Before talking about the evolution of taxation systems over the years, let us first understand what tax is. It is defined as a mandatory financial charge or some other type of levy imposed upon a taxpayer by a governmental organization in order to fund government spending and various public expenditures. Over the decades, there has been a significant change in the practice of charging income tax. Let us look into the history of income tax from ancient times.
The origin of taxes in India can be traced back to the ancient texts of "Manusmriti" and "Arthashastra." The philosophies in Kautilya's arthashastra deal with the system of taxes in a very planned and elaborate manner. According to Kautilya, the power of a government depends on the strength of its treasury. Kautilya's philosophy of 'kosh mulo dand' can be found on the logo of the Income Tax Department. The first king in India known for establishing a formal tax system was Chandragupta Maurya. His administration is mentioned in detail in the Arthashastra written by Kautilya, also known as the chief advisor to Chandragupta Maurya. According to the history of taxes by the income tax department, taxes in these ancient times were collected at 1/6 of the produce, or 17%, from land revenue, from traders (artists and artisans) at 1/5th of their income, or 20%, and also in the form of octroi, customs, and general sales tax.
Coming to the medieval era, the Jagidari system was introduced. Under this system, the land was allocated to jagidars, and they were made responsible for the collection of taxes from the allocated land. Moreover, the Delhi sultans followed various ways to augment revenues. the chief ones being:
- Khiraj (land revenue): This was the major source, constituting a fifth of the taxpayer's total produce/income. though it was raised to half under Alauddin Khilji and Muhammed bin Tughlak. The tax was imposed only on non-Muslims, though children, women, and monks were exempt.
- Octroi: levied on commercial goods, with an additional import tax of 2.5%-10% on items sourced from other kingdoms.
- Zakat: a small tax imposed on Muslims.
By the 13th century, the most famous pre-modern South Indian state, the Chola Empire, was in severe agrarian crisis, with widespread poverty and people selling themselves into slavery due to unpaid taxes. Despite efforts to reduce taxes and limit land acquisitions by the wealthy, these measures often came too late. Moreover, similar struggles were faced by the Mughal Empire, which also dealt with unfair taxation, peasant oppression, and powerful landowners weakening the state.
In the 18th century, the Mugal power declined and the East India Company began taking control. Under the East India Company, the traditional taxation system was drastically altered. The British imposed heavy land taxes without offering any concessions, often forcing farmers to abandon their land. The company profited by collecting taxes, purchasing produce with that tax money, and selling it abroad, leading to widespread exploitation and hardship for Indian farmers. In 1858, after the revolt of 1857, the control was transferred from the East India Company to the British Crown. In 1860, James Wilson introduced the first budget of India. He divided income into four schedules, each of which was taxed as:
- Income from land property
- Income from professions and trade
- Income from securities, annuities, and dividends.
- Income from salaries and pensions
On agriculture income, a 2% tax was imposed on income between Rs. 200 and Rs. 499 and 4% on incomes above this. They also taxed various economic activities, requiring businessmen to obtain a government license and were forced to pay taxes on matchboxes, tobacco, and even salt. Indian traders had to use Council Bills for payments purchased in London, leading to additional taxes on currency exchange. This system ensured that significant profits from Indian trade ultimately benefited Britain. Additionally, heavy taxes on cash crops like indigo and opium were introduced initially to recover from the 1857 revolt but became a major revenue source for the British.
Between 1860 and 1886, the British government revised tax laws every three years and alternated between license tax and income tax depending on the financial requirements of the empire. Due to the low collection of taxes under the license tax system, it was abolished in 1886, and income tax became the base structure of taxation in India. In 1886, the government reintroduced the Income Tax Act. Under this act, income was divided into four categories and taxed separately:
- Salaries, pennies, or gratuities
- Net profits of companies
- Interest on the securities of the government of India
- And other sources of income
During 1916 to 1922, tax bases were constantly widened to recover the financial losses sustained by the British empire during World War 1. As predicted in Manusmriti and Arthashastra, tax avoidance became out of control in India due to excessive taxes and complicated tax laws. The Income Tax Act of 1922 sought to create a tax administration and a tax appellate authority with an aim to reduce tax avoidance and became one of the most comprehensive tax laws of that time. Changes made in the act were as follows:
- Fixing of tax rates every year by a special finance act at the time of the annual budget
- Provision of ex parte assessment
- TDS was made compulsory for private employees.
- Re-opening of assessment allowed.
This act was substantially updated in 1939 to meet the financial losses sustained by the British Empire during World War 2. However, this time around things were not that simple; India had already begun its march to the civil disobedience movement. Increased tax avoidance, civil disobedience, and its own financial crises made India a financial burden to the British administration, and in 1947 India became an independent nation. The Income Tax Act of 1922 was amended post-independence and replaced in 1961 with our very own income tax act.
After independence, broadly India went through four stages of economy: agriculture economy, industrialization or liberalization, globalization, and digital economy. Each of them brought new tax issues with it, and tax laws over time became more complicated. India till today faces issues of tax avoidance, civil disobedience, and huge public deficits. In today's times, the taxation system has become much more systemized, and the government is constantly trying to make it less complicated for citizens. Currently, the Income Tax Act follows two tax regimes: the default and the old tax regime, each having its own unique benefits. Taxpayers have the flexibility to choose between the old and new regimes based on what works best for their financial situation. With the introduction of GST in 2017, the government has tried to address various loopholes in the taxation system. The Goods and Services Tax replaces the Value Added Tax (VAT) system, which had several significant issues, including the cascading effect (tax on tax), multiple tax rates, limited input tax credit, and complex compliance procedures. With the help of GST, the government aimed to create a more streamlined, uniform, and efficient taxation system, eliminating many of these problems. 17 taxes, including central taxes and state taxes, were subsumed under GST.
To conclude, India has been constantly amending its taxation laws, and with the recent news that Finance Minister Nirmala Sitharaman is expected to introduce a new income tax law within the next six months, it will be exciting to see what changes are made. This ongoing effort reflects the government's commitment to creating a more efficient and taxpayer-friendly system, adapting to the evolving needs of the economy and its citizens.
CAclubindia
