Introduction to Income Tax Act, 1961

Introduction to Income Tax Act, 1961

Introduction:

Tax is a payment made by individual and organization to the government. Government needs money for financing of defense, development such as construction of roads, dams, power projects, railways, health services etc.. Funds for all these requirements are collected by way of taxes. Taxes are the major source of revenue of any state. The role of the government is not just to maintain law and order but also to provide the above to the citizens.

In India all the taxes are divided into two parts i.e. Direct & Indirect Tax. Wealth Tax, Income Tax, Gift Tax, Corporate Tax are included in direct taxes.

Service Tax, Central Excise, Custom duty, Sales Tax, VAT are the indirect taxes. In the year 2017 GST has replaced all these indirect taxes. Out of the above taxes excluding VAT all the taxes are collected by central government. VAT is an important source of income in the hands of state government.

Structure of Taxation in India:

1. Direct Tax-

It is the payment made by the assessee directly to the government after income is received.

 

2.    Indirect Tax-

It is included in the price of commodities and services. This tax is paid by individuals to the government indirectly when they buy commodities or services.

 

Income Tax-

Income tax means tax on income earned by person during the previous year. This act was passed in parliament in September 1961. Hence, the title of the act is "Income Tax- Act, 1961". This act is applicable from first April 1962. This act is applicable to the entire country including Jammu and Kashmir.

 

History of Income Tax in India

Income tax is one of the most significant sources of revenue for the Government of India. Its evolution in the country is rooted in colonial governance and has since been shaped by political, economic, and social changes.

1. Early History

• Ancient Period:

o   Evidence of taxation in India dates back to ancient times, as mentioned in scriptures such as the Manusmriti and Arthashastra.

o   Tax was collected from peasants, artisans, and trade₹ It was typically levied on agricultural produce, wealth, and professions.

o   The concept of taxation was tied to dharma (moral duty) to support the king and administration.

• Medieval Period:

o   During the Mughal era, taxes such as zakat (charity tax) and jizya (poll tax on non-Muslims) were prominent.

o   Land revenue, under systems like Zamindari, was the main source of income for the state.

 

2. Introduction of Income Tax in British India

• Backdrop:

The need for a structured tax system arose during the colonial period due to increased administrative costs, especially after the Revolt of 1857.

• First Income Tax Law (1860):

The First Income Tax Law was introduced by Sir James Wilson to compensate for the losses incurred during the First War of Independence (1857). Key Features of First Income Tax Law were:

§  Taxed incomes above ₹200 annually.

§  Different rates were applied based on income brackets.

§  The law was a temporary measure and was repealed in 1865.

• Subsequent Developments:

Various attempts were made to refine the income tax laws between 1867 and 1886. In 1886, a more comprehensive Income Tax Act was introduced, establishing clearer rules for taxation.

 

3. Income Tax Act of 1918

Income Tax Act of 1918 Replaced the earlier 1886 Act to address ambiguities and inefficiencies. It introduced progressive taxation, where higher incomes were taxed at higher rates. This Act was later replaced by the Income Tax Act of 1922.

 

4. Income Tax Act of 1922

Income Tax Act of 1922 A significant milestone in the evolution of income tax in India. Its key feature were,

• Provided more comprehensive definitions and broader coverage of taxable income.
• Gave administrative powers to the Income Tax Department.
• The Act remained in force even after India’s independence.

 

5. Post-Independence Period

• Adoption of the Income Tax Act, 1922:

After gaining independence in 1947, the Indian government continued with the 1922 Act until it was overhauled.

• Income Tax Act, 1961:

o   Enacted on April 1, 1962, it replaced the 1922 Act.

o   Features:

§  Comprehensive provisions covering all aspects of income tax, including determination, assessment, and collection.

§  Introduced concepts like "residential status" and "scope of total income."

§  Applied uniformly across the country.

 

6. Key Developments in the Modern Era

·        Liberalization and Reforms (1990s):

o   Economic liberalization in 1991 necessitated reforms in tax administration.

o   Introduction of policies aimed at widening the tax base and reducing evasion.

o   Adoption of technology for tax filing and administration.

·        Digitization:

o   Launch of e-filing of income tax returns in 2003.

o   Online grievance redressal mechanisms introduced.

·        Tax Simplification:

o   Introduction of the Direct Taxes Code (DTC) to simplify and consolidate tax laws.

o   Replacement of the DTC with amendments to the Income Tax Act, 1961.

 

7. Key Milestones in Income Tax Administration

• PAN System (1995):
• Introduction of the Permanent Account Number (PAN) for taxpayers to streamline tax identification and transactions.
• GST and Indirect Taxation Reform (2017):
• While GST is an indirect tax, its introduction reduced overlaps and improved revenue collection alongside direct taxes like income tax.