Income Tax Act : A few words

Samarpan Mukherjee, Ex-Addl CIT

Income Tax Act is a comprehensive as well as a complex enactment of fiscal Statutes of the country. With the passage of time it has undergone various changes keeping in view the socio -economic needs of the society and the broader objective of rationalization of the taxation structure. In the process one Act has been completely replaced by another Act. In this article without going into the niceties of the statue, let us in few lines embark upon and make an effort to look into the genesis along with an approach and objectives of the presently operating tax laws.

Prevalence of a taxation system in India dates back to the Vedic age. King was the sovereign authority to levy and collect tax from its’ subjects in some form or the other, purpose of which was to have a slice of the produce derived out of the land on which king had the supreme authority. The extent of levy varied from subjects to subjects in a graded manner so that none is burdened and could feel the pinch. Besides, from the ancient sage Manu’s “Smrti”, we find the reference of a variety of tax measures. Manu stated that the king could levy taxes on its’ subjects which had the sanction of ‘Sastras’, means the legality. He advised that taxes should not however cause hardship to the citizen for whom it was meant and from whom it had been collected. He prescribed the following principles of taxation;-

• Traders and artisans   – 1/5^th of their profits in silver and gold.

• Agriculturists              -1/6^th, 1/8^th or 1/10^thof the produce as per the circumstances

• Performing artists       – ad hoc payment , rendering of personal services etc.

• Mode of Payment       – cattle, grains, raw materials,

In the post Vedic age, the reference of a well planned and systematic approach to levy and collect taxes for the state exchequer is found from Kautilya’s Arthasastra. It was around 300 B.C when Maurya Empire was at its’ height, a study of an organized governance for a civil society was done by Kautilya  . He suggested many do’s and don’ts for administering a firm economic policy and military strategy by a noble king, the ‘Rajashree’, the king with wisdom and virtues.  Along with the social ethics he also covered the aspect of welfare of the society. In respect of matters pertaining to taxation, his suggestions were an ideal blend of both direct and indirect taxes. During this period, collection of land revenue formed an important source of revenue to the State coffer. Besides, existence of levy of tax in the form of water taxes,   octroi duties, toll taxes, customs duties were all in vogue in this time. Taxes were also collected on Forest produce and from activities of mining of metals etc.

On a gradual transition from the ancient Hindu reign to Muslim period of Indian History, we find a shift of focus in the principle ownership of land as according to the Mohammedan Law, the same rested with the Almighty God. History tells us that both aggressive as well as oppressive practices of tax collection did exists at that period in some form or other at different point of time so that the military administration of the Monarchy is well served in the interest of the autocratic king who had the total power and control of state along with the place of worship. Incidentally, Mughol period experienced multiple sources of revenue collection, which apart from the land revenue as principal source of tax collection , income from property, persons and profession were all exploited for such purposes. During the period of Akbar there had been some commendable reform in the tax administration and collection of revenue under the leadership of Raja Todar Mal who also served as Revenue officer under Sher Shah Suri who had initiated some administrative reform in the system and assessment of collection of land revenue. Akbar made lot changes and modifications in this regard, which apart from decentralization of the system of annual assessment initially, subsequently replaced by a system where 1/3rd of the average produce of the land of the previous ten years was to be converted into cash revenue. Considering production, crop failure due to natural calamity, areas and the locality, this system was later revised.  Provisions for remission of taxes were also introduced during this period. Remissions of taxes were not only centered on one or two items but it included all sorts of taxes of which ”Nazars’, ‘Harvest Tax’, ’Jiziya’ and ‘Pilgrimage Tax’, Taxes on sale and purchases of horses. Cattle and trees are worth mentioning. However, most of these remissions were reverted back during the period of Aurangzib who only remitted those taxes which had the sanction of Islamic Law. ‘Jiziya’ and ‘Pilgrimage Tax’ was again reintroduced on Hindus.

A reference to the tax policy of Hindu rulers of that time also deserves mentioning. Raja Krishna Dev of Vijayanagar Empire in south though followed many tax policies of the Muslim rulers but he abolished those taxes that put burden to the tax payers. He also exploited other avenues to increase the state income by introducing Fees from mining, irrigation tax, custom duties from foreign trade etc.   In this regard it will be unjust if the name of Shivaji of Maharastra is not mentioned. As regards fixation and collection of land revenue, Shivaji was not a blind follower of the system adopted by the Muslim rulers nor he did accept the principles of assessment followed in south. Through a systematic survey he fixed a standard unit of measurement of land for the purpose of determining the land revenue. Besides, in his time custom duties, cesses, special taxes in the name of ‘Coronation Tax’, earnings from mints were all there though he abolished many existing taxes which were in existence prior to him. It is also important to mention here that during his period there was no control mechanism on currency as flow of all sorts of currency was in practice.

The present tax system in India virtually owes its’ origin to the British legacy. The prevailing economic scenario that existed in the post Sepoy Mutiny period forced the British rulers to impose a tax on income to augment government funding. Accordingly, in the year 1860, an Act to tax income was passed. Income arising out of profits from trade profession and property was taxed fixing the basic exemption limit of income for taxation at Rs.500.  The Act was in operation till 1865 when it ceased to exist. However in the year 1867, again due to the demanding situation of the economy a Licence Tax was imposed for identical purposes for one year and thereafter, with effect from 1^st April 1869 an Act to impose Income Tax was reintroduced with variable rates for different ranges of income slab starting from Rs.500 to Rs.1.00.000 and above. As per the existing social needs the system to tax income tended to crystalise in 1886 with in between modifications and alternations or variations from time to time in rates, slabs of income, administrative procedure and mechanism. The process went on till the First World War. Finally, as an outcome of the recommendations of All India Income tax Committee formed in 1921, by Act XI of 1922 Income Tax Act 1922 was enacted merging two existing Acts on Income Tax and Super Tax. In this Act apart from laying a foundation and making a proper tuning of the administrative machineries and functionaries, the operative portion of the statute was also given a more meaningful rationale. Concept of ‘previous year’, ‘income’, ‘taxable income’, ‘total income’, obligation of an ‘employer’ were all introduced . The 1922 Act was continued and operable with intermediary amendments and improvements till 31^st March1962 when it was completely replaced by the present Act.

Due to the impact of flow of money in few hands in the post second world war period and after the independence of the country in 1947, it was felt necessary both to augment government funding and to have a control on the economy with certain checks and balances. The 1922 Act was found to be inadequate. In 1954 John Mathai Commission or Taxation Enquiry Commission was set up to carry out an in depth study of the tax laws and their administration. Thereafter in 1956 at the request of the Government of India, famous economist Prof Nicholas Kaldor made an examination of the tax policies of the country and made quite a number of proposals for broadening the tax base and removing the prevalent inequalities. The primary structure of the present day tax system mostly depended on these studies and recommendations. Resultantly, in the Twelfth Year of the Republic of India, Income Tax Act 1961 had been enacted in the Parliament which came into operation with effect from 1^st April 1962.

This Act is in operation for about half of a century with additions, alterations, modifications, insertions, omissions, explanations and with supporting Schedules to the Act. Over the years it has put on lot of weight and volume. Numerically there are 298 sections but practically more than 600 live independent provisions which exist for effective implementations of the Act. There are quite a few numbers of sections where different self contained provisions have been expressed in one serial number by adding with the said number A, B, C, D  etc. Sections with alphabets like JJAA and VVA even have used to identify a particular provision of law by annexing with that Section for giving an   independent import and ramification. As for example, Sections 80 and 115. Besides, there are many other situations in the Act where we find   identical expression of numerical. Interestingly, we find in one particular Section, Section 10 which is operating only with clauses for denoting different sources and situations of income which are outside the ambit of tax. Even with all these exercises and ramifications   the Act can not run alone. For a proper implementation of the Act, it has to go along with it, a almost equally voluminous Rules and the Schedules and Appendix attached to the Act and the Rules respectively and the Circulars and the Notifications issued from time to time. Incidentally, the implementations and effectiveness of the Rules, called Income Tax Rules 1962 has also been made from 1^st April1962. Ever since the Income Tax Act and Rules have been made operative, till The Finance (No.2) Act, 2009 and Income Tax (Eleventh Amendment) Rules2009, as many as 109 Amendment Acts have been passed which however inter alia includes the Finance Acts of each year besides there are countless Amendments Rules framed in different years. All these exercises were only to address the prevalent situations and attempt for a rationalization and simplification of the operation of the law in force.

Both the Income Tax Act and the Income Tax Rules have laid down certain inclusive as well as exhaustive definitions of words, phrases and expressions. For understanding a particular term or expression whether defined or not in the Act or in the Rules, the settled principle is, their literal meaning coupled with their popular sense shall always be considered. Where the simple literal meaning give rise to incongruous, discriminatory and unintended results, to avoid absurdity the language can be modified to accord the intention of the Parliament so that the object of a particular provision of law is not frustrated. Even then the complex characteristics of the Statue could not be removed. It is felt that as long as the social surface is uneven, the parameter stands on an uneven balance. The scope for argument and controversy are automatically generated multiplying the complexities.

“Keeping pace with the suggestions originated from Prof. Kaldor, India is gradually shifting to the age of progressive taxation with more emphasis on collection of direct taxes. Though suitable amendments have been made from time to time in keeping with economic and social needs of a country where the population has already exceeded 100 cores but the enormity of the problem has been compounded in these years. Admitting the fact that changes in the rate of taxation have brought about substantial changes in the collection of direct taxes, yet we have a along way to go. In the year 1997 there was an attempt to simply the existing tax laws. Accordingly, the working of the draft Bill to consolidate and amend the law relating to income tax was placed before the public for general discussions and reactions. The proposal was in the form of “The Income Tax Bill 1997” proposing a new “Income Tax Act 1998” operable from 1^st April 1998 replacing the existing Income Tax Act 1961.There were only 251 sections which covered the entire gamut of the income tax laws. Be it whatever might be, it lost in oblivion and never came into operation. In a developing and growing economy with inter play of multiple social purposes, this does not sound unnatural. Hopefully, this year Hon’ble Finance Minister while presenting Finance Bill 2010 in the Loksabha on February 26, 2010 has announced that all deliberations and discussions are over and the implementation of Direct Tax Code will be effected from 1^st April 2011.  Now it is neither in the pipe line nor in making, will it be a reality. A replacement of the Income Tax Act ’61 is already overdue. If new Act withstands the test of time, the purpose of its effectiveness and successfulness will be proved. No amount of ‘ifs’ and ‘buts’  or in that matter any amount of conjunctions can be sufficient to find fault in any particular subject but it is also not denying a fact that to streamline a complex subject like income tax India is an upheaval task. So at present to   comment on it will be a premature conjecture. Let us hope that new Act will be able to rationalize and simplify the tax laws and it achieves the purpose for which it is meant. Both the honest tax payer and the country will sigh for a relief.