Income Tax

The Amazing History of Income Tax in India- Read Now

history of income tax in india

The Income Tax collection system can be traced back to be continuing from the period of ancient civilizations. Interestingly, the history of  Income tax in India is also deeply rooted in ancient times.

At present, taxes in India fall under two categories. Income tax is categorized in the direct taxation type of tax in India, the other being the category of Indirect Taxes. The current Income tax structure in India is governed under the Income Tax Act 1961.

In this post, we will discuss and analyze the provenance of the Income Tax system prevailing in India. At the same time, we will study their influence of old taxation systems on the modern-day taxation regime of India.

The main points of analysis in this article are as follows;

  • The Prominent sources of Income Tax system of India
  • The Impact of ancient taxation system on contemporary taxation
  • Development of Tax Mechanism After independence
  • Contemporary taxation System
  • Current Income Tax Slab

The Prominent sources of Income Tax system of India

The prevailing Income Tax Act 1961 is the apex rule book for governing income tax in India. However, the current tax system can be traced to ancient sources in origination. The income tax in India is no exception to this phenomenon.

The current income tax provisions are a result of periods of progression right from ancient Indian kingdoms to the pre-economic liberalization era.

The incredible insight of the discussion is how provisions prevailing back to 2000 BC are still useful in modern-day taxation practices.

The Prominent sources of Income-tax provisions are

  • Manusmṛti 
  • Arthashastra
  • British India Taxation Policies

Manusmṛti (Reads मनुस्मृति in Devanagari Script)

The Manusmrti is the ancient and prevalent source of income tax provisions. Manusmrti emphasized the strategic imposition and regulation of income tax on the subjects.

As per it, the taxation should not be an aching experience for the subjects. The taxation should be right enough that it should fulfill a reasonable revenue target as well as feels justified to the masses.

The Income Tax provisions as prescribed by the Manusmrti are as follows;

  • Traders to pay 20% of Income
  • Artisans to pay 20% of Income
  • Agriculturists were required to pay1/6, 1/8, or 1/10 of the value of total production.

The rates vary according to the conditions influencing crop production. Additionally, the traders and artisans were required to pay Income tax in the form of gold or silver.

Arthashastra (Reads अर्थशास्त्र in Devanagari Script)

role of arthshastrai n history of income tax of india

The Arthashastra is another prominent source of taxation laws and provisions in India. The Arthashastra can be considered as the first Indian text addressing public finance, financial administration, and fiscal laws in a structured manner.

The book was written by Kautilya in around 2300 BC. It is credited to have an enormous impact on the development of the Income Tax system in India.

Kautilya coded the taxation system according to the principle of maximum welfare to the society.”

The text focused on establishing a defined taxation code. The policies, tax slabs, and responsibility of tax collectors were pre-determined in the book.

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Moreover, the schedule of each payment, due dates of payment, quantity, and kind of commodities accepted were all encoded.

Not just this, the book also mentions the taxation for export & import of goods, toll taxes, etc.

The Income Tax provisions as prescribed by the Arthashastra are as follows;

  • Agriculturists were required to pay  1/6 of produce as a flat rate for land taxation
  • The affluent were required to pay higher taxes, and less privileged were imposed with lower taxes
  • Rule of the book with limited flexibility to tax collectors

British India Policies

The tax policies enacted by the British government of India have made the most influencing effect of the present-day taxation system of India.

The enactment of income tax laws structured under British India rule can be credited to the famous event of mutiny. The mutiny of 1857 by Indian soldiers of the British army caused heavy losses to the British government of that time.

British India policies in the history of income tax of india

The Income Tax Act of 1860

The Income Tax Act was introduced in the year 1860 to meet the losses incurred as a result of mutiny. The Act of 1860 was implemented for a period of 5 years and quashed consequently.

The Income Tax Act of 1867

The subsequent Act to be enacted was the Income Tax Act 1867

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

  • Exemption of income from agriculture produce from taxation
  • Premiums paid for Life Insurance were exempted from Taxation
  • Hindu Undivided Family was addressed as a separate taxable unit

The Income Tax Act of 1918

The Income Tax Act of 1918 brought some major changes in the income tax system. For the first time, the receipts and deductions of casual or non-occurring nature were also included 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 occurred during business or professional operations were included in computing net income
  • Deductions of non-re-occurring was included in computing taxable income

The Income Tax Act of 1922

The income tax of 1922 was the most significant milestone in the history of income tax system in India. The Act is credited to represent the first organized income tax structure in India.

The Act of 1922 provided the much-needed flexibility in the taxation system of India for Income Tax. Moreover, it laid a proper system of tax administration in India that remained in function for the next 40 years.

The prominent features of the income tax act 1922 are as follows;

  • Tax rates were decided according to the budgetary needs of the prevailing period
  • Amendments in the Act were no longer a necessity to make changes in the rate of tax imposition

Tax Mechanism After independence

Income tax act 1961

The Income Tax Act of 1922 was the governing book for income tax in India until 1962. The Act met with several amendments ever since its enactment.

However, a new act, the Income Tax Act of 1961, was enacted by the government in the year 1961. The history of income tax in India entered in to a new era after enactment of the same.

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

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

  • Income tax was imposed on income under five heads

a. Income from salaries

b. Income from business and profession

c. Income in the form of capital gains

d. Income from house property

e. Income from other sources

  • A system for revenue audit was introduced for the first time to compute taxes in India
  • The evaluation system for the duties discharged by the income tax officers came into force

Establishment of PAN

In the year 1994, PAN (Permanent Account Number) was launched. PAN aimed to accredit a unique identification number to the taxpayer.

Permanent Account Number is being used to track the taxation correspondence of the taxpayer. It is also being utilized to record TDS/TCS credits, high-value transactions of the linked taxpayer.

Contemporary taxation System

The present income tax system is governed by the provisions of the Income Tax Act 1961. However, the prevailing tax system underwent a lot of changes and amendments since 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 need for modern-day taxpayers. The taxation structure went through multiple changes to make taxation a hassle-free experience for the subjects as well as the tax collection authorities.

Modernization of the tax payment system was a result of the same legacy.

Modern system of income tax of india

Prominent features of the contemporary taxation system are dominated by the confluence of technology and taxation system. They are as follows;

Website of Income Tax Department

The official website of the Income Tax Department was launched in the year 2003.  The website became a one-stop solution to gather all income tax-related information for the taxpayers.

E-Payment

The Income Tax department facilitated the taxpayers to pay taxes through electronic payment gateways. They can pay their taxes via online banking, debit cards, credit cards, e-challan, etc.

E-filling

The e-filing portal was launched in the year 2006-2007. The e-filing option facilitated the taxpayer to submit their tax returns online.

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

The ancient sources of taxation code have a considerable influence on the present taxation system. Many taxation policies and procedures can be sourced back to ancient times.

Impact of Manusmrti

Manusmrti advised having a flexible taxation system. The rate of taxation should not be excessive to a level that the subjects feel compel to exempt tax liabilities.

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Additionally, the text also mentions having different taxation slabs for people engaged in a different occupation. At the same time, the circumstances of taxpayer should be taken into account for computing taxable income.

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

Impact of Arthashastra

The Arthashastra laid down the principle of maximum social welfare for tax administration.  The book also mentions the principle of justice and equity. Both of the policies were duly adopted in our present taxation system.

As per the code book, the fortunate should pay higher taxes as compared to the less privileged sections of the state.

People deemed unfit for paying income tax such as diseased or students were duly exempted from tax liabilities or were provided with remissions.

Similarly, the elderly are imposed with a lower rate of taxation as per the existing tax slab of the income tax.

Impact of British India Policies

The Income Tax Act enacted during the British regime in India laid the foundation for future statutory acts for Income Tax. The income tax policies framed during the period laid down a strong foundation for organized income tax administration in India.

The flexibility of tax rate as per the budgetary needs of the state as prevailing in the current system was first mentioned in this period. These policies had  great impact on the history of income tax in India.

Current  Income Tax rate Slab

Current tax slab

The income tax rate slab at present is as follows;

Income Tax Slabs for Individual & HUF

Income Tax SlabsTax Rate for Individual & HUF Below the Age Of 60 Years
Up to ₹2,50,000*Nil
₹2,50,001 to ₹5,00,0005% of total income exceeding ₹2,50,000
₹5,00,001 to ₹10,00,000₹12,500 + 20% of total income exceeding ₹5,00,000
Above ₹10,00,000₹1,12,500 + 30% of total income exceeding ₹10,00,000

Income Tax Slabs for Senior citizens aged 60 Years But Less than 80 Years

Income Tax SlabsTax Rate for Senior citizens aged 60 Years But Less than 80 Years
Income up to Rs 3,00,000*No tax
Income from Rs 3,00,000 – Rs 5,00,0005%
Income from Rs 5,00,000 – 10,00,00020%
Income more than Rs 10,00,00030%

Income Tax Slabs for Super Senior Citizens (Aged 80 Years And Above)

Income Tax SlabsTax Rate for Super Senior Citizens (Aged 80 Years And Above)
Income up to Rs 5,00,000*No tax
Income from Rs 5,00,000 – 10,00,00020%
Income more than Rs 10,00,00030%

Income Tax Slabs for Domestic Companies

Turnover ParticularsTax Rate
Gross turnover up to 250 Cr. in the previous year25%
Gross turnover exceeding 250 Cr. in the previous year30%

Conclusion

The striking resemblance between the ancient taxation systems and the prevailing one is impressive. Taxation system prevalent 2300 years ago are still in practice in their evolved version.

The study of the History of income tax in India helps to understand the origin of contemporary income tax practices. The insightful legacy of ancient taxation regimes is a guiding light for present tax administration.

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