As the rest of India scrambled to meet the July 31 deadline for filing Income Tax Returns (ITR), one state remained blissfully exempt from the tax frenzy – Sikkim. Thanks to a special provision under Section 10 (26AAA) of the Indian Income Tax Act, Sikkim has been spared from paying income tax since its merger with India. This exemption was granted to preserve the state’s existing tax structure, which was in place before it joined the Indian Union.

Prior to its accession to India, Sikkim had its own tax system, and its residents were not subject to the Indian Income Tax Act. The Government of India, to maintain the status quo, granted Sikkim special exemptions from income tax.

Sikkim Income Tax Exemption Act 

The Union Budget of 2008 repealed the Sikkim Tax Act and exempted Sikkim residents from paying income tax through Section 10(26AAA) of the Income Tax Act. This move was made to preserve Sikkim’s special status under Article 371(f) of the Indian Constitution.

Legal challenges

In 2013, the Association of Old Settlers of Sikkim and others challenged the constitutional validity of Section 10(26AAA) of the Income-tax Act, 1961, before the Supreme Court of India. They argued that the definition of “Sikkimese” under this section unfairly excluded two categories of individuals from tax exemption: 

1. Indians settled in Sikkim before it merged with India on April 26, 1975.
2. Sikkimese women who married non-Sikkimese men after April 1, 2008.

As per Section 10(26AAA), introduced by the Finance Act of 2008 (effective retroactively from the tax year 1989-90), the term “Sikkimese” included:

1. Individuals listed in the Sikkim Subjects Register before April 26, 1975.
2. Individuals added to the register by government orders in 1990 and 1991.
3. Individuals whose close relatives (father, husband, paternal grandfather or brother) are listed in the register.

This definition covered most of Sikkim’s population but excluded around 1 per cent – Indians who settled in Sikkim before April 26, 1975, and chose not to give up their Indian citizenship, so their names were not in the Sikkim Subjects Register. 

The taxpayers argued this exclusion was unfair and discriminatory. They wanted the tax exemption to include all individuals settled in Sikkim before April 1, 1975, whose names were not in the register. They also argued that denying the exemption to Sikkimese women marrying non-Sikkimese men after April 1, 2008, was discriminatory.

Supreme Court ruling

A two-judge bench of the Supreme Court ruled it was indeed discriminatory to deny tax exemptions to Sikkimese women married to non-Sikkimese men after April 1, 2008. This rule did not apply to Sikkimese men who married non-Sikkimese women or to Sikkimese women who married non-Sikkimese men before this date. The Court found this rule unfair and a violation of the constitutional right to equality. 

For Indians settled in Sikkim before April 26, 1975, whose names are not in the Sikkim Subjects Register, the judges agreed that the denial of exemption was discriminatory but suggested different solutions. Justice MR Shah struck down the rule denying the exemption, while Justice BV Nagarathna used Article 142 of the Constitution to direct the Centre to add a clause to Section 10(26AAA) to grant tax exemptions to these individuals. Until the law is amended, she ordered that these individuals should still get the tax exemption under Section 10(26AAA).

Gangtok:

All tourist vehicles entering Sikkim will now have to mandatorily carry a large garbage bag, according to an official order.

The decision has been taken to ensure community participation towards achieving the goal of environmental sustainability, said the order issued by the Tourism and Civil Aviation Department.

It will be the responsibility of the tour operators, travel agencies, and vehicle drivers to inform the traveller about the use of garbage bags for waste disposal, it said.

Random checks of tourist vehicles would be conducted to ensure compliance and any vehicle found violating the order, will be penalised, it added.

Awareness campaigns about cleanliness are being carried out to educate tourists about waste management and environmental sustainability, officials said.

Sikkim, which is India’s least populated state with over 6 lakh residents, gets more than 20 lakh visitors every year for its picturesque Himalayan destinations, they said. 

(Except for the headline, this story has not been edited by NDTV staff and is published from a syndicated feed.)

Guwahati:

One person was killed today when a taxi travelling on National Highway-10 from Lingi to Singtam in Sikkim’s Gangtok was hit by a large boulder. The accident was caused due to a landslide.

The incident comes amidst the monsoon’s severe impact on Sikkim, with NH 10—vital for connecting the state with the rest of the country—facing intermittent closures due to landslides and rising Teesta River levels. The alternative route via Kalimpong and Darjeeling districts is also frequently disrupted by landslides.

Sikkim’s Pakyong Airport has been non-operational since the start of the monsoon season, and helicopter services remain cancelled throughout this period.

Despite the challenges, the Sikkim government continues to press for NH 10’s maintenance by central agencies, emphasizing its critical role in national security and facilitating Army movements. This demand was reiterated by Chief Minister Prem Singh Tamang in discussions with Prime Minister Narendra Modi and other Union Ministers.

Moreover, NH 10 and the Teesta River banks are still recovering from the damage caused by a glacial lake outburst flood in October last year. While state-led mitigation efforts are underway, ongoing rains have impeded restoration work.

The authorities in North Bengal and Sikkim have issued multiple warnings regarding incessant rainfall and travel advisories, underscoring the precarious conditions faced by commuters and residents alike during this challenging period.

New Delhi:
The verdict of Himalayan states Sikkim and Arunachal Pradesh will be out today, as the tenure of their legislative assemblies are being counted.

Here are top 10 points on this big story:

Sikkim Chief Minister PS Tamang on Monday announced two housing schemes for those who lost their homes in the flash flood that ravaged the northern part of the Himalayan state.

The state government will also provide Rs 10,000 each to students who lost their school materials and Rs 5,000 more if they live on rent far from home, Mr Tamang said.

The flash flood, which was triggered by a cloudburst in the early hours of October 4, has left at least 38 people dead and affected over 88,000 people. 

(Except for the headline, this story has not been edited by NDTV staff and is published from a syndicated feed.)

Kolkata:

The Indian Air Force has started humanitarian aid and disaster relief operations in Sikkim, devastated by a flash flood in Teesta river, a Defence official said on Monday.

Thirty-three bodies, including those of nine army jawans, have been recovered so far from slush and debris left behind by the flash flood that devastated Sikkim, while the search continued for more than 105 people who are still missing, officials in the Himalayan state said.

The Jalpaiguri district administration in adjoining northern West Bengal has said 40 bodies were fished out of the river downstream.

Officials warned that the figures reported by Sikkim and West Bengal may have some duplication even as both states were keeping each other informed of their respective rescue efforts.

“The IAF commenced its humanitarian aid and disaster relief operations from Air Force Station Bagdogra for the flood victims of Sikkim on the Air Force Day,” the Defence official said.

The air force started carrying Garud commandos, communication equipment, fuel, medicines, search and rescue equipment by Chinook and MI 17 V5 helicopters to the state from Sunday, he said.

Stating that the Eastern Air Command is coordinating the humanitarian aid and disaster relief (HADR) operations, the official said that the IAF is fully geared up to reach out to the victims of the flash floods that left the small Himalayan state in disarray.

“The helicopters are kept ready to transport the stranded tourists and local residents to safer locations as soon as the weather conditions improve,” the Defence official said.

The Met Department on Monday forecast light to moderate rain at many places accompanied by thunderstorms and lightning in sub-Himalayan West Bengal and Sikkim over the next five days.

Meanwhile, the Jalpaiguri district administration in West Bengal has said they have so far recovered 40 bodies from the downstream of the Teesta River. Officials said 10 bodies have so far been identified.

Since bodies are still being found from the slush and debris left behind by Teesta in both states, the exact toll will be clear in the next few days after collating the details, officials said.

The flash flood, which was triggered by a cloudburst in the early hours of Wednesday, has affected 60,870 people. So far, 2,563 people have been rescued from different areas of the state, most of which have been cut off from the rest of the country, according to the Sikkim State Disaster Management Authority (SDMA). 

(Except for the headline, this story has not been edited by NDTV staff and is published from a syndicated feed.)

Guwahati:

With North Sikkim cut off by a raging Teesta river, rescue efforts are in progress on a war-footing. A temporary bamboo bridge has been built at Chungthang connecting it to Pegong.

Beyond Pegong, roads and bridges connecting north Sikkim to the rest of the state has been washed away.

After the devastation, Chungthang was completely cut off from Pegong.

The construction of the temporary bridge was a priority, as it will enable transportation of stranded tourists and locals to the other side from Chungthang.

People involved in the Project Swastik of the Border Roads Organisation have established the first composite footbridge over Teesta river at Chungthang, facilitating the rescue of 50 stranded tourists from disaster-hit Lachen Valley today, BRO sources added.

Braving the harsh weather conditions, BRO personnel of Project Swastik have established first composite foot crossing over Teesta River at Chungthang facilitating rescue of 50 stranded tourists from disaster affected Lachen Valley@SpokespersonMoD@adgpi@BROindia@PIBGangtokpic.twitter.com/ZMybJktAqx

— PRO, GUWAHATI, MINISTRY OF DEFENCE, GOVT OF INDIA (@prodefgau) October 8, 2023

The Indo-Tibetan Border Police rescued 56 civilians at Chungthang via a zip line. Of the 56 civilians rescued, there were 52 men and four women.

Sikkim:

Sikkim Chief Minister Prem Singh Tamang has blamed “inferior construction” by the previous state government for the destruction of the Chungthang Dam – a 1200 MW hydroelectric project washed away Wednesday in flash floods triggered by a glacial lake outburst over South Lhonak Lake. Mr Tamang told NDTV “sub-standard” work by the earlier Sikkim Democratic Front government, which was in power for over 24 years, is to blame for a tragedy that has claimed 19 lives so far.

“Dam is fully damaged… washed out. Disaster in the lower belt is because of this. Yes… there was a cloudburst and the Lhonak Lake burst… but, because of inferior and sub-standard construction by previous government, the dam broke and even more floods hit Lower Sikkim with violence,” he said.

The Chief Minister also said “major damage” had been reported from across the state.

“Major damage in areas like the Chunthang Dam but do not know full extent because areas in Lower Sikkim are still cut-off. Roads have been washed out, bridges destroyed. 13 bridges over Teesta have been washed away,” Mr Tamang explained.

READ |A Decade Before Sikkim Flash Floods, There Were Warnings

He said his government is working with the centre to airlift relief and rescue teams but bad weather had hampered operations on Thursday. “Today weather has improved, so we will step up efforts.”

“First priority are 3,000 stranded tourists,” Mr Tamang said, “We will rescue them first.”

READ |19 Dead, 3,000 Stranded In Sikkim, Fresh Alert Issued: 10 Points

On rebuilding efforts, the Chief Minister said, “We will set up a team of technical experts and proceed based on their inputs. But, I have to tell you, this is a major disaster. It is major.”

Mr Tamang said he had spoken to Prime Minister Narendra Modi, Union Home Minister Amit Shah and Defence Minister Rajnath Singh, and that they had offered all possible support. Shortly after the disaster the Prime Minister posted on X (formerly Twitter), “Spoke to Sikkim CM… Assured all possible support… pray for safety and well-being of all those affected.”

At least 19 people, including seven soldiers, died in the floods that ravaged Sikkim early Wednesday, sweeping away farms and villages. More than 100 people, including 15 Army personnel, are still missing. So far around 2,500 people have been evacuated and nearly 6,000 shifted to relief camps.

READ | ISRO’s Satellite Images Show How Sikkim’s Lhonak Lake Burst, Caused Floods

The Sikkim government has warned of another potential glacial lake outburst; Shako Cho Lake near Lachen is at risk and authorities have begun evacuating residents from surrounding areas.

READ |Mortar Shell Carried By Floodwaters Explodes In Bengal’s Jalpaiguri, 2 Dead

The government has also warned of “stray explosions” after the floods hit an Army ammunitions depot. Two people have already died after they were hit by explosives that were washed away.

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New Delhi:

Nearly 65 per cent of Sikkim’s Lhonak Lake – around 105 hectares – has been drained after a cloudburst forced the water body to overflow and trigger flash floods in the Teesta River.

Temporal satellite images (referring to before-and-after) released Wednesday evening by space agency ISRO show dramatic changes in the volume of water in the lake; photos taken on September 17 and September 28 show the bullet-shaped lake holding 162.7 and 167.4 hectares, respectively.

An image taken at 6 AM Wednesday morning – after the cloudburst and flash flood wreaked havoc in the state, washing away large parts of a hydroelectric project and leaving 49 people missing – shows the lake reduced by more than half and with only an estimated 60.3 hectares of water in it.

READ | Cloudburst In Sikkim Triggers Flash Floods, Soldiers Among Missing

“Temporal changes in the lake area – as on September 17, September 28, and October 4. It is observed the lake is burst and about 105 hectares has been drained out, which might have created a flash flood downstream… will continue monitoring the lake using the satellite data,” ISRO said.

The floods have killed at least eight people, news agency PTI said citing unnamed officials who also said three bodies were found hundreds of kilometres downstream in north Bengal. The other five were found in the state’s Golitar and Singtam areas, Gangtok district officer Mahendra Chettri said.

23 soldiers are among those missing. The Army and local officials have launched a joint rescue op.

45 people have been rescued, of whom 18 have suffered injuries, PTI reported.

There was heavy rainfall in Sikkim overnight; the weather department said the northern part of the state, where the lake is, received nearly 50 mm from Sunday – 48 per cent more than normal.

READ | Parts Of Teesta River Dam Washed Away After Cloudburst In Sikkim

Other parts of the state received even more rain; eastern areas saw 315 per cent unseasonal rainfall while South Sikkim got a massive 943 per cent more. West Sikkim got 50 per cent extra rain.

The cloudburst over Lhonak Lake not only caused that to overflow but also pushed up water levels in the Teesta, which flows through Sikkim and Bengal before entering Bangladesh.

The overflowing Teesta also swept away parts of a dam at Chungthang, which is the state’s largest hydropower project. The Army said the level of water flowing through the dam led to a sudden increase of 15-20 feet downstream.

Visuals also showed catastrophic floods in North Sikkim’s Mangan district.

A steel bridge at Singtam, which is 30 km from Gangtok, was completely destroyed.

Sections of National Highway 10 were washed away and several other roads were damaged, making access to Gangtok, Pakyong, Namchi, Gyalshing, Soreng and Mangan districts extremely difficult.

Residents in low-lying areas of Chungthang and Singtam have been evacuated.

“Nobody has been injured but there is significant damage to public property. Relief operations are on,” Sikkim Chief Minister Prem Singh Tamang said during a visit to affected areas.

Prime Minister Narendra Modi said he had spoken to the Chief Minister Tamang and assured him of support.

Small States must prioritise raising their own revenue to reduce their dependency on the Union government

The fiscal situation of India’s States has garnered significant attention in recent times. Despite ample data on State finances, most of the analysis is centred around larger States. There needs to be more discussion on the fiscal position of small States (i.e. States with a population of less than 1 crore). Most of these small States have distinctive characteristics that limit revenue mobilisation. Recognising these disabilities, the Constitution has provided mechanisms to address them. But these States continue to rely heavily on the Union government for revenue. This dependence creates vulnerabilities for the States as well as the Union.

The total revenue receipts for a State constitute transfers from the Union government such as the State’s share in Union taxes including income tax, corporation tax, and grants, and the State’s own revenues from tax and non-tax sources. The State can raise its own taxes (own tax revenue or OTR) from professions, property, commodities, etc. It can mobilise non-tax revenue (own non-tax revenue or ONTR) from social and economic services, profits, dividends, etc.

The revenue receipts of each of the small States have increased. For six of the nine States, they have grown faster than the gross state domestic product (GSDP). But these increases are primarily due to Union transfers rather than States’ own revenues. In other words, dependence on the Union has not decreased. For three States — Mizoram, Sikkim and Tripura — the revenue receipts have grown slower than the State GSDP implying limited fiscal space to operate.

While the share of Union transfers in the revenue receipts of all States combined hovers between 40% and 50%, the ratio is quite large for the small States. Except for Goa, the Union’s share in all the other small States’ revenue receipts is more than 60% (2022-23 Budget Estimates). For five States, the share is around 90% (Chart 1).

Chart 1 | The chart shows the current transfers to the revenue receipts ratio. The figures are in %.

Charts appear incomplete? Click to remove AMP mode

The States’ economies have grown over time, but this has not necessarily translated into higher revenue mobilisation capacities. It is best reflected in the continued dominance (2014-2023) of current transfers in the revenue receipts.

The capacity of small States to raise their own taxes continues to be limited. Eight out of nine States fare worse than the all-State average OTR-GSDP ratio (Chart 2).

Chart 2 | The chart shows the own tax revenue (OTR) to gross state domestic product (GSDP). The figures are in %.

The distinctive characteristics of these States restrict economic activity and consequently make it challenging to generate tax revenue. However, what is particularly concerning is that the States’ ability to mobilise taxes has yet to show significant improvement over time. At best, it has fluctuated, with several States experiencing a peak in their OTR-GSDP ratio around 2017-18. The small States do relatively better in mobilising their ONTR, with six States performing better than the all-State average. However, States such as Manipur, Tripura, and Nagaland have consistently struggled in terms of their ONTR-GSDP ratio, performing poorly in comparison.

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The limited capacity of small States to generate their own revenues results in a heavy dependence on the Union government, exposing the States to various vulnerabilities. First, the States rely on the Union governments’ political goodwill. A sudden decline in Union transfers can adversely affect the States’ expenditures. In the last few years, there have been increasing disagreements concerning resource sharing (for example, GST compensation) between the Union and the States. Second, high dependence on the Union might imply less fiscal freedom for the States. A significant portion of the funds transferred by the Union is tied to specific purposes, limiting the States’ flexibility. In some instances, given their existing revenue situation, the States might be unable to match the transfers. Third, the lack of their own revenues can lead to weakened State capacity, affecting the delivery of social, economic, and general services. This situation becomes even more critical as many small States share international borders. The developmental concerns in these States can have implications for national security.

To mitigate these vulnerabilities, the States must prioritise identifying new sources of tax revenue or explore ways to leverage existing ones more effectively. A study by Manipur University evaluating the State finances of Manipur identified how its liquor prohibition policies have led to substantial revenue losses without significantly reducing the negative consequences of drinking. Another study of Arunachal Pradesh’s finances identified the potential to generate more revenue from transactions on land and sales tax.

Additionally, there is a need to improve the tax administration in the States. Not only will this lead to higher resource mobilisation, but it will also reduce the deviation of actual from budgeted tax revenues. The States can boost their collection of non-tax revenues by revising the existing charges and rates for various services and enhancing administrative revenue collection efficiency. Many state public sector enterprises in these States are not in good shape and do not contribute enough revenue. The States must consider revitalising and corporatising these enterprises to improve their revenue performance. Some States such as Mizoram have closed down loss-making public sector enterprises, recognising that these entities are a liability.

Sarthak Pradhan is an Assistant Professor at the Takshashila Institution. The research for this article was made possible by The International Centre Goa Research Grants. Email ID: sarthak@takshashila.org.in

Source: “State Finances: A Study of Budgets”, Reserve Bank of India

Also read: Data | Friction over revenue sharing formula: Why some States get more money from Centre

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