Why are Sikkim Natives exempt from paying Income Tax? Know the Reason

The citizens of India are liable to pay income taxes under the Income Tax Act, of 1961. However, the original inhabitants of Sikkim are exempted from payment of Income tax under section 10(26AAA) of the Income Tax Act, 1961. All the states of the Northeast have received a special status under Article 371A of the Indian Constitution. This is the reason that people from other parts of the country are prohibited from buying property in the state. For the unversed, on January 13, the Supreme Court held that the benefit of tax exemption provided in Section 10 (26AAA) shall be extended to all Sikkimese people.

The bench of Justices M R Shah and B V Nagarathna passed the law that old Indian settlers, irrespective of whether his/her name is recorded in the register under the Sikkim Subjects Regulations, 1961 or not, are entitled to tax exemption.

Earlier, the law was only limited to those who possessed a Sikkim subject certificate and their descendant’s certificate. Following this, he was considered an Indian citizen under the Sikkim Citizenship Amendment Order, of 1989. But after the Supreme Court granted the status of Sikkimese natives to the people of India who were living in Sikkim till April 26, 1975 (a day before the merger of Sikkim with India), 95 per cent of the population was excluded from tax liability.

Section 10 (26AAA) aims to reduce the burden on taxpayers by granting tax exemptions. Calculating an “exempted income,” or income that is excluded from total income calculations has been focused on in this section.

Sikkim was established in 1642 and as per the Indo-Sikkim Peace Agreement in the year 1950, Sikkim became the protected state of India. In 1975, the state was merged with India. At that time, Sikkim’s ruler was Chogyal. He granted the Sikkim Income Tax Manual in the year 1948. Thus, when India was merged with India, the terms of income tax exemption for Sikkimese people were imposed on them. Taking this into consideration, section 10 (26AAA) of the Indian Income Tax Act has provided an exemption from income tax to the native residents of Sikkim.

The people of Sikkim have been getting tax exemptions since 1950. It is held that old settlers before the merger of Sikkim with India are recorded in the register maintained under Sikkim Subjects Regulations. Section 10 (26AAA) was inserted into the Income Tax Act, 1961, the date on which the IT Act was made applicable in Sikkim.

Recently, Finance Minister Nirmala Sitharaman had the nation’s attention on 01 February 2023 as she presented her 5th national budget. In a recent development, she reduced the number of tax slabs from six to five. However, Sikkim tax laws remain unchanged.

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