courtesy : Tax White Paper
History
Ancient times
Taxation has been a function of sovereign states since ancient times. The earliest archaeological evidence of taxation in India is found in Ashoka’s pillar inscription at Lumbini. According to the inscription, tax relief was given to the people of Lumbini (who paid one-eighth of their income, instead of one-sixth).
In the Manusmriti, Manu says that the king has the sovereign power to levy and collect tax according to Shastra:
लोके च करादिग्रहणो शास्त्रनिष्ठः स्यात् । — Manu, Sloka 128, Manusmriti (“It is in accordance with Sastra to collect taxes from citizens.”)
The Baudhayana sutras note that the king received one-sixth of the income from his subjects, in return for protection. According to Kautilya’s Arthashastra (a treatise on economics, the art of governance and foreign policy), artha is not only wealth; a government’s power depended on the strength of its treasury: “From the treasury comes the power of the government, and the earth, whose ornament is the treasury, is acquired by means of the treasury and army.” Kalidasa’s Raghuvamsha, eulogizing King Dilipa, says: “it was only for the good of his subjects that he collected taxes from them just as the sun draws moisture from the earth to give it back a thousand time.”
19th and early 20th centuries
British rule in India became established during the 19th century. After the Mutiny of 1857, the British government faced an acute financial crisis. To fill the treasury, the first Income-tax Act was introduced in February 1860 by Sir James Wilson (British India’s first finance minister). The act received the assent of the governor-general on 24 July 1860, and came into effect immediately. It was divided into 21 parts, with 259 sections. Income was classified in four schedules: i) income from landed property; ii) income from professions and trade; iii) income from securities, annuities and dividends, and iv) income from salaries and pensions. Agricultural income was taxable.
A number of laws were enacted to streamline the income-tax laws; the Super-Rich Tax and a new Income-tax Act were passed in 1918. The Act of 1922 significantly changed the Act of 1918 by shifting income-tax administration from the provincial to the central government. Another notable feature of the act was that the rules would be outlined by annual Finance Acts instead of the act itself. A new Income-tax Act was passed in 1939.
Present day
The 1922 act was amended twenty-nine times between 1939 and 1956. A tax on capital gains was imposed in 1946, and the concept of capital gains has been amended a number of times. In 1956, Nicholas Kaldor was appointed to investigate the Indian tax system in light of the Second Five-Year Plan’s revenue requirement. He submitted an extensive report for a coordinated tax system, and several taxation acts were enacted: 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 its recommendations took shape in the Income-tax Act, 1961. The act, which became effective on 1 April 1962, replaced the Indian Income Tax Act, 1922. Current income-tax law is governed by the 1961 act, which has 298 sections and four schedules.
The Direct Taxes Code Bill was sponsored in Parliament on 30 August 2010 by the finance minister to replace the Income Tax Act, 1961 and the Wealth Tax Act. The bill could not pass, however, and lapsed after revocation of the Wealth Tax Act in 2015.
Amnesty
In its income declaration scheme, 2016, the government of India allowed taxpayers to declare previously-undisclosed income and pay a one-time 45-percent tax. Declarations totaled 64,275, netting ₹652.5 billion (US$8.2 billion).
Tax brackets
For the assessment year 2016–17, individuals earning up to ₹2.5 lakh (US$3,100) were exempt from income tax. About one percent of the population, the upper class, falls under the 30-percent slab. It increased by an average of 22 percent from 2000 to 2010, encompassing 580,000 income-tax payers. The middle class, who fall under the 10- and 20-percent slabs, grew by an average of seven percent annually to 2.78 million income-tax payers.
Agricultural income
According to section 10(1) of the Act, agricultural income is tax-exempt. Section 2(1A) defines agricultural income as:
- Rent or revenue derived from land in India which is used for agricultural purposes
- Income derived from such land by agricultural operations, including the processing of agricultural produce, raised or received as rent-in-kind, for the market or for sale
- Income attributable to a farm house, subject to conditions
- Income derived from saplings or seedlings grown in a nursery
