The origins of the income tax system can be traced back to as early as the 1900s; this not only means that the Indian tax system has come a long way, but it also means that this tax payment system is quite robust and has stood the test of time. Income tax is a direct tax and is a major source of revenue for the Indian Government.
Now, you can also claim tax* deductions and exemptions on various savings and schemes such as life insurance policies and many government-backed schemes resulting from the amendments to the various tax laws for years.
This direct tax is levied on organisations, Hindu Undivided Families (HUFs) and individuals is alike; however, these taxpayers should earn a certain amount of income and need to fall under a certain tax bracket for their income to be taxable. Here we will not only know who introduced income tax in India but also see how the system has evolved over the years.
A Brief on Income Tax
As a taxpayer, when your income is higher than a certain limit as prescribed by the income tax laws, income tax has to be paid on such income. The tax paid is used by the government to offer better education, healthcare, physical infrastructure and welfare schemes for all. The word tax has come from the LATIN term “taxare”, which means charge, and the Income Tax Act was enacted in the year 1961 along with a number of rules and provisions which not only help taxpayers pay their taxes but also help them file their tax returns and avail of tax refunds, if applicable.
Introduction of Income Tax System in India
The income tax system underwent further changes in India during British rule, and the structure of the system is somewhat similar to what the current and modern tax system looks like.
The debts that the British Government had to pay were immense on expanding the military forces. Hence, the first Income Tax Act was introduced in India on 24th July 1860 and has been the basic structure for the income tax system that we have today.
The income tax act back then was classified into four sections:
- Income from land property
- Salary and pension income
- Income from securities
- Income from profession and trade
Evolution of Income Tax System in India
Income tax is levied on taxpayers by the government based on the profits they earn from their income or profession. Let’s go through the years during which the income tax system in India evolved:
The New Income Tax Act of 1886 in India was introduced to reform and reorganise the older income tax laws. Under the New Income Tax Act 1886, income tax introduced in India was classified into four income sections. This act also underwent quite a few amendments from time to time:
- Income from salary, pension/gratuities
- Interest income from the securities of the Indian Government
- Income from the profits of companies
- Other sources of Income
To levy an income tax on individuals with more incomes or those earning more profits from various sources, a super tax was introduced in India in the year 1917. This helped the government widen the scope of their tax collection to include more income bracket under the system.
The new Income Tax Act was passed in the year 1918, and this act replaced the Income Tax Act 1886, bringing some major revisions and reforms to the Indian tax system.
1919 - 1922
The excess profit tax was introduced in the year 1919 to levy taxes on those earning additional profits from their business or trade. The Income Tax Act 1922 replaced the Income Tax Act 1918 and become a more comprehensive income tax law that covered a greater base of taxpayers.
Among the many prominent features of the latest income tax act, one of the most important reforms was the provincial authorities handing over the responsibilities of tax administration to the central government. Now ever since the Income Tax Act was introduced, the income tax act has undergone 29 amendments, reforms and changes that were carried out between 1939 and 1956.
After India gained its independence in 1947, the Law Commission and the Enquiry Committee made several recommendations based on which the Income Tax Act of 1961 was introduced. Ever since there have been several amendments to this Act which comprises 23 chapters and 298 sections. All of these sections cover the different aspects of levying taxes, tax collection, tax administration and so on by the Government of India.
As of today, under the Tax Act, 1961, income is classified under the following heads as stated below:
- Salary income
- House property income
- Capital gains income
- Income earned on profits/gains from business/profession
- Income from other sources
Each year, the Union Budget is presented by the Government of India, and some amendments may be recommended and made to the Income Tax Act. These changes may include revision of tax rates or introduction of new provisions, and so on.
The Union Budget of 2022 saw the introduction of a new but optional tax regime that lets taxpayers choose which tax regime they would like to opt for. If a taxpayer chooses to go with the new tax regime, they cannot go back to the previous tax regime. However, one can switch to following the new tax regime from the older one in the coming financial year.
For taxpayers of today’s generation, the older tax laws and the process of tax payment may not only seem slow but also unfair to some extent. With the technological development in our country and a more organised and completely digitalised approach to tax collection and tax returns, the Income Tax Department, the Government of India and also the taxpayers can benefit from the efficiency of the current tax collection process.