Income Tax in Sikkim: Why Sikkim is Exempt from Income Tax?

Sikkim is the only state in India where residents are exempt from paying income tax, due to its unique historical and legal status. This exemption is based on the state's merger treaty with India in 1975 and is protected by Article 371(F) of the Indian Constitution as well as Section 10(26AAA) of the Income Tax Act, 1961. In this article, we will find out more about the rationale for granting this exemption and the legal provisions behind it.

Historical Context

Sikkim officially became the 22nd state of India on May 16, 1975, following its merger with the country. Before this, Sikkim was an independent kingdom governed by the Chogyal Dynasty, with its own set of laws, including its own tax system. One such law was the Sikkim Income Tax Manual of 1948. After the merger, the Indian government agreed to preserve many of Sikkim's existing laws, including its tax laws, ensuring the state retained certain unique legal provisions.

Why was Section 10(26AAA) Introduced under the Income-tax Act, 1961?

At the time of the 1975 merger, the Government of India guaranteed that Sikkim's existing laws and privileges would not be disturbed. This guarantee was given to avoid economic distress to Sikkimese citizens, who were not hitherto liable to Indian tax laws, and to ensure economic stability in the area. Section 10(26AAA) was enacted to legalise this exemption.

Income Exempted Under Section 10(26AAA) of the Income Tax Act

Section 10(26AAA) exempts Sikkimese individuals from paying income tax on the following types of income:

• Income from any source in the State of Sikkim: This includes any income generated from within Sikkim, irrespective of the type of income (e.g., salary, business profits, rental income, etc.).
• Dividend or interest on securities: Income from dividends or interest on securities is exempt if it accrues or arises in Sikkim.

Who Qualifies for this Exemption? 

The following assessees qualify for this exemption:

• Individuals who were recognised as Sikkimese subjects before April 26, 1975.
• Their direct descendants
• Holders of Sikkim Subject Certificates. 

Conclusion

Sikkim's special Article 371F and Section 10(26AAA) of the Income Tax Act status frees Sikkimese from paying income tax on income that they earn in the state. It protects Sikkim's unique historical and legal status after becoming part of India, ensuring that its people get economic stability as well.