History of Taxation in India
The article ‘History of Taxation in India’ aims to analyse and elucidate the history along with the features of the taxation system in India. Taxation is the most important and largest source of financing for the country. According to the provisions of the Constitution of India, the government has the right to collect these taxes from the public. The government uses tax money for various programs aimed at advancing the nation.
The Indian tax system is built on a three-tier federal framework. Taxation in India is a transfer of payment collected by the national government from the people or other taxpayers for the growth and security of the country. They are usually unavoidable taxes, fines or other charges imposed on people or businesses to pay for government activities.
Taxation in India is a concept that aims to improve society by providing basic comforts and conveniences to all. These payments are used for all public works, such as building schools or roads. They can be collected by an individual or a large company.
The state imposes taxes for state use and service. The state takes and collects them from the purchase or sale of goods or services. Taxes bring income to the state and are therefore one of the most important parts of the administrative system of any form of government. The strength of the economy depends on how good the tax system is. A fair tax system can promote the economic growth of a country and lead to its prosperity. This in turn makes its citizens happier and more productive.
Effective tax policy leads to GDP growth and it is considered healthy if it fulfils an attractive, distributive and stabilizing function in the economy. There are two types of payments – direct and indirect. Direct taxes are those that an entity pays directly to the government and include income tax, property tax, etc. Indirect taxes are taxes that the (economic) entity pays through third parties.
Origin of Taxation in India
The word ‘tax’ has been derived from the Latin word ‘taxare’, meaning ‘to assess the worth of something’.
Both Manu Smriti and Arthashastra refer to various tax measures. A detailed analysis of this subject in Manu Smriti and Arthashastra clearly showed the existence of a rational system of taxation even in ancient times. In addition, taxes were levied on various individuals such as actors, dancers, singers and all classes. In ancient times, taxes were paid in the form of gold coins, livestock, grain, raw materials and also personal services.
It is the oldest and most dominant source of income tax. Manusmriti emphasizes strategic imposition and regulation of corporate income tax. According to Manu, taxation should not be a painful experience for test subjects. Taxation must be correct enough to achieve a reasonable revenue target and feel right to the masses.
The income tax provisions of Manusmrti are as follows:
- Merchants would pay 20 per cent of the revenue
- Artisans would pay 20% of the income
- Farmers would pay 1/6, 1/8 or 1/10 of the value of the total output.
Arthashastra is one of the most important sources of tax laws and regulations in India. Arthashastra could be considered the main Indian text that mentions the finance, financial management and financial law of the country in a structured way. The book was written by Kautilya around 2300 BC. This accreditation had an enormous impact on the development of the Indian income tax system. Kautilya proposed a system of taxation based on the principle of “maximum welfare of society”. The text discussed the creation of a defined tax code. The principles, tax rates and obligations of tax collectors were determined in advance in the book. The schedule, payment dates, quantity and type of goods received for each payment were also coded. The book also mentions export and import taxes, road user fees, etc.
Income tax provisions mentioned in Arthashastra are:
- Farmers would pay land tax at a flat rate of 1/6 of the production
- The rich would pay higher taxes, and the less privileged would have lower taxes
- Reserve rule with limited flexibility for taxpayers
Sir James Wilson introduced the Indian tax system in 1850. He was appointed as the Finance Minister of India under British rule. The Indian Income Tax Act, enacted in 1860, marked a fundamental turning point in India’s taxation system. The reason behind the introduction of this law was to counterbalance the losses suffered by the British government after the famous rebellion of 1857.
Historical background of Income Tax in India
In India, the current system of direct taxation has existed in one form or another since ancient times
1860 – Sir James Wilson first introduced the tax. India’s first “Union Budget”, was presented by pre-independence finance minister James Wilson on 7 April 1860. The Indian Income Tax Act of 1860 was implemented to cover losses incurred by the government in the military rebellion in 1857. Income was divided into four schedules that are taxed separately:
- Income from landed property
- Income from professions and trades
- Income from Securities
- Income from Salaries and Pensions
However, it is important to note that this act was replaced by several license taxes.
1886 – Separate Income Tax Act was passed. That Act has been in force till now and various amendments have been made to it from time to time.
Under the Indian Income Tax Act of 1886, income was divided into four separate taxed schedules:
1) Salary, pension or gratuities
2) Net profit of companies
3) Interest in the securities of the Government of India
4) Other sources of income.
1918 – A new income tax was passed. The Indian Income Tax Act of 1918 repealed the Indian Income Tax Act of 1886 and introduced several important amendments.
1922 – It was again replaced by a new law passed in 1922. The history of the organization of the Income Tax Department begins in 1922. The Income Tax Act of 1922 provided for the first time a special nomenclature for the various income tax offices. The Income Tax Act of 1922 was in force until 1961. The Income Tax Act of 1922 became very complicated due to innumerable amendments. Therefore, the Government of India referred the matter to the Law Commission in 1956 to facilitate and prevent tax evasion.
1961 – After consultation with the Ministry of Justice, the Income Tax Act 1961 was finally passed. The Income Tax Act 1961 came into force on 1 April 1962. It applies to the whole of India (including Jammu and Kashmir). Every year since 1962, several extensive changes have been made in the Union Budget in the Income Tax Act, which includes the Finance Act. Once approved by both Houses of Parliament and assent of the President of India, it becomes a Finance 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.
Characteristic Features of Income Tax
The amount paid when the government taxes the direct income of its residents on that basis is called income tax. There are countless complexities, hurdles, difficulties and characteristics associated with income tax in India. Although the whole procedure may seem complicated, effective management of the situation can have consequences for the people of the country. Income tax is a means by which the government ensures the correct and timely performance of community activities and public duties.
The basic features are mentioned below:
- With income tax, the income of the previous year is taxed according to the tax rate of the current tax year in force in the Financial Management Law.
- With income tax, a person’s income from the previous year is taxed.
- The liability of the taxpayer is calculated based on his residence status in the previous year.
- The income tax liability arises only if the total income of the reporting period exceeds the tax-free threshold stipulated in the Finance Act for that year.
- The income tax is progressive, which means that as income increases, the tax burden increases.
- Taxes must be deducted at the source and deposited in the treasury.
Instead of assuming that income tax is a burden, citizens should contribute to the development of the nation by paying income tax. We, the citizens of India, should try to understand the importance of income tax and the perceived role of their money in the growth of the country. As a responsible citizen, you must always pay income tax on time, because only through taxes can our country remain among other industrialized countries and move forward. If people begin to see income tax as a burden and avoid paying it, then the growth of our nation will suffer, as well as social decay, to avoid paying the same income tax on time.
 History of Direct Taxation, Available Here
 History of Taxation in India, Available Here
 Evolution of Income Tax and Section 1 of Income Tax Act, 1861, Available Here
 Taxation in India: Types, Available Here
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