Under the new tax regime, annual earnings of up to ₹12 lakh are now completely tax free, but anyone earning above that has to hand a share to the government. Even so, there is one state in India where this entire calculation simply falls away. A person living here can earn crores or even billions of rupees, yet not owe a single rupee in income tax. That state is Sikkim, where about 95 percent of the population enjoys a 100 percent exemption from income tax.
This is exactly why Sikkim is often called India's very own tax haven. For the state's original residents, the concession is nothing new. It has been in place ever since Sikkim merged with India. Lately, however, questions have begun to surface, and the demand to scrap this special relief is growing louder. The accusation is that outsiders too are misusing the rule to dodge taxes.
A story that begins before independence
The reason Sikkim pays no tax traces all the way back to 1948. In that period the Chogyal ruler of Sikkim issued an income tax manual under which no tax of any kind was collected from the people of the state. Later, in 1975, when Sikkim fully merged with India, a condition was laid down that the old tax exemption enjoyed by its people would continue exactly as before.
The Indian government accepted that condition. Sikkim was then granted special status under Article 371-F of the Constitution. On that basis, Section 10(26AAA) of the Income Tax Act, 1961 grants an income tax exemption to the original residents of Sikkim.
How 95 percent of the population came to qualify
In the beginning, the exemption applied only to those who held a Sikkim Subject Certificate. Only these original residents were freed from paying income tax. But a landmark Supreme Court ruling changed the picture entirely, bringing 95 percent of the state's population within the ambit of the exemption.
In its order, the court made clear that people of Indian origin who had settled in Sikkim up to 26 April 1975, that is just one day before the merger with India, would also be treated as original residents of the state. It was after this ruling that the reach of the income tax exemption widened to cover a much larger population, and it remains in force to this day.
