On May 16, 1975, Sikkim became the 22nd state of the Union of India. Before this, Sikkim had its own tax system. The state was allowed to adhere to its own tax structure even after it merged into India.
The Indian state whose residents don’t pay income tax. (Getty Images)
New Delhi: While people in other states raced to file their Income Tax Returns (ITR) as the deadline inched closer, there was one state which was untouched by the maddening rush. Sikkim is the only state which has been exempted from income tax. Wonder why?
Why Sikkim is exempted from income tax?
It’s because the state falls under a special provision under Section 10 (26AAA) of the Indian Income Tax Act. Since the hill state joined the Indian Union, Sikkim has been excluded from paying income tax. It was given exemption so that state’s existing tax structure remains intact. This tax structure has been there in the state even before it amalgamated with India.
On May 16, 1975, Sikkim became the 22nd state of the Union of India. Before this, Sikkim had its own tax system. The state was allowed to adhere to its own tax structure even after it merged into India. The residents of the state were not subject to the Indian Income Tax Act. And to maintain the status quo, Sikkim was given special exemptions from income tax.
What rule exempts the state from income tax?
In 2008, the Union Budget repealed the Sikkim Tax Act, exempting Sikkimese from paying income tax through Section 10 (26AAA) of the Income Tax Act, which said that income earned by Sikkimese from sources within Sikkim or from dividends or interest on securities is exempt from income tax. This provision was made to preserve Sikkim’s special status under Article 371(f) of the Indian Constitution.
A “Sikkimese” was defined as one who was domiciled in Sikkim immediately before its merger with India, among other criteria.
What were the legal challenges?
It was in 2013 that the Association of Old Settlers of Sikkim and others contested before the Supreme Court the constitutional validity of Section 10 (26AAA) of the Income-tax Act, 1961. They challenged the exclusion of “old Indian settlers” who had settled in Sikkim before its 1975 merger with India.
In response, the apex court directed the state to amend Section 10(26AAA) and include all Indian citizens domiciled in Sikkim as of April 26, 1975, and extend the exemption of tax.
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