Sikkim tax free

Sikkim tax free

Subject: Economy

Section: Fiscal policy

Context:

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 as compared to some of the densely populated States that are seeing much less volume despite having a larger number of traders mainly due to the commodity market speculation by Sikkim resident traders and other states which use sikkim traders as proxy.

Cause of rise in commodity market speculation in Sikkim:-

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 However, in 2008 Sikkim’s tax laws were repealed which led to following measures by the Centre.

• Exemption from mandatory requirement of PAN-for investments in the securities market, commodity market and mutual funds, provided they gave a proof of residency, led to a decline in tax filings.
• Section 10 (26AAA by the Centre– Under this, the income accrued to the Sikkimese individuals in the State or by way of dividend or interest on securities from elsewhere was exempt from tax.

Concept:

Multi Commodity Exchange (MCX) as the name suggests is an exchange like BSE and NSE where commodities are traded. It is under the ownership of Ministry of Finance, Government of India.

It is a platform for commodity traders that facilitate online trading, settlement and clearing of commodity futures transactions, thereby providing a platform for risk management (hedging).

It was established in November 2003 under the regulatory framework of FMC (Forward Markets Commission).

In 2016, the FMC was merged with SEBI and MCX as an exchange that falls under the regulatory purview of SEBI.

It is India’s largest commodity derivatives exchange and located in Mumbai.

MCX offers options trading in gold and futures trading in non-ferrous metals, bullion, energy, and a number of agricultural commodities (mentha oil, cardamom, crude palm oil, cotton, and others).

Commodities traded include –

• Metal – Aluminium, Copper, Lead, Nickel, Zinc
• Bullion – Gold, Gold Mini, Gold Guinea, Gold Petal, Gold Petal ( New Delhi), Gold Global, Silver, Silver Mini, Silver Micro, Silver 1000.
• Agro Commodities – Cardamom, Cotton, Crude Palm Oil, Kapas, Mentha Oil, Castor seed, RBD Palm Olein, Black Pepper.
• Energy – Crude Oil, Natural Gas.

National Commodity & Derivatives Exchange Limited (NCDEX):

National Commodity & Derivatives Exchange Limited (NCDEX/ the Exchange) is an Indian-based agricultural product exchange with a large market share in the agricultural products segment.

It is composed of a Board of Directors with experience in the agricultural products market. The NCDEX main objective is to provide an exchange platform for market players seeking to trade in agricultural products.

It is a public limited company that was incorporated on 23 April 2003 under the Companies Act, 1956, beginning operations on 15 December 2003  and regulated by the SEBI.

Future and Option Transactions:

Derivatives are products whose value is derived from the value of one or more basic variables, which are called Underlying Assets. The underlying asset can be equity, index, foreign exchange (Forex), commodity or any other asset. Futures and options represent two of the most common forms of “Derivatives”.

• A Futures Contract is an agreement between buyer and seller to buy or sell an asset at a certain time in the future at a certain price. The contract has to be honored by both parties on the due date. This is used by traders or speculators who are engaged in arbitrage. Arbitrage means that the trader shall buy the stock at a low price today as he wants to sell it on a future date at a high price.

E.g: If a farmer is producing corn and it takes 1 year for his produce to develop. Currently the price of the corn is Rs. 100 per kg and after 1 year he wants to sell it but he doesn’t know the price of the corn. So he enters into a forward contract or a futures contract with a buyer to sell at say “Rs. 110 per kg” after 1 year.

Now the buyer has decided this rate based on some mathematical calculations which could involve current rate of the commodity, probable future date, risk free returns etc. So he is willing to take the risk and buy corn at Rs. 110 per kg from the producer. He might make a profit or loss but this cannot be predicted but the producer makes a decent profit.

The report on India’s Demographic Dividend released by industry body CII argues that the rise in India’s working age population is necessary but not sufficient for it to sustain the economic growth.

• An option is a contract that gives the buyer the Right but not the obligation to buy a commodity at a specified price at a specified future date.

If a farmer has 50 kg of corn and wants to sell it for Rs. 50000. Now a trader is interested to buy but he doesn’t have the money currently. So he enters into an “option contract” with the farmer. This contract states that the buyer shall have the Option to purchase the Corn at a specified price at a future date say 3 months. The buyer shall have to pay the price of the Option which is say Rs. 1000.

Now if the buyer returns after 3 months and the price of the corn is Rs. 5 lakh but he can still buy it for Rs. 50000 as he has bought a contract and wants to exercise his Right to buy. He thus makes a profit.

However if the Corn market crashes and the produce is worth only Rs. 5000 now he can exercise his Right to not buy the Corn from the farmer and the option contract expires. Thus he loses only the Rs. 1000 he invested in the Option.