, the activity of Sikkim-based traders was primarily speculative, experts say, adding that traders in other States may be using Sikkim-based residents as a proxy to carry out these trades. Sikkim, an erstwhile kingdom, was merged into India on condition that its old laws and special status, as envisaged in Article 371(f) of the Constitution, remain intact. Thus, the State followed its own Sikkim Income Tax Manual 1948, which governed the tax laws. Under it, no resident was supposed to pay taxes to the Centre. However, when Sikkim’s tax laws were repealed in 2008, the Union Budget exempted the State’s residents from tax by inserting section 10 (26AAA). Under this, the income accrued to Sikkimese individuals in the State or by way of dividend or interest on securities from elsewhere was exempt from tax. This, combined with exemption of PAN requirements and lack of tax filings, makes it nearly impossible to assess market speculators from Sikkim.

Post-2008, SEBI exempted Sikkim residents from PAN requirement for investments in the securities market and mutual funds, provided they gave a proof of residency. The exemption was made following an order by the Sikkim High Court in 2007. In September 2015, the erstwhile commodity market regulator Forward Markets Commission that oversaw MCX was merged into SEBI. Hence, the SEBI rules of PAN exemption could have also become available to the commodity traders on MCX. Experts say this laxity of PAN requirement has now come in handy for Sikkim-based commodity market traders, who face no urgency of tax filings and thus enjoy a tax haven-like status.

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