Sikkim connection of Demonetisation Scheme and Black Money Conversion. No income tax payable by Sikkimese person u/s 10(26AAA)

Sikkim connection of Demonetisation Scheme Tax Evasion. No income tax payable by Sikkimese person u/s 10(26AAA) of Income Tax Act, 1961 

Post demonetisation and withdrawal of old bank notes of the denomination of Rs. 500/- and 1000/- as reported, the Income Tax Department is all set to tighten the noose around the tax evaders relentlessly trying to somehow find a way to change the colour of their black money.

However, a close look at Google webmaster analytics suggest that the word “Sikkim” has suddenly become one of the frequently searched keyword at Google search engine in India.

So, what is mystery of newly found love for “Sikkim” and the connection between “Sikkim” and recent demonetisation scheme? Do they tax evaders have found a way to bypass impending the rigors of the Income Tax?

It is notable that recently a notice by income tax department for cash deposit in State Bank of Sikkim has caught much attention. To discover answers to all these questions one need to have a look at the following facts which may lead to the key to the Sikkim google search mystery.

Income Tax in Sikkim – Background
Sikkim became part of India in April 1975. The Constitution (Thirty sixth Amendment) Act, 1975 inserted Article 371-F in the Constitution of India, in terms of which not all the laws of India were extended to the new State of Sikkim.

Under Article 371-F (k) all laws in force immediately before the appointed day, i.e., 26th April, 1975, in the territories comprising the State of Sikkim or any part thereof were to continue to be in force therein until amended or repealed by a competent legislature or other competent authority.

The Income Tax Act, 1961 was not made straightaway applicable to the State of Sikkim. Till such extension of the Act to Sikkim by a notification issued under Article 371- F (n), income tax was to be charged and collected under the Sikkim State Income-tax Manual 1948 (Sikkim Manual 1948). The recovery of tax was under the scheme of the Sikkim (Collection of Taxes and Prevention of Evasion of Payment of Taxes) Act, 1987.

By a Notification No. S.O. 1028 E dated 7th November, 1988 issued under Article 371-F(n) of the Constitution, the Act, the Wealth Tax Act, 1957 and the Gift Tax Act, 1958 were extended to the State of Sikkim. In terms of para 2 of the said Notification, the Central Government appointed, by Notification S.O. 148 E dated 23rd February 1989, the 1st of April, 1989 as the date on which the Income Tax Act, 1961 would come into force in the State of Sikkim in relation to the previous year relevant to the AY commencing on the 1st day of April, 1989. In other words, Income Tax Act, 1961 was made applicable to the State of Sikkim from Assessment Year 1989-90.

However, subsequently by virtue of Section 26 of the Finance Act, 1989 the applicability of the Income tax Act, 1961 to the State of Sikkim was postponed for one year and it became applicable from AY 1990-91.

Taxation of Income of Sikkimese Individual:
While other categories of assessees in Sikkim are liable to income tax w.e.f.  AY 1990-91, in case of an individual being a Sikkimese, by virtue of section 10(26AAA) of the Income Tax Act, 1961, income tax is not applicable on any income which accrues or arises to him/her-

• from any source in the State of Sikkim; or
• by way of dividend or interest on securities

This exemption is however not applicable to a Sikkimese women who on or after 1^st April, 2008 had married not Sikkimese.

The above exemption has been granted by the Finance Act, 2008 by inserting the new section 10(26AAA) with retrospective effect from AY 1990-91.

Unlocking the Sikkim Google Search Mystery-
Thus, it is no more a mystery why few people have suddenly found a new love for Sikkim. Since, no income tax is payable on any income earned by a Sikkimese individual from any source within Sikkim, such individuals may be of great interest for those looking for converting their black money and yet avoid scanner of the Income Tax Department.

I hope Income Tax Department/Vigilance Agencies are also keeping a close watch on the spurt of visit/calls to Sikkim so that the provisions of section 10(26AAA) are not misused by the tax evaders.