Income Tax - Modern History of Income Tax

The Income Tax history in modern India dates back to 1860. In this year first Income Tax Act was introduced and which remained in force for a period of 5 years. This Act lapsed in 1865. Thereafter Act-II of 1886 was in force. This Act of 1886 was the improved version. It introduced the definition of agricultural income and the exemption it granted in respect of agricultural income has continued to be a feature of all subsequent legislations.

The year 1918 saw the introduction of Act VII of 1918, it recasted the entire tax laws. This Act was designed keeping in mind the remedy to certain inequalities in the assessment of individual tax payers under the 1886 Act. The Act introduced the scheme of aggregating income from all sources for the purpose of determining the rate of tax.

The Indian Income Tax Act, 1922 which came into being as a result of the recommendations of the All India Income Tax Committee is a milestone in the evolution of Direct Tax Laws in India. Its importance lies in the fact that the administration of the Income Tax hitherto carried on by the Provincial Governments came to be vested in the Central Government.

The Act of 1922, similar to the Act of 1918, applied to all incomes "accruing or arising", or received in British India, or deemed to be accrued, arisen or received. This Act marked an important change from the Act of 1918 by establishing the charge in the year of assessment on the income of the previous year instead of merely adopting the previous year's income as a measure of income of the year of assessment.

The Act made a departure by abandoning the system of specifying the rates of taxation in its own Schedules. It left the rates to be announced by the Finance Acts, a feature which survives to this day. It also enabled loss under one head of income to be set-off against profits under any other head, so that the tax was chargeable only on net income.

The Act of 1922 remained in force till the year 1961. In 1956 the Government had referred the Act to the Law Commission to recast it on logical lines and to make it simple without changing the basic tax structure. The present Income Tax Act is the Act of Sept., 1961.

Income Tax Timeline in India
1860 1860 Introduced for the first time for a period of five years to cover the 1857 mutiny expenses. It was abolished in 1873.
1877 1877 The tax system was revived as a result of the Great Famine of 1876.
1886 1886 Introduced as Act II of 1886. It laid down the basic scheme of income tax that continues till the present day.
1918 1918 Introduced as Act VII of 1918. It had features like aggregation of income from various sources for the determination of the rate, classification of income under six heads and application of the Act to all income that accrued or arose or was received in India from whatever source in British India.
1922 1922 On the recommendations of the All-India Income Tax Committee, the father of the present act was introduced. The central government was vested with the power to administer the tax.
1961 1961 The Act came into force from 1 April 1962, it extended to the whole of India.
1997 1997 Establishment of the Tax Reform Committee under the chairmanship of Dr. Raja J. Chelliah. It was followed by restructuring the income tax with parameters like lower taxes, fewer slabs, higher execptions, etc.
2003 The Kelkar Task Force, which was followed by outsourcing of PAN/TAN, exemption of dividend income, compensated by levy of the dividend distributed tax to be paid by the company.

Income Tax Rates Across the World Country Personal Income Tax Rate
Australia 0% - 48.5%
Canada 16% - 29%
Estonia 24% - 24%
Denmark 44% - 63%
Hong Kong 0% - 33%
India 0% - 33%
Israel 10% - 49%
Malaysia 0% - 29%
Mexico 3% - 32%
Russia 13% - 13%
Singapore 0% - 22%
UK 0% - 40%
US 10% -35%