History of Income Tax in India: Everything you need to know!
In this post, we will be discussing everything about the history of income tax in India right from the ancient times.
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Evolution of Income Tax in India
History of income tax in Ancient India
Income tax in India has been an old history, so prior to discussing the present Taxation system in India, it will be relevant to discuss the background of income tax in India.
We always have been the misconception that the tax system was discovered in recent India, although it first originated in the period of Manusmriti and Arthashastra. We can get the evidence of the presence of taxation or a variety of tax measures in India from both Manusmriti and Arthashastra itself.
In Manusmriti, Manu was the ancient sage and law-giver and he was the responsible person to regulate and impose taxes in the kingdom. According to him Traders and artisans should pay 1/5th of their profits in silver and gold, while the agriculturists had to pay 1/6th, 1/8th and 1/10th of their produce depending upon their situation or circumstances. There was a well-planned taxation system, even in ancient times.
Apart from this, taxes were also imposed on various groups of people like actors, dancers, singers and even dancing girls. Taxes were paid in the form of gold-coins, cattle, grains, raw-materials and even paid by rendering personal service.
In Arthashastra, Kautliya has mentioned various types of taxes and duties imposed on agricultural produce, trade, octroi, tolls and custom duties. The duties(taxes) had to be paid at the time of war or emergency. He emphasized on the part of removing inconsistency in case of taxation.
History of income tax in Modern India
In modern India, Income Tax was introduced for the first time in the year 1860 by Sir James Wilson. The motive behind imposing this act by Sir James Wilson was to recover the amount of losses sustained by the government due to Sepoy Mutiny of 1857.
After 1850 a new income tax act 1886 was passed under which income tax was divided into four schedules
- Salaries, pensions or gratuities
- Net profits of companies
- Interests on the securities of the Govt of India
- Other sources of income
In 1918 a new income tax Act was passed and replaced by another new Act which was passed in the year 1922. This Act remained in force up to the year 1961-62.
By the recommendations of Prof. Nicholas Kaldor, the following acts were introduced:
- Wealth Tax Act, 1957
- Expenditure Tax Act,1957
- Gift Tax Act, 1958
In 1958, the Law Commission had submitted a report on the new Income Tax Act and based on these recommendations, Income-tax Act,1961 came into existence with effect from 1st of April, 1962.
Since 1962, several amendments have been made every year through the Union Budget. Now, it has become a regular feature to present the Finance Bill every year along with the Union Budget that include rates of income tax for the next year.
Definition of income tax?
In short Income tax is a kind of tax (The word ‘Tax’ first emerged in the English language in the 14th century and evolved from the Latin word ‘Taxare’ which means ‘to assess’.) that central government imposes/charges/levies on the income generated during a financial year by the businesses and individuals within their jurisdiction.
Why are taxes imposed by the government?
Taxes are levied/imposed in almost every country of the world. Taxes are a source of revenue for the government. The funded revenue is utilized by the government in serving various sectors. They are utilized for developing infrastructure of the country, in education, to provide better healthcare, giving subsidies to the farmers in agriculture, in military and ammunition, and some other welfare funds.
Tax structure in India
In India, taxes are collected by the central and state government and mainly divided in two types, direct taxes and indirect taxes.
Direct taxes are the taxes levied on the income earned by individuals and corporate entities. The liability to deposit taxes is on the assessees themselves. For Example: Income Tax
On the other hand, indirect taxes are levied on the sale and provision of goods and services respectively. The liability to collect and deposit taxes is on the sellers or service provider directly. For example: GST
Before introduction of GST in the Indian taxation system, the following indirect taxes used to apply on goods and services in India:
Value Added Tax (VAT, State)
Central Sales Tax (collected by State)
Entry Tax (State)
Luxury Tax (State)Advertisement
Direct Taxes are classified in three parts :
This tax is applicable on an individual or a Hindu Undivided Family(HUF) and excludes capital gains and profits other than companies. Income tax is calculated as per the applicable slab rates specified by the government every year in the union budget.
This tax is applicable on the companies. The company has the liability to pay taxes on the profits they make from their businesses. A specific rate of tax for corporates has been prescribed by the income tax laws of India.
Capital Gains Tax:
This tax is applicable on the profits from the sale of a capital asset only. The rate of tax on capital gains depends on the type of capital gain. The capital gains tax is divided into two parts by the Income Tax Act, 1961.
Short-Term Capital Gains Tax
Long-Term Capital Gains Tax
Tax reform in India
There are so many tax reforms made to the income tax act from time to time but GST (Goods and Services Tax) is one of the biggest tax reforms in India, implemented from 1st of July 2017. It is an indirect tax (combination of 17 indirect taxes and 23 cess). It replaces all the indirect taxes levied on goods and services by the Central and State Governments.
Types of GST
There are mainly three types of GST in India:-
Central Goods & Services Tax (CGST)
State Goods & Services Tax (SGST)
Integrated Goods & Services Tax (IGST)
Tax authorities in India
To regulate executive and administrative functions the following income-tax authorities have been constituted under the Income tax Act, 1961.
- The Central Board of Direct Taxes (CBDT)
2. Principal Directors-General of Income-tax or Principal Chief Commissioners of Income-tax
3. Directors-General of Income-tax or Chief Commissioners of Income-tax
4. Principal Directors of Income-tax or Principal Commissioners of Income-tax
5. Directors of Income-tax or Commissioners of Income-tax or Commissioners of Income-tax (Appeals)
6. Additional Directors of Income-tax or Additional Commissioners of Income-tax or Additional Commissioners of Income-tax Appeals
7. Joint Directors of Income-tax or Joint Commissioners of Income-tax
8. Deputy Directors of Income-tax or Deputy Commissioners of Income-tax or Deputy Commissioners of Income tax Appeals
9. Assistant Directors of Income-tax or Assistant Commissioners of Income-tax
10. Income-tax Officers
11. Tax Recovery Officers
12. Inspector of Income Tax
Tax compliances, appeal & disputes
In some cases, if the return of income filed by a taxpayer is subject to verification or audit by tax authorities. This process is called an ‘assessment’. In case a taxpayer is dissatisfied by the conclusion of the assessment, he/she can file an appeal before the dispute resolution authorities.
a) The taxpayer can file an appeal before the Commissioner in Form No. 35, signed by the taxpayer or his authorized representative.
b) Both taxpayer and the Assessing Officer can file an appeal before ITAT(Income Tax Appellate Tribunal) in Form 36.
c) They can appeal before the High Court, If anyone is not satisfied with the verdict of the Tax appellate Tribunal, where the High Court is satisfied that the case involves a substantial question of law.
d) They can appeal before the Supreme Court against the High Court’s order in respect of the Appellate Tribunal’s order lies with the Supreme Court in those cases, which are certified to be fit for appeal to the Supreme Court.
Read our previous articles on major changes & addition of taxes
Section 194Q and Section 206C(1H) of Income Tax Act
TDS & TCS under Section 206AB & 206CCA for not filling of ITR
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