Here’s Why Sikkim Residents Don’t Have to Pay Income Tax

New Delhi: As the July 31 deadline for filing Income Tax Returns (ITR) looms over much of India, Sikkim remains notably exempt from the annual tax frenzy. This unique exemption stems from Section 10(26AAA) of the Indian Income Tax Act, a special provision that has preserved the state's distinct tax status since its merger with India.

Historically, before joining India on April 26, 1975, Sikkim operated under its own tax system, and its residents were not subject to the Indian Income Tax Act. To maintain continuity, the Indian government exempted Sikkim from income tax, a status codified in the Union Budget of 2008. This exemption was designed to honor Sikkim’s special status under Article 371(f) of the Indian Constitution, which aimed to protect the region’s pre-existing tax structure.

However, Section 10(26AAA) has faced legal scrutiny. In 2013, the Association of Old Settlers of Sikkim challenged the constitutional validity of this provision before the Supreme Court. They contended that the definition of "Sikkimese" under the law unfairly excluded certain groups from the tax exemption:

1. Indians who settled in Sikkim before its merger but whose names were not on the Sikkim Subjects Register.

2. Sikkimese women who married non-Sikkimese men after April 1, 2008.

The Supreme Court has addressed these concerns. A two-judge bench ruled that excluding Sikkimese women married to non-Sikkimese men post-April 1, 2008, was discriminatory and violated constitutional equality rights. Additionally, the court acknowledged the unfairness in excluding Indians settled in Sikkim before the merger whose names were not on the register.

To rectify this, Justice MR Shah struck down the discriminatory rule, while Justice BV Nagarathna employed Article 142 of the Constitution to direct the government to amend Section 10(26AAA) to include these individuals. Until the law is formally updated, Justice Nagarathna ordered that the tax exemption continue for the affected groups.