No income tax: Why residents of THIS Indian state exempted from paying taxes?

• February 16, 2023
• CA Chandan Agarwal's Office

In one of the Indian states, the residents are exempted from paying income tax

It is a known fact that every taxpayer in India has to mandatory file income tax every year. The Ministry of Finance is the prime authority that announces changes in the income tax slab during the country’s annual budget which is presented on 1 February. However, there’s one Indian state that is exempted from paying income tax–it is Sikkim.

Sikkim, an erstwhile kingdom was merged into India on the condition that its old laws and special status will remain intact. Thus the small hilly northeastern state followed its own Sikkim Income Tax Manual 1948, which governed the tax laws since 1975. Under this rule, no resident of Sikkim was supposed to pay taxes to the Centre.

But in the year 2008, Sikkim’s tax laws were repealed. The Union Budget that year exempted the State’s residents from tax by inserting section 10 (26AAA). A section in the Act protected the special status given to Sikkim and “Sikkimese” as per Article 371(f) was inserted. In 2008, the Union government granted I-T exemption to over 94% of Sikkimese people but left out the 500-odd families who had refused to give up their Indian citizenship.

Under Section 10 (26AAA), the income accrued to Sikkimese individuals in the state or by way of dividends or interest on securities from elsewhere was exempted.

Besides, market regulator Sebi also exempted Sikkim residents from the mandatory PAN requirement for investments in the Indian securities market and mutual funds.

Meanwhile, the Supreme Court of India held that the benefit of tax exemption provided in Section 10 (26AAA) shall be extended to all Sikkimese people, including those who permanently settled in the state prior to the merger of Sikkim in India.

Before SC’s judgment, the income tax exemption excluded “old Indian settlers”, who had permanently settled in the state before 1975, when Sikkim merged with India. The Supreme Court verdict was in response to a petition filed by the Association of Old Settlers of Sikkim (AOSS) in 2013, challenging the denial of I-T exemption by excluding them from the definition of Sikkimese even though they have been living in the state since the time it was an independent kingdom.

The court directed the state to amend the Explanation to Section 10 (26AAA) to include a clause to extend the exemption from payment of income tax to all Indian citizens domiciled in Sikkim on or before April 26, 1975.

Besides, the apex court has also struck down the exclusion from the exempted category Sikkimese woman who marries a non-Sikkimese man after 1st April 2008 as being “ultra vires Articles 14, 15 and 21 of the Constitution of India”.

Source: https://www.livemint.com/news/india/no-income-tax-why-residents-of-this-indian-state-sikkim-exempted-from-paying-taxes-11676505925327.html