EVALUATION OF TAXATION SYSTEM IN INDIA

[DR.MARIAPPAN GOVINDARAJAN]

Any person cannot live in isolation. He requires food, safety, wealth etc. He cannot himself attain them. In a family each and every member requires the help of others. Father earns money, mother managed the income of the father and arranges food and maintains the health of family members. Children are growing up, helping their parents and live in a joint family life.

Like a family the people used to live in groups. This group may be small or large. A small group may be a village. A large group may be a State or a Country. The people in this system join together mainly because of safety, security etc. To achieve this money is required. Who is to collect money? The people living in a group forms an association for themselves and elect their head who will take care of the said group.

In a country people select their representatives who may be the members of the State or a Country. These people make rules for the safety, security and wealth of their State or Country. Without money they can do nothing. Therefore, they collect money from the people by means of tax. Therefore, the tax system was prevailing from the earlier periods of livelihood.

The word tax comes from taxare or taxo. which is Latin and means to determine or identify the worth of something. Governments impose taxes to use the services provided by it. Taxes are imposed and collected by the state. The state then uses the money collected for various welfare schemes or services and runs the government. The economic strength of a nation is dependent on how good the tax systems of the nation are. Some characteristics of tax are that it is compulsory for the public good, it is paid from one’s income and it improves the revenue of the state.

Earlier taxation system

K.B.Sarkar commends the system of taxation in ancient India in his book ‘Public Finance in Ancient India’, (1978 Edition) as follows:-

‘Most of the taxes of Ancient India were highly productive. The admixture of direct taxes with indirect Taxes secured elasticity in the tax system, although more emphasis was laid on direct tax. The tax-structure was a broad based one and covered most people within its fold. The taxes were varied and the large variety of taxes reflected the life of a large and composite population’.

The Mauryan Empire, under the rule of Emperor Chandragupta Maurya and later Emperor Ashoka, (322 BCE to 185 BCE) implemented a well-organized taxation system to finance the administration, military, and public works. Major resources for collection of tax are land revenue, trade and commerce, mining and forest resource, profession and occupation, wealth and property. The Mauryan Empire had a well-structured administrative system to collect taxes efficiently.

Manusmriti, suggests the king collect and regulate taxes in a manner that is fair on the subjects. As per provisions mentioned in it:

• Traders must pay 20% or 1/5th of their income;
• Artisans must pay 20% or 1/5th of their income;
• Agriculturists must pay 1/6th, 1/8th, or 1/10th of the crop produce, depending on the circumstances.

In the 3rd century BCE, the Arthashastra deals with the subjects of politics, economics, military and defence, and state functioning, to name a few. The affluent pay high taxes as compared to the less privileged. It also flattened the tax rate for agriculturists at 1/6th of the land produce. Moreover, it mentions taxes regarding the import, export, tolls, and income tax during emergencies.

Taxation during colonial

While ancient texts play a crucial role in the evolution of taxation in India, the income tax system as we know it today first came into the picture in the year 1860. It was introduced by Sir James Wilson during the British era in the country. The taxation policies were formed to compensate for the loss to the British government of the time during the military mutiny of 1857. The said Act was amended from time to time.

Income Tax Act, 1886

In the year 1886 Income Tax Act was passed. This Act also underwent many amendments. Tax laws have witnessed constant revisions from time to time. Under this, the tax was levied on income from four sources including, income from salaries, pensions and gratuities, company net profits, interest on securities, and from other sources.

Income Tax Act,1918

On 01.04.1918 a new Income Tax Act was passed. introduced several changes to the previous Act. Among the various amendments, the deductions and receipts of casual or not recurring in nature that occurred during business and professional transactions were also taken into account while computing taxable income.

Income Tax Act, 1922

Repealing the Income Tax Act, 1918 the Income Tax Act, 1922 was passed. This Act provided flexibility to the income tax structure in India. This Act also helped to build a proper administration system for tax in India. It remained in force until the year 1961.

Independent regime

The Constitution of India empowers the Central Government and State Governments to levy taxes. No tax cannot be levied without the authority of law in the Constitution. The Constitution provides that the tax shall be levied from the public in the least genuine way that will not affect the public.

Tax levy is the compulsory one. The Supreme Court held that that a tax is undoubtedly in nature of a compulsory exaction of money by public authority for public purpose.

Two types of taxation

In India there are two types of taxation – direct tax, the tax paid by citizens directly to the Government such as income tax etc. and indirect tax in which the tax is paid by the citizens through the dealers from whom the products are sold or the services are availed.

The following are the direct taxes collected by the Central Government-

• Tax on corporate income;
• Tax on individual income;
• Wealth tax;
• Double taxation avoidance treaty.

The following are the indirect taxes levied by the Central Government-

• Customs duty;
• Central Excise;
• Service tax;
• GST (which replaced the central excise and service tax).

The following are the indirect taxes levied by the State Governments-

• State GST;
• Taxes on local bodies.

Before introduction of GST, State Governments levied Sales tax act which was replaced by the Value Added Tax.

Income Tax Act, 1922           

After independence the Income Tax Act, 1922 was continued. The Income Tax Act 1922 underwent numerous amendments and later it was repealed by the Income Tax Act 1961. The Act, 1961 was enacted in consultation with the Ministry of Law. This Act came into effect from 01.04.1962. The Central Board of Revenue was divided, giving birth to the Central Board of Direct Taxes (CBDT).

This Act imposes taxes on the following incomes-

• Income from Salary;
• Income from business or profession;
• Income from capital gains;
• Income from House property;
• Income from other sources.

Amendments

The Income-tax Act is dynamic legislation requiring regular updating and amendments to reflect the nation’s changing economic, social, and political realities. Many amendments were made to the Income Tax Act, 1961. The amendments reflect the economic changes, fiscal policies, and government priorities. It, therefore, adapts to changes in the economy, business environments, inflation rates, income sources, and global financial trends.

The Income Tax Act, 1961 was amended nearly 65 times till date. More than 4000 amendments were made to this Act through various finance Acts.

Direct Tax Code, 2013

Direct Tax Code, 2013 was proposed in draft but not enacted. The objectives of the Direct Tax Code, 2013 are-

• To replace the Income Tax Act, 1961;
• To consolidate all laws relating to direct taxes;
• To establish an economic, effective and equitable direct tax system;
• To achieve voluntary compliances;
• To reduce the scope for disputes and minimise litigation;
• To stabilise the tax regime;
• To pave the way for a sinel unified taxpayer reporting system
• Eventually to increase the tax GDP ratio.

Income Tax Bill, 2025

The Central Government introduced the new Income Tax Bill, 2025 in the Parliament. The objects of the said Bill are-

• To simplify the existing framework rather than completely overhaul it. The proposed Bill maintains continuity while ensuring improved clarity and efficiency.
• To reduce the compliance burden, minimise litigation, eliminate ambiguities, simplify language, streamline provisions by reducing the number of sections and so on. With respect to the proposed Income Tax Bill.

The language has been simplified wherever possible, without disturbing the mean. Many of the provisions in the existing Act became redundant. These are removed in the Bill. 149 Sections are removed. Many of the provisions in the existing Act are omitted by the Bill. 174 sections are omitted.           

The Parliament referred the Bill to the Select Committee for its consideration. It is expected that the said bill will come into force with effect from 01.04.2026.

References:

1. https://incometaxindia.gov.in/pages/about-us/history-of-direct-taxation.aspx.
2. https://www.pnbmetlife.com/articles/taxation/evolution-of-taxation-system-in-india.html.
3. www.ijnrd.org/papers/IJNRD2309405.pdf.
4. https://www.hciseychelles.gov.in/taxation-system-in-india.php.
5. https://pwonlyias.com/upsc-notes/taxation/
6. https://www.startupindia.gov.in/content/sih/en/international/go-to-market-guide/tax-system-india.html.
7. www.icsi.edu/media/portals/72/dtcppt-Group%203.pdf.