Origin and Development of Taxation -Tax History Chronology

ANCIENT PERIOD
There is enough evidence to show that taxes on income in some form or the other were levied
even in primitive and ancient communities. References to taxes in ancient India are found in
“Manusmriti” and “Kautilya’s Arthashastra”. Manu the ancient sage and law giver stated that
king should levy taxes according to sastras. He advised that taxes should be related to income
and should not be excessive. He laid down that traders and artisans should pay 1/5th of their
profits in gold and silver, while the agriculturists were to pay 1/6th, 1/8th and 1/10th of their
produce depending upon their circumstances. The detailed analysis given by Manu on the
subject clearly shows the existence of a well-planned taxation system, even in ancient times.
Kautilya’s Arthasastra was the first authoritative text on public finance, administration and
the fiscal laws. Collection of income tax was well organized during Mauryan Empire.
Schedule of tax payment, time of payment, manner and quantity were fixed according to
Arthasastra. It is remarkable that the present day system of taxation is in many ways similar
to the system of taxation given by Kautilya 2300 years ago.
Medieval Era
The system of progressive taxation perhaps owes its origin to Emperor Krishna Devaraya of
Vijaynagar who maintained that taxes should not be levied at flat rates and the amount of tax
levied must depend upon the income of the farmer. Tax administration was further refined by
Sher Shah Sun later by Akbar. Tile Mughal emperors granted land revenue rights to d
Mansabdar in exchange for promises of soldiers in war time. The treaty of 1765 gave
Britishers the right to collect taxes on behalf of the emperor. Well before the dissolution of
the Mughal Empire in 1857, the British system of District Collectors of land revenue was
established.
Initial Period (1860-1886)
Income tax in its modern form was introduced in India for first time in 1860 by the British
Government to overcome the financial crisis following the events of 1857. Initially
Government introduced it as a temporary measure of raising revenue under the Income Tax
Act 1860 for a period of five years. Different tax rates were prescribed for different heads of
income. In the year 1867, it was transformed as licence tax on trade and profession. In the
year 1869, the licence tax was replaced by Income Tax again. The assessments were made on
arbitrary basis leading to inequality, unpopularity and widespread tax evasion. Income Tax
was withdrawn in the year 1874. After the great famine of 1876-78, the Government
introduced local Acts for income tax in different provinces. With several amendments, these
Acts remained in force till 1886. Thus, the period from 1860 to 1886 was a period of
experiments in the context of income tax in India.
PRE-INDEPENDENCE PERIOD (1886-1947)
In 1886, a new Income Tax Act was passed with great improvements than the previous Acts.
This Act with several amendments in different years continued till 1918. In 1918, a new Act
was passed repealing all the previous Acts. For the first time, this Act introduced the concept
of aggregating income under different heads for charging tax. In 1921, the Government
constituted „All India Income Tax Committee‟ and on the basis of recommendation of this
committee a new Act (Act XI of 1922) was enacted. This Act is a landmark in the history of
Indian Income Tax system. This Act made income tax a central subject by shifting the tax
administration from the Provincial Governments to the Central Government. During this
period, the Board of Revenue (Central Board of Revenue) and Income Tax Department with
defined administrative structure came into existence.
POST INDEPENDENCE PERIOD
The Income Tax Act 1922 continued to be applicable to independent India. During the early
post-independence period, the Income Tax legislation had become very complicated on
account of innumerable changes. During this period tax evasion was wide spread and tax
collection was very expensive. In 1956, the Government of India referred the Act to a Law
Commission to make the Income Tax Act simpler, logical and revenue oriented. The Law
Commission submitted its report in September 1958 and in the meantime the Govt. also
appointed a Direct Taxes Administration Enquiry Committee to suggest the measures for
minimizing the inconvenience to the assessees and prevention of tax evasion. This committee
submitted its report in 1959. The recommendations of the Law Commission and the Enquiry
Committee were examined and extensive tax reform programme was undertaken by the
Government of India under the supervision of Prof. Nicholas Kaldor. The Income Tax Bill
1961, prepared on the basis of the Committee‟s recommendations and suggestions from
Chamber of Commerce, was introduced in the Lok Sabha on 24.4.1961. It was passed in
September 1961 by Lok Sabha. The Income Tax Act 1961 came into force on April 1, 1962. It
applies to whole of India including the state of Jammu and Kashmir. It is a comprehensive
piece of legislation having 23 Chapters, 298 Sections, various sub sections and 14 schedules.
Since 1962, it has been subjected to numerous amendments by the Finance Act of each year
to cope with 5 changing scenario of India and its economy. Moreover the Central Board of
Direct Taxes is empowered to amend rules and to clarify instructions as and when it becomes
necessary. Besides this, amendments have also been made by various Amendment Acts e.g.
Taxation Laws Amendment Act 1984, Direct Taxes Amendment Act 1987, Direct Taxes Law
(Amendment) Acts of 1988 and 1989, Direct Taxes Law (Second Amendment) Act 1989 and
at last the Taxation Law (Amendment) Act 1991. As a matter of fact, the Income Tax Act
1961 has been amended drastically. It has therefore become very complicated both for
administration and taxpayers.
RECENT TAX REFORMS
The economic crisis of 1991 led to structural tax reforms in India with main purpose of
correcting the fiscal imbalance. Subsequently, the Tax Reforms Committee headed by Raja
Chelliah (Government of India, 1992) and Task Force on Direct Taxes headed by Vijay
Kelkar (Government of India, 2002) made several proposals for improving Income Tax
System. These recommendations have been implemented by the government in phases from
time to time. As regarding the personal income tax, the maximum marginal rate has been
drastically reduced, tax slabs have been restructured with low tax rates and exemption limit
has been raised. In addition to this, government rationalised various incentive provisions and
widened TDS scope. In case of corporate tax, the government has reduced rates applicable to
both domestic and foreign companies, introduced depreciation on intangible assets and
rationalised various 6 incentive provisions. Some new taxes have been introduced such as
Minimum Alternative Tax and Dividend Distribution Tax, Securities Transaction Tax, Fringe
Benefit Tax and Banking Cash Transaction Tax. However, Fringe Benefit Tax and Banking
Cash Transaction Tax were withdrawn by Finance Act, 2009. The Income tax administration
was restructured with effect from August 1, 2001 to facilitate the introduction of computer
technology. Further, keeping in mind the global developments, the department has made
considerable efforts for reforming the tax administration in recent years. Some important
measures in this direction are introduction of mandatory quoting of Permanent Account
Number (PAN), e-filing of returns, e-TDS, epayment, Tax Information Network (TIN),
Annual Information Return (AIR) for high value transaction, Integrated Taxpayer Profiling
System (ITPS), Refund Banker Scheme in certain cities etc. The main objective of these
reforms has been to enhance tax revenue by expanding the taxpayer base, improving
operational efficiency of the tax administration, encouraging voluntary tax compliance,
creating a taxpayer friendly atmosphere and simplifying procedural rules.