History of income tax in India

In the year 1860, the tax was first introduced in India by Sir James Wilson with the intention to meet the losses sustained by the government due to the Military Mutiny of 1857. In the year 1918, a new income tax has been passed and again it was substituted by another new act which was passed in 1922. This Act remained in operation up to the assessment year 1961-62 with several amendments.

In discussion with the Ministry of Law finally the Income Tax Act, 1961 has been passed. The Income Tax Act 1961 was brought into force from 1st April 1962. It was applicable to entire India and Sikkim (which also includes Jammu and Kashmir).

From the year 1962 many amendments of far-reaching nature were made in the Income Tax Act by the Union Budget each year.

History of Income-tax in India in the Ancient times

In India, the system of direct taxation came into force in one form or another even from ancient times. There are references has been made to both in Manu Smriti and Arthasastra to a diversity of tax measures. The thorough analysis provided by Manu Smriti and Arthasastra on the subject clearly showed the existence of a considered taxation system, even in ancient times. Not just this, also taxes were imposed on various classes of individuals like actors, dancers, singers and even dancing girls. Taxes in the ancient times were payable in the shape of gold-coins, cattle, grains, raw materials and also by providing personal service.

Manu Smriti: 

The Manusmrti is the earliest and predominant source of income tax provisions. Manusmrti gives emphasis to the strategic imposition as well as regulation of income tax on the subjects.

According to it, taxation must not be a painful experience for the subjects. The taxation must be right enough that it could fulfill a reasonable revenue target in addition to feels right towards the masses.

The Income Tax provisions as given by the Manusmrti are:

•    Traders would pay 20% of Income

•    Artisans would pay 20% of Income

•    Agriculturists would  pay1/6, 1/8, or 1/10 of the value of total production.

The rates differ according to the circumstances influencing crop production. Moreover, the traders and artisans were obligatory to pay Income tax in the form of gold or silver.

Arthashastra

The Arthashastra is one more prominent source of taxation laws as well as provisions in India. The Arthashastra could be considered as the primary Indian text mentioning public finance, financial administration, and financial laws in a structured manner.

The book has been written by Kautilya in around 2300 BC. It was accredited to have a huge impact on the development of the Income Tax system in India.
Kautilya hinted the taxation system as per the principle of “maximum welfare to the society.”

The text considered establishing a defined taxation code. The policies, tax slabs, and duty of tax collectors have been pre-determined in the book.

Also, the schedule of every payment, due dates of payment, quantity, and type of commodities accepted were also encoded.

Furthermore, the book also mentioned the taxation for export and import of merchandises, toll taxes, etc.

The Income Tax provisions as stated by the Arthashastra are;

•    Agriculturists would pay  1/6 of produce as a flat rate for land taxation

•    The affluent would pay higher taxes, and less privileged were levied with lower taxes

•    Rule of the book with limited flexibility towards tax collectors

The Income Tax Act of 1860     

The tax policies passed by the British government of India made the most influencing effect of the contemporary tax system of India.

The policy of income tax laws which has been structured under the British India rule could be credited to the well-known event of mutiny. The mutiny of 1857 through Indian soldiers of the British army caused huge losses towards the British government of that time.

The Income Tax Act was presented in the year 1860 in order to meet the losses experienced as a consequence of mutiny. The Act of 1860 was applied for a period of 5 years and quashed accordingly.

The main features of the Income Tax Act 1860 are;

•    Exemption of earnings from agriculture produce from taxation

•    Premiums payable for Life Insurance were exempted from Taxation

•    Hindu Undivided Family were addressed as a separate taxable unit

The Income Tax Act of 1918

The Income Tax Act of 1918 made some major changes in the income tax system. For the very first time, the receipts and deductions of casual or non-occurring nature were also incorporated under the computation of taxable incomes.

The prominent features of the Income Tax Act 1860 are as followed;

•    The receipts of non-re-occurring nature happened during business or professional operations were also incorporated in computing net income.

•    Deductions of non-re-occurring were incorporated in computing taxable income.

The Income Tax Act of 1922

The income tax of 1922 was the most noteworthy milestone in the history of the income tax system in India. The Act is accredited to represent the primary organized income tax structure in India.

The Act of 1922 furnished the much-required flexibility in the taxation system of India for Income Tax. Furthermore, it placed a proper system of tax administration in India that continued to be in function for the next 40 years.

The features of the income tax act 1922 are;

•    The rate of taxes was decided as per  the budgetary requirements of the prevailing period

•    Amendments in the Act was no longer a necessity to make changes in the rate of tax imposition

Tax Mechanism After independence

The Income Tax Act of 1922 was the leading book for income tax in India until 1962. The Act then experienced many amendments ever since its enactment.
Though, a new act, the Income Tax Act of 1961, has been enacted by the government in the year 1961. The history of income tax in India arrived in a new period after enactment of the same.

The Act of 1961 is the governing Act for income tax India till now. The income tax rules of 1962 followed the Act.

The features of the Income Tax Act 1961 are as follows;

•    Income tax was levied on income under five heads, they are;

1.    Income from earnings

2.    Income from business and profession

3.    Income in the form of capital gains

4.    Income from house property

5.    Income from other sources

•    A system for revenue audit was presented for the first time to compute taxes in India

•    The evaluation system for the responsibilities discharged through the income tax officers came into force

The Ancient Taxation System Impact on the History of Income Tax in India

The ancient system of taxation had a considerable influence on the present taxation system. Numerous taxation policies and processes could be sourced back to ancient times.

Impact of Manusmrti

Manusmrti guided having a flexible taxation system. The taxation rate must not be excessive towards a level that the subjects feel compel to exempted tax liabilities.

Also, the text also mentioned having diverse taxation slabs for individuals involved in a different occupation. Altogether, the conditions of the taxpayer must be taken into account for computing taxable income.

The aspect of flexibility that is found in the present tax system could be traced from the given text.

Impact of Arthashastra

The Arthashastra put forward the code of maximum social welfare for tax administration.  The book also mentioned the principle of justice and equity. Both of the policies were accordingly adopted in our current taxation system.

According to the codebook, the privileged must pay higher taxes in contrast to the less privileged sections of the state.

Individuals deemed unfit for paying income tax like diseased or students were accordingly exempted from tax liabilities or were given remissions.

Also, older people are levied with a lower rate of taxation in accordance with the present tax slab of the income tax.

Impact of British India Policies

The Income Tax Act presented during the British rule in India stated the foundation for forthcoming statutory acts for Income Tax. The income tax policies made during the period specified a strong foundation for organized income tax administration in India.
The tax rate flexibility consistent with the budgetary requirements of the state as prevalent in the present system was first started in this period. These rules had great impact on the history of income tax in India.

Contemporary taxation System

The current income tax system is administered through the provisions of the Income Tax Act 1961. However, the prevailing tax system experienced many changes and amendments from the time of the implementation of the Act of 1961.

Although the organizational structure of the tax system is derived from 1961, the provisions changed at regular intervals. The moves were inspired by the advisory of tax committees as well to suit the needs of the hour.

The income tax slab of a year can be inconsistent in comparison to the previous years. There can be changes in the list of direct taxes as well as the type of taxes that can be further defined by the government.

The present income tax system addresses the requirement for contemporary taxpayers. The structure of taxation went through numerous changes to make taxation a hassle-free experience for the subjects as well as the tax collection authorities.

Conclusion

The History of income tax in India assists to understand the origin of current income tax practices. The intuitive legacy of ancient taxation rules functions as a guiding light for the existing tax administration in India.

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Author:

eStartIndia Team