In India,
Direct taxes have been levied in India for centuries. The system of direct taxation as it is known today has been in force in
one form or another even from ancient times. In this article, we are discussing
how the Income Tax Laws evolved over the time in India. Taxation
was considered a sacred duty in Vedic times. It finds its references in many
ancient books like “Srimad Bhagavatam”, “Manu Smriti” and “Arthasastra”.
Ancient
Indian political thinking has always considered the issue of public finance to
be of prime importance, and this is why the Mahabharata, Manusmriti, the
Arthasastra and Shukranitisar provide detailed descriptions of the ways and
means of creating an abundant treasury (Kosha), which is the inseparable part
of the seven organs of the state machinery (Saptanga). Two great literary
works, the (Manusmriti and Arthasastra) consisted of detailed advice given to
kings by wise sage, on the matter of taxation.
According to Manu Smriti, the king
should arrange the collection of taxes in such a manner that the tax payer did
not feel the pinch of paying taxes. He laid down that traders and artisans
should pay 1/5th of their profits in silver and gold, while the agriculturists
were to pay 1/6th, 1/8th and 1/10th of their produce depending upon their
circumstances.
In the
earliest period of Indian history, the early Vedic Period, the state probably
depended for its support on the voluntary contributions of the people. But some
method of compulsory contribution must have been found necessary in India as
soon as a more improved form of government had come into existence. The early tax-system,
however, was a very simple one, and the evolution of a complex system of public
finance was doubtless a slow and gradual process. By the fourth century B.C.
the system of public finance had reached a very advanced stage of development,
as is evident in Kautilya’s Arthasastra and the Brahmamical and Buddhist texts.
During the Mauryan
Empire [322 BC to 187 BC]
Revenue
system of Mauryan Empire was devised by the Minister of Chandragupta
Maurya, Kautilya. The principal items of revenue in town and country have
been listed by Kautilya while describing the duties of the Samaharta
(collector-general) Kautilya’s “Arthashstra” deals with
taxation in an elaborate and planned manner suggesting ways to guide a king in
running the state in an efficient and fruitful manner. According to him,
treasury is the root of administration.
Kautilya has also described in great detail the system of tax
administration in the Mauryan Empire. It is remarkable that the present day tax
system is in many ways similar to the system of taxation in vogue about 2300 years ago.
Kautilya's Arthasastra mentioned that each tax was specific and there
was no scope for arbitrariness. Tax collectors determined the schedule of each
payment, and its time, manner and quantity being all pre-determined. The land
revenue was fixed at 1/6 share of the produce and import and export duties were
determined on ad-valorem basis. The import duties on foreign goods were roughly
20% of their value. Similarly, tolls, road cess, ferry charges and other levies
were all fixed. Kautilya also laid down that during war or emergencies like
famine or floods, etc. the taxation system should be made more stringent and
the king could also raise war loans. The land revenue could be raised from
1/6th to 1/4th during the emergencies. The people engaged in commerce were
to pay big donations to war efforts.
The following
taxes were imposed on the sources of income in cities:
(i)
wine manufacturing tax;
(ii) salt manufacturing tax;
(iii) taxes on ghee, oil and edible oil;
(iv) taxes on animal slaughterers;
(v) taxes on artisans and artists;
(vi) taxes on gamblers and gambling houses;
(vii) taxes on prostitution,
(viii) taxes on
the income of temples; and
(ix)
taxes on additional incomes of the wage
earners.
During the Sultan
Alauddin Khilji period [1296-1316]
Alauddin Khilji made several
sweeping reforms in the field of revenue system. This scale of agrarian tax at 50% was the highest under Khilji among all other sultans and kings so
far in India. Not only this, he also imposed house tax (Ghari) and pasture tax (Charai or
Chari) on the agrarian population.
Sultan
Alauddin Khilji introduced three taxes on peasantry, viz.
(i) “Kharaj” (tax on cultivation);
(ii) “Charai”
(tax on milch cattle); and
(iii) “Ghari” (tax on house).
Then the " Ghari and Charai" tax was
stopped by Firoze Tughluq in (1351-88)..
During the Tuluva dynasty in South India [1509 to 1592]
In
the Vijayanagara Empire, the Government department responsible collecting the
land revenue is called as Athanave. The Vijaya-nagara emperors collected the
taxes based on the soil fertility of lands.
Tax on production is 1/6 of the gross production. It was paid either in the
form of crop or Money. Heavy taxes were levied on prostitution. Emperor
Krishnadevraya of Vijayanagar who maintained that taxes should not be
levied at flat rates and the amount of tax levied must depend on the income of
the farmer. During his reign he kept a strict control over his ministers,
and any minister who committed misdeeds was dealt with severely. He
abolished some of the obnoxious taxes such as the marriage fee. To
increase revenues, he brought new lands under cultivation by ordering
deforestation of some areas.
During
the Mughal period [1526 to 1850]
Mughal Emperors established their
empire in India on the basis of large collection of revenue and taxes. The
collection of revenue from land was the backbone of the Mughal economy. But
Mughals also collected a large number of other taxes from different sources
which were also deposited in the royal treasury.
The nature of these taxes and
duties varied from emperor to emperor for making their own image and seeing the
condition of the merchants. The Mughal emperors made changes in their taxation
policies and several examples showing the abolition and introduction of
protective measures.
Akbar was the first Mughal
emperor who took an initiative to abolish all the duties or cesses as ‘abwabs’
or illegal cesses. He also abolished tamgha (inland tolls) and Jazia (tax on
non-muslims) which brought in several crores of dams and the regulations to
abolish these taxes were sent over the whole empire
Taxation policies of the Mughals
sometimes confronted with the local interest. Therefore Mughals faced local
resistance also. But these taxes were abolished due to their poor
administration. But again tax on trade and professions was imposed in 1859 by
the government of India under the compulsion of financial crisis owing to the
sepoy mutiny. Under this tax a 3 per cent levy was imposed on all incomes below
2000.
The treaty of 1765 gave
Britishers the right to collect taxes on behalf of the emperor. Well before the
dissolution of the Mughal Empire in 1857, the British system of District
Collectors of land revenue was established.
Indian
Income Tax Act, 1860
The Income Tax was introduced for the first time by Sir
James Wilson. India’s First “Union Budget” Introduced by Pre-independence
finance minister, James Wilson on 7 April, 1860. Income tax was introduced for
the first time in India on July
24, 1860, to compensate for the losses incurred by the British regime
during the first war of independence against British Rule. Income was divided into four
schedules taxed separately: (i) Income from landed property; (ii) Income from
professions and trades; (iii) Income from Securities; (iv) Income from Salaries
and pensions. Under each schedule the tax rate was 2% for incomes below Rs. 500
and 4 % for incomes above that amount. Assessment was made by a local
committee, the Panchayat in the rural district and by special commissioners and
collectors in towns and cities.
License
Tax
The Indian Income Tax Act of 1860
expired in 1863 and was replaced by a License Tax. The government was forced by
financial difficulties to reintroduce an income tax in 1869. Under the Indian
Income Tax Act of 1869, salaries were taxed at 2 pies per rupees and
individuals, divided into classes, paid fixed fees that went from Rs. 6 on an
income of Rs. 500 up to Rs. 1,140 on an income of Rs. 1,10,000. The exemptions
criterions and the assessment methods were the same as under the Indian Income
Tax Act of 1860. The Indian Income Tax Act of 1869 expired in 1873. The
government replaced it in 1878 by several license taxes to raise money for
famine insurance in Bengal, North-Western Provinces and Oudh, Punjab, Central
Provinces, Bombay and Madras.
Indian
Income Tax Act, 1886
Separate Income
tax act, 1886 was passed. This act remained in force up to, with various
amendments from time to time. Under the Indian
Income Tax Act of 1886, income was divided
into four schedules taxed separately: (i) salaries, pensions or gratuities; (ii)
net profits of companies; (iii) interests on the securities of the Government
of India; (iv) other
sources of income. The Act defined agricultural
income and exempted it from tax liability in view of the already existing land
revenue a kind of direct taxes. The Act of 1886 exempted life insurance
premiums paid by an assessed on policies on his own life. Another important
provision of this Act Hindu undivided family was treated as a distinct taxable
entity.
Indian
Income Tax Act, 1918
The main reforms to the Indian
Income Tax Act of 1886 were due to the administrative and financial difficulties
linked to the First World War and were implemented in 1918 and in 1922. The
Indian Income Tax Act of 1918 repealed the Indian Income Tax Act of 1886 and
introduced several important changes.
The Act of 1918 brought under
change also receipts of casual or non recurring nature pertaining to business
or profesions. Although income tax in India has been a charge on net income since
inception, it was in the Act of 1918 that specific provisions were inserted for
the first time pertaining to business deductions for the purpose of computing
net income. The Act of 1918 remained in force for a short period and was
replaced by new Act (Act XI of 1922) in view of the reforms introduced by the
Govt. of India Act, 1919.
Indian Income
Tax Act, 1922
The
organizational history of the income tax department dates back to the year
1922. " one of the important aspects of the 1922 Act was that, it laid
down the basis, the mechanism of administering the tax and the rates at which
the tax was to be levied would be laid down in annual finance acts. This is
procedure brought in the much needed flexibility in adjusting the tax rates in
accordance with the annual budgetary requirements and in securing a degree of
elasticity for the tax system (Tyagi, 2008). Before 1922 the tax rate were
determined by the Income tax act itself and to revise the rates the act itself
had to be amended. Finally, income tax return filing was made compulsory. This Act remained in force up to the assessment year
1961-62 with numerous amendments.
Income
Tax Act,1961
In consultation
with the Ministry of Law finally the Income Tax Act, 1961 was passed. The
Income Tax Act 1961 has been brought into force with 1 April 1962. The act which came into force on
April 1, 1962, replaced the Indian income tax Act, 1922.It applies to the whole of India. Since 1962,
several amendments of far-reaching nature have been made in the Income Tax Act
by the Union Budget every year which also contains Finance Bill.
After it is passed by both the houses of Parliament and receives the assent of
the President of India, it becomes the Finance act. Furthermore, A set of rules known
as Income Tax Rules, 1962 have been framed for implementing the various
provisions of the Act.
At present, there are five heads of
Income:
(1) Income from Salary;
(2) Income from House Property;
(3) Income from Profits and Gains of
Business or Profession;
(4) Income from Capital Gains;
(5) Income from Other Sources.
India has abolished multiple taxes with passage of time and
imposed new ones. Details of such taxes which were repealed are as under :
List of
Direct Tax Acts repealed
S. No.
|
Act No.
|
Short
title
|
Remarks
|
|
1.
|
Act of 1860
|
Indian
Income Tax Act, 1860
|
Consequent
upon the financial difficulties created by the events of 1857. Income Tax was
introduced in India for the first time by the British
|
The Indian Income Tax Act of 1860 was lapsed in 1865
|
2.
|
-
|
Licence
Tax 1867
|
Income
Tax Act, 1860 was replaced by a
licence tax, 1867. Licence Tax 1867 - on professions and trades and the
latter was converted into a certificate tax in the following year
|
It was
latter abolished in 1873. Licence tax traders remained in operation till 1886
when it was merged in the income tax Act, 1886 of that year.
|
3.
|
11 of 1886
|
Indian
Income Tax Act, 1886
|
It was
replaced 1867 by a licence tax on
professions and trades and the latter was converted into a certificate tax in
the following year. It was latter abolished in 1873. Licence tax traders
remained in operation till 1886 when it was merged in the income tax Act,
1886 of that year.
|
The
Indian Income Tax Act of 1918 repealed the Indian Income Tax Act of 1886.
|
4.
|
Act of 1918
|
Indian
Income Tax Act, 1918
|
The
Act of 1918 was replaced by Indian Income Tax Act, 1922 (Act XI of 1922)
|
|
5.
|
XI of 1922
|
Indian
Income Tax Act, 1922
|
The Income
Tax Act, 1961 which came into force on April 1, 1962, replaced the Indian
income tax Act, 1922.
|
|
6.
|
34 of 1953
|
Estate Duty Act, 1953
(It is also known as inheritance tax)
|
Estate Duty Act was abolished with effect from March 16,
1985
|
|
7.
|
27 of 1957
|
Wealth Tax Act, 1957
|
The application of the Wealth Tax Act has been discontinued since 1
April 2016.
|
|
8.
|
29 of 1957
|
Expenditure-tax Act, 1957
|
The expenditure tax was first
introduced by Sh. T. T. Krishnamachari (then Finance Minister) in 1957. After being abolished in 1962 by Shri Morarji Desai, it
was brought again in 1964. It was finally abolished in 1966 after
which Shri Chaudhary Charan Singh tried to bring it again in 1979 but failed.
|
This Expenditure-tax Act has been repealed by the Finance Act, 1966 (13 of
1966), section 40 (with effect from 01.04.1966).
|
9.
|
18 of 1958
|
Gift Tax Act, 1958
|
The Gift Tax Act was repealed with effect from 1st October,
1998
|
|
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