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, has increased to 2,217 compared to 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 is 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
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 tax returns.
More than 95 per cent of the trading volume on 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 on MCX 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.
India’s tax haven
Sikkim, an erstwhile kingdom, was merged into India on condition 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However, when Sikkim’s tax laws were repealed in 2008, the Union Budget that year exempted the State’s residents from tax by inserting section 10 (26AAA). Since an old law was being replaced with the Income Tax Act 1961 of India, a section in the Act protected the special status given to Sikkim & “Sikkimese” as per Article 371(f) was inserted. Thus, under 26AAA, the income accrued to Sikkimese individuals in the State or by way of dividend or interest on securities from elsewhere were exempt. This, combined with exemption of PAN requirements and lack of tax filings, makes it nearly impossible to assess market speculators from Sikkim.
SEBI exempted PAN
Post-2008, market regulator SEBI exempted Sikkim residents from the mandatory PAN requirement for investments in the Indian securities market and mutual funds. They gave a proof of residency to the custodians and exchanges in Mumbai.
SEBI’s circular to exempt the PAN requirement for Sikkim individuals was issued following an order by the Sikkim High Court in 2007. In September 2015, the erstwhile commodity market regulator Forwards Market Commission that oversaw MCX was merged into SEBI. Hence, the SEBI rules of PAN exemption to Sikkim residents 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.
After demonetisation in 2016 and the imposition of GST in 2017, the flow of money to Sikkim has been higher than before, which effectively seems to have revamped speculative trading activities in Sikkim. Tax experts say that many grey areas, including practical and technical probabilities, have clouded the Income Tax Act in Sikkim.