Income Tax History

The Constitution of India → Schedule VII → Union List → Entry 82 has given the power to the Central Government to levy a tax on any income other than agricultural income, which is defined in Section 10(1) of the Income Tax Act, 1961. The Income Tax Law consists of Income Tax Act 1961, Income Tax Rules 1962, Notifications and Circulars issued by Central Board of Direct Taxes (CBDT), Annual Finance Acts and judicial pronouncements by the Supreme Court and High Courts.

The government imposes a tax on taxable income of all persons who are individuals, Hindu Undivided Families (HUF’s), companies, firms, LLP, an association of persons, a body of individuals, local authority and any other artificial juridical person. The levy of tax on a person depends upon their residential status. The CBDT administers the Income Tax Department, which is a part of the Department of Revenue under the Ministry of Finance, Govt. of India. Income tax is a key source of funds that the government uses to fund its activities and serve the public.

The Income Tax Department is the biggest revenue mobilizer for the Government. The total tax revenues of the Central Government increased from ₹1,392.26 billion (US$20 billion) in 1997–98 to ₹5,889.09 billion (US$83 billion) in 2007–08. In 2018–19, the direct tax collections reported by CBDT were approximately INR 11.17 lakh crore.

Modern Times

The 19th century saw the establishment of British rule in India. Following the Mutiny of 1857, the British government faced an acute financial crisis. To fill up the treasury, the first Income-tax Act was introduced in February 1860 by James Wilson, who became British-India’s first Finance Minister.[7] The Act received the assent of the Governor-General on 24 July 1860 and came into effect immediately. It was divided into 21 parts consisting of no less than 259 sections. Income was classified under four schedules:

• Income from landed property
• Income from professions and trade
• Income from securities, annuities and dividends
• Income from salaries and pensions. Agricultural income was subject to tax.

Subsequently, many laws were brought to streamline income tax laws. For example, the Super-Rich Tax was introduced in 1918, and the new Income-tax Act was passed in 1918. However, the Act of 1922 marked an important change from the Act of 1918 by shifting the administration of the income tax from the hands of the Provincial Government to the Central government. Another remarkable feature of this Act was that the rules were to be enunciated by the annual finance Acts instead of the basic enactment. Again, a new Income-tax Act came in 1939.

The 1922 Act, was amended not less than twenty-nine times between 1939 and 1956. A tax on capital gains was imposed for the first time in 1946, although the concept of ‘capital gains’ has been amended many times by later amendments. In 1956, Nicholas Kaldor was appointed to investigate the Indian tax system in the light of the revenue requirement of the second five-year plan (1956–1961). He submitted an exhaustive report for a coordinated tax system and the result was the enactment of several taxation Acts, viz., the wealth-tax Act 1957, the Expenditure-tax Act, 1957 and the Gift-tax Act, 1958.

The Direct Taxes Administration Enquiry Committee, under the Chairmanship of Mahavir Tyagi, submitted its report on 30 November 1959 and the recommendations made therein took shape of the Income Tax Act, 1961. The 1961 Act came in to force with effect from 1 April 1962, by replacing the Indian Income Tax Act, 1922 which had remained in operation for 40 years. The present law of income tax is governed by the Income Tax Act, 1961, which has 298 sections and 4 schedules and is applicable to whole of India including the state of Jammu and Kashmir.

The Direct Taxes Code Bill was tabled in the Parliament on 30 August 2010 by the then Finance Minister to replace the Income Tax Act, 1961 and Wealth Tax Act. The bill, however, could not go through and eventually lapsed after revocation of the Wealth Tax Act in 2015.

Charge to Income Tax

For the assessment year 2016–17, individuals earning an income up to ₹2.5 lakh (US$3,500) were exempt from income tax.

About 1% of the national population, called the upper class, fall under the 30% slab. It grew 22% annually on average during 2000–10 to 0.58 million income taxpayers. The middle class, who fall under the 10% and 20% slabs, grew 7% annually on average to 2.78 million income taxpayers.

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