Taxation [before & after 1947]
Taxation plays a crucial role for thousands of years. It helps government for their functions and providing public services. The word tax was originated from the word "taxare," which is a latin word, which state the meaning to determine the value of something. In shorted and simple statement, it is about finding out the worth of something in order to decide what amount of tax is to be paid.

Before talking about the evolution of taxation systems over the years, let us first understand what tax is. Tax is defined as an mandatory financial charge or some other type of levy imposed upon a taxpayer by a governmental organization to fund government spending and various public expenditures. Over the years, the way income tax is collected and used has changed a lot.
Before Independence

• Taxation on land under British:
• In the 18th century, the Mughal power declined, and the East India Company began taking control.
• Under the control of the East India Company, the old way of collecting taxes changed significantly.
• The British imposed heavy taxes without offering any concessions, forcing farmers to abandon their land.
• The East India Company profited by collecting taxes, purchasing produce with that tax money, and selling it abroad, leading to exploitation and hardship for Indian farmers.
• In 1858, after the revolt of 1857, control was transferred from the East India Company to the British Crown.
• In 1860, James Wilson introduced the first budget of India.
   
• Three systems of taxation on land introduced by the British:
• Zamindari System: Ownership of lands was transferred to Zamindars, who were authorized to collect fixed taxes and pay them to the British.
• Ryotwari System: Developed by Thomas Munro in 1820 in South India, including Madras, Bombay, and parts of Assam. Under this system, ownership rights were given to peasants who paid taxes directly to the British.
• Mahalwari System: Introduced by Holt Mackenzie in 1822 in regions like Central Province, North-West Frontier, Agra, and Punjab. A unit called 'Mahal' (comprising one or more villages) was collectively liable to pay taxes.
   
• First Budget and Income Tax:
• In 1860, the first Union Budget was presented by British Economist Sir James Wilson.
• Three types of taxes were introduced for the first time:
  • Income tax
  • License tax
  • Tobacco duty
     
• Income Tax Act, 1860:
• Several changes were made under this Act related to taxation in British India.
• The Income Tax Act of 1961 further reformed how taxes worked in India, particularly in tax assessment, organization, and collection.
• First Direct Tax: Before this law, India relied on indirect taxes like customs and excise duties. This was the first law to directly tax personal income.
• Taxes on Income: This Act introduced taxes on different sources of income, including property, businesses, professions, and trades.
• Significance of the Income Tax Act of 1860: This law marked a turning point for India's taxation system, introducing income tax, creating a centralized tax system, and establishing assessment and collection rules. Though temporary, it laid the foundation for future income tax laws in India.

Four Types of Income Tax

Income tax was charged on:

• Landed property income
• Income from professions and trades
• Income from securities
• Salaries and pensions

Other Taxes

Salt Tax

The British introduced a salt tax in 1882, which stopped Indians from collecting or selling salt. The British controlled the entire salt trade. The tax was only lifted after the famous Salt Satyagraha led by Mahatma Gandhi during the Dandi March.

Custom Duty

From 1846, the British set import taxes on goods brought into India. Cotton goods from Britain had a 3.5% tax, while other goods had a 5% tax. After the Great Depression, these taxes increased to 15% for British goods and 20% for goods from other countries.

Reforms

Between 1865 and 1886, the British made several changes to the tax system, including a new Income Tax Act of 1865. This law taxed income from land, agriculture, and trade, but it was an early and incomplete system that was easy to avoid.

Income Tax Act, 1918

This Act includes 53 sections. It came into force on the first day of April, 1918. This Act covered all types of income, regardless of the source, if it accrued, arose, or was received in British India. Major reforms under this Act:

• Receipts and deductions of non-recurring nature were included in taxable income computation.

Reasons for the Act:

• To raise revenue for the government
• To address the financial needs of the British Colonial Government
• To introduce corporate taxation, ensuring companies paid taxes
• To address economic and social changes
• To create a legal framework for taxation

Exceptions under this Act:

• Any income derived from property held under trust or other legal obligation wholly for religious or charitable purposes.
• The income of local authorities.
• Interest on securities held by any Provident Fund under the Provident Funds Act, 1897.
• Legacies.
• Any perquisite or benefit which is neither money nor reasonably capable of being converted into money.
   

Income Tax Act, 1922

This Act consisted of 68 sections and came into force on April 1, 1922. It was a more comprehensive income tax law that covered a larger tax base.

Why was the Income Tax Act, 1918 replaced by the Income Tax Act, 1922?

• More structured, with clear roles for authorities
• Introduced progressive tax rates based on income
• Detailed provisions for company taxation
• Established the Income Tax Appellate Tribunal (ITAT)
• Expanded to include more sources like capital gains
   

After Independence

Income Tax Act, 1961

This Act is considered the primary legislation for income tax. It is a progressive tax act, meaning that as an individual's income increases, the tax imposed also increases. Key features of the Income Tax Act, 1961:

• It outlines provisions for individual and corporate taxation.
• It lays down the procedure for tax collection.
• Consists of 23 chapters, 298 sections, and 14 schedules.
• Came into force on April 1, 1962.
• Applicable throughout India.
• Direct tax in nature—taxpayers pay a percentage of their income directly.

Main Objectives of Income Tax Act 1961

Some of the objectives are as follows:

• Price Stability - The IT Act maintains price stability in the economy by laying out regulations for direct taxes. It serves as a measure to control private spending, thereby keeping a check on the inflation of commodity prices.
• Full Employment - This Act reduces the income tax rates in order to promote higher demand for goods and services. This, in turn, leads to increased employment opportunities, thus fulfilling the objective of full employment.
• Non-Revenue Objective - A higher tax rate is applicable for wealthy people compared to the poor. In this way, the Income Tax Act encourages a progressive taxation system that addresses the inequality in wealth among its citizens, carrying out its non-revenue objective.
• Cyclical Fluctuations Control - When there is an economic boom, the income tax rates are increased, while in times of recession, it is reduced. In this way, the Act maintains control over cyclical fluctuations in the value of money.
• Reducing Balance of Payment Issues - The Income Tax Act imposes customs duties on the import of certain goods. This helps encourage the domestic production of goods, thereby reducing the balance of payment difficulties for the authorities.

Features of Income Tax Act 1961

Some of the salient features of the Income Tax Act 1961 are as follows:

• Income tax is a form of direct tax that needs to be borne by the taxpayer. It cannot be transferred to another person.
• The Central Government of India controls this form of taxation.
• It is applicable to the taxpayer's income which was earned in the previous year.
• Tax calculation is applicable based on the assessee's income tax slab.
• The government levies a progressive income tax rate so that rich and economically powerful individuals have to pay taxes at higher rates.
• Deductions apply to a maximum limit per financial year in certain cases.

Conclusion

• Before Independence – There were various laws related to the taxation system made by the Britishers.
• The first Income Tax Act was made in 1860. This Act was the first to talk about taxing individuals, meaning people who earned income above a certain limit had to pay income tax.
• This Act was replaced by the Income Tax Act 1918, which introduced unnecessary Excise Duty/Custom Duty, Sales Tax, or Indirect Tax.
• Later, the Income Tax Act 1922 replaced the previous Act, introducing a more structured system of imposing and recovering tax.
• After India gained independence, it began to develop its own tax system. The post-independence tax laws were designed to recognize the rights of weaker sections, including poor people.
• All the existing laws and Acts were eventually replaced by the Income Tax Act 1961, which remains the primary law governing income tax in India.

Written By:

• Deepanshu Bhati and
• Sneha Gaur