History of Income Tax in India

Personal Income Tax in India is not something recent; it has a history that can be traced back to prehistoric times, and it has passed through many developmental stages before the British rule as well as after independence. Hence, the knowledge of such a history is important for understanding the present system of taxation, which has been affecting both individuals and businesses.

Taxation in Ancient India

Taxation is not a new concept to Indian society. In fact, it has existed for centuries. Ancient texts such as the Manu Smriti and the Arthashastra have given a highly elaborated set of rules from how to levy and collect taxes to their utilization. In these older tax systems, the goals were quite the same: to levy revenue and in parallel make sure that social welfare and economic stability are observed.

Manu Smriti

Manu Smriti would probably be the oldest source of law in India and even contains the most detailed provisions for income tax. Manu, the ancient lawgiver, held that taxes should be fair, not a burden. According to Manu Smriti:

• The merchant and artisan taxed 20% of the earned income.
• Farmers paid 1/6 to 1/10 of their produce. The rate fluctuated with crop yield and economic condition.
  These tax rates should be fair in satisfying the state with its needs for revenues and should not hurt the citizens.

Arthashastra

The Arthashastra, by Kautilya (also known as Chanakya), is one of the earliest texts. It was written in an organized manner for taxation. Kautilya argued for a system of taxation that sought to maximize welfare for society. Among his guidelines were:

• A flat 1/6 production tax for land. This makes sure that the farmers pay into the state but they are not over-burdened.
• Higher taxes for the rich and low taxes for the poor. This comes out of a progressive tax philosophy.
  Arthashastra by Kautilya: It brought in a neatly documented tax code. This document consisted of well-laid-out principles, rates of tax, and the duties of those collecting taxes. This codification in the early period laid its foundation. It was induced in the organized approach on public finance in India.

British Colonial Age: Income Tax Act, 1860

Income tax in India has a history at the onset of modern history, during the British colonial period. Sir James Wilson first introduced formal income tax in 1860. It aimed at covering the losses suffered by the British government in the revolt of 1857. The major features of the Income Tax Act 1860 are:

• It exempted income from farming. This has been a portrayal of the British government depending on land revenue.
• Life insurance premiums were tax-exempt; this helped in popularizing the purchase of insurance.
• The Act recognized Hindu undivided families as separate taxable units. This was a big change from individual taxation.
  This was a temporary measure for five years only. But as a matter of fact, it opened the way for income tax laws in India.

Personal Income Tax Act of 1918

New Income Tax Act In the year 1918, a new Act of imposing Income Tax was brought into force by the British Government. It brought a change in the tax system of India. The first time this kind of Act offered:

• We should tax one-time income, such as business profits. This would enhance the tax system.
• Allowing the tax deductions for some, non-recurring expenses. It would make the taxable income fairer.
  The Act aimed at a fair tax system, the reflections of the growing complexities in the Indian economy.

1922 Income Tax Act

The Income Tax Act, 1922 marked a milestone in the history of taxation in India, introducing features to be the basics for the present income tax system in India.

• This allowed flexible tax rates, which could be implemented regarding the needs of the government budget without changing the law.
• The Act set up a better tax system. It created a tax collection machinery that worked for the next 40 years.
  The 1922 Act was enforceable up to the year 1961 when the Income Tax Act of 1961 came into force. Many amendments were done to keep pace with the then changing economy.

Tax Reforms Post-independence

India kept the Act of 1922 post-independence in 1947; however, it did require a new tax code to suit the changing needs of the state. The requirement of an overall taxation reform was initiated with the government under process to achieve a new tax code, which finally translated into the Income Tax Act of 1961. The objective of this act is to provide an overall detailed scheme for income tax in India.

The 1961 Income Tax Act

The Income Tax Act of 1961 dawned a new era in Indian taxation. It had many new characteristics. They continue to represent India's income tax system to this day.

• Five Heads of Income: Salary; House property; Business or Profession; Capital Gains; and Other Sources are the five heads of income specified under this Act.
• Revenue Audits: For the first time, this Act introduced a system of revenue audits, whereby the tax authorities would check the veracity of filed tax returns.
• Competency Evaluation: The Act confers assessment competency upon the tax officials and ensures enforcement. In the process, this made sure taxpayers obeyed the law.
  The Act of 1961 has been very largely amended over the years since its passing. Nonetheless, it still remains the backbone of income tax law in India.

Section 1 of the Income Tax Act, 1961

Section 1 is the section of the Income Tax Act, 1961 that defines the short title and also outlines details regarding its scope and commencement.

• Short Title: The Act may be called the Income-tax Act, 1961.
• Applicability: This extends throughout India, covering all the states and union territories of India.
• Commencement: The Act came into effect on 1st April 1962. It applies from the assessment year 1962-63.
  Initially, it was not applicable in Sikkim. On its merger with India in 1975, the Income Tax Act, 1961 has been gradually extended to Sikkim. Fully applicable from assessment year 1990-91.

Impact on Contemporary Taxation

The history of income tax in India has had a long-lasting impact on the structure and administration of current tax practices. Ancient texts and colonial laws continue to influence modern tax policy and its administration.

Discussion of Similarities and Differences between Ancient and Modern Taxation

Ancient and modern India's methods of taxation could differ but similarities might come to some extent.

• Continuities: Modern tax policy is guided by the elements of fairness as highlighted by Manu and Kautil.
• Changes: Ways of tax collection, taxable income, and laws have evolved. They are just a reflection of growing complexity in the Indian economy.

Challenges in Taxation Across the Centuries

Over the years, India's taxation system has faced many challenges.

• Administrative Difficulties: Tax authorities have long faced the enormous challenge of how to achieve compliance and block evasion.
• Societal Resistance: Taxes invariably bring about some type of resentment if seen to be too high or unfair.
  Addressing these challenges has required continuous adaptation and reform of the tax system.

Taxation's Part in Nation Building

Taxation has been the guiding light, so to speak, in building a nation like India. It funds public services and infrastructure, and development programs. A good taxation system is very important for the welfare and growth of the state; it is one of the basic tenets of good governance.

Conclusion

The history of the Income Tax of India is a very interesting and convoluted saga. It's the story of the economic and political evolution in the country. Taxation has been the function of changing social needs. This is well observed from old texts like Manusmriti and Arthashastra, so also from more modern ones like the Income Tax Act, 1961. For anyone who deals with tax policy or compliance, this is a very important history because it would throw light on what the basis of the present system is.