Brief history of income tax in India
The first Income-tax Act in India was introduced in 1860 on account of financial stress owing to the mutiny of 1857 and was to be in force for a period of 5 years. The concept of the aggregate income from all sources was not material except for determining the minimum taxable limit. Agricultural income from lands above a rental value of Rs. 600/- per annum was included for tax. The Act lapsed in 1865. The tax was revived in 1867 in the form of a ‘license tax’ on trades and professions on the basis of annual income. Tax was deducted from the salaries provided to government servants. This Act was in force for one year. The improvement of the financial situation by 1873 saw the abolition of income tax in that year.[1]
The great famine of 1876-1878 brought about the revival of direct taxation by the Act of 1877. Now there was a license tax on the trader combined with a cess on land.[2]
Act II of 1886 was the first important landmark in the history of income-tax in India. Its basic scheme has endured right till the present day. It introduced a definition of agricultural income almost in the form it stands today and the exemption granted in respect of such income has continued to be a feature of direct taxation since. [3]
Super-tax was levied by the Super-tax Act, 1917 later replaced by the Super-tax Act, 1920. The two acts levying income-tax and super-tax were replaced by a consolidated act which was the Indian Income-tax Act, 1922[4]
The year 1918 was the second landmark in the history of taxation in India. Act VII of 1918 was introduced and for the first time introduced the concept of aggregating income from all sources to determine the rate. The levy was on income earned in the year of assessment and not the previous year unlike other acts. The assessment was made in the first instance on income of the previous year and later was adjusted to income of the assessment year. [5]
The Indian Income Tax Act, 1922(XI of 1922) came into being as a result of the recommendations of the All India Income Tax Committee. The administrative power of levying income tax by the provincial governments now vested in the Central Government. An important change from the Act of 1918 was that the levy was now made in the year of assessment on income of the previous year instead of adopting the previous years income as a measure for ascertaining the income in the year of assessment as explained above. Further, with the advent of political independence in 1947 the ruling party felt the ever increasing need for money. It was also felt that too many amendments and changes had made the 1922 Act an oddly compact piece of legislation which needed replacement. The matter was referred to the Law Commission in 1956 and after two years of deliberations the Law Commission submitted on 26th September, 1958 its twelfth report incorporating the Bill of a new Act. The Direct Taxes Administration Enquiry Committee constituted in 1958 under the chairmanship of Sri Mahabir Tyagi also considered the matter. The Income-tax Bill, 1961 was drafted and the result is the Income-tax Act, 1961.[6][7]
Section 1 of the Income-tax Act, 1961
Section 1 of the Income Tax Act, 1961 begins with the marginal note ‘Short title, extent and commencement’. The Act is to called the Income-tax Act, 1961 per sub-section 1. The Act extends to the whole of India per sub-section 2. The Act came into force on April 1, 1962 per sub-section 3.
The power to levy a tax rests with Parliament and/or the Legislatures of the different States and such power is derived from the corresponding entries provided in the lists contained in the seventh schedule as provided under Article 246 of the Constitution of India, 1950. The power to levy income tax has been conferred upon Parliament vide Entry 82[8] of List I of the Seventh Schedule. Thus, Parliament being the competent body enacted the Income-tax Act, 1961 which came into force on April 1, 1962. The Income-tax Act, 1961 replaced the Indian Income-tax Act, 1922 which was in force until the promulgation of the current Income Tax Act, 1961.
The Act received the assent of the President on September 13, 1961 and was brought into force on April 1, 1962 from assessment year 1962-1963. Section 297(1) of the Act repealed the Indian-income Tax Act, 1922. However, the Act of 1922 would continue to be in force with respect to pending matters, or where a return of income had been filed before the commencement of the Act for any assessment year, and for other situations as mentioned in sub-section 2 to Section 297 thereof.
Since the past many years, there has been talk of the Government replacing the Income-tax Act, 1961 with a code to be known as the Direct Taxes Code. However, the Income-tax Act, 1961 has not been replaced and the code is yet to see the light of day.
The Income-tax Act, 1961 applies to the whole of India. Currently India is comprised of 28 States and 8 Union Territories. Initially, the act never applied to the State of Sikkim. Sikkim became a State and a part of India by virtue of the Constitution(Thirty-sixth Amendment) Act with effect from April 26th, 1975. Article 371F made special provision for Sikkim and clause (n) thereof empowered the President by notification to extend to the State any enactment in force in any State in India at the date of the notification. Thus, two notifications[9] were issued extending the Income Tax Act, 1961 to the State of Sikkim with effect from Assessment Year 1989-1990. However, by virtue of Section 26 of the Finance Act, 1989, the Income Tax Act, 1961 stands extended to the State of Sikkim with effect from Assessment Year 1990-1991 onwards.
Conclusion
The aim of this article is to provide a brief history of taxation in India and make known to readers slightly lesser known facts on the genesis of income tax i.e which body has passed the Act, the source of power etc. These facts are not widely discussed but it is important for every tax practitioner or any other person to have a good foundation of the subject which includes its history. Above all, I hope reading this article has proven worthwhile.
[1] Sampath Iyengar’s Law of Income Tax 11th edition
[2] Sampath Iyengar’s Law of Income Tax 11th edition
[3] Sampath Iyengar’s Law of Income Tax 11th edition
[4] Chaturvedi and Pithisaria’s Income Tax Law 6th edition
[5] Sampath Iyengar’s Law of Income Tax 11th edition
[6] Sampath Iyengar’s Law of Income Tax 11th edition
[7] Chaturvedi and Pithisarias Income Tax Law 6th edition
[8] 82. Taxes on income other than agricultural income
[9] Notification No. SO 1028(E) dated November 7th, 1988 (Ministry of Home Affairs) [1989] 176 ITR St. 222 and Notification No. 148(E) dated February 23rd, 1989 (Department of Revenue) [1989] 176 ITR St 223.
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