History of Income Tax in India ( Self Guide)

Taxation existed since the dawn of early civilization. The word tax is based on the latin word taco which means to estimate. To tax means to impose a financial charge or other levies upon a taxpayer. Tax is a compulsory payment to government by its citizens. This article takes a look at the development and history of income tax in India.

When was income tax introduced in India?

In India, this tax was first introduced by Sir James Wilson in 1860 to compensate the government for losses incurred as a result of the 1857 military mutiny. After that, some, changes were made from time to time. Another income tax law was passed in 1886. This law remained in force with various modifications from time to time.

A new income tax was passed in 1918 and replaced by another new law passed in 1922. This law was in force with many changes until the evaluation year 1961- 62. 

 Income Tax Act 1961 came into force on 1 April 1962. Applies to all of India and Sikkim (including Jammu and Kashmir). Since 1962, the union budget has made several sweeping changes to the income tax law each year.

Which country introduced income tax first?

The first records of organized records come from Egypt around 3000 B.C. It is mentioned in many historical sources, including the Bible.

Britain first levied income tax on movable property in 1798 to cover the costs of the war against Napoleon. It was first imposed in India in 1860 by the then British Indian government. 

Raja Chellia is the father of tax reform in India. Raja Chellia played a key role in reforming India’s economic policy.

What are the 3 types of income tax?

Below is a list of the three types of income tax.

1. Wealth Tax

This is a type of direct tax that must be paid when owning any kind of property, regardless of whether the property generates income. Wealth tax is levied on individuals, corporations, and HUFs (Hindu Undivided Families), and tax liability is based on residency status.

2. Corporate Tax

According to the IT Act 1961, domestic and international business organizations must pay corporate income tax. This tax is levied on domestic companies that exist as separate legal entities from their shareholders. 

Foreign companies that generate or are considered to generate income in India must pay corporate income tax. Corporate Income Tax also includes other income taxes such as FBT (Fringe Benefit Tax), MAT (Minimum Alternative Tax), and STT (Securities Transaction Tax).

3. Capital Gains Tax

Capital gains tax is another type of income tax in India. This is a tax levied on all income derived from the sale of property or investments. This includes real estate, automobiles, machinery, companies, art, bonds, and stocks. This applies to both individual taxpayers and businesses. Depending on how long you have held the investment or asset, you will have to pay either Short Term Capital Gains Tax (STCG) or Long Term Capital Gains Tax (LTCG).

How is the evolution of the income tax system in India?

Income Tax Act,1860

Income tax was first introduced in India by the British in 1860. The Act of 1860 expired in 1865 as it was passed only five years after him. This was replaced in 1867 with a license tax on professions and trades and changed to a certificate tax the following year. It was later repealed in 1873. License tax dealers remained in business until 1886 when they were merged under the Income Tax Act.

Income Tax Act, 1886

Act of 1886 levied a tax on residents as well as non-residents in India. The Act defined agricultural income and exempted it from taxation on existing basic income, a type of direct tax.

Income Tax Act, 1918

The 1918 Act also changed temporary or one-time income from businesses and professions. Although income tax in India has been a tax on net income from its inception, it was a law of 1918 that first introduced specific provisions on business deductions to calculate net income.  The 1918 Act was effective for a short period and was replaced by a new Act (Act XI, 1992) given the reforms introduced by the Government of India Act, 1919.

Income Tax Act, 1922

The history of the income tax department dates back to the year 1922. One of the key aspects of the 1922 Act was to lay the foundations for the tax administration mechanism and to establish tax rates in the annual Finance Act. This process is urgently needed to align tax rates with annual budget requirements and ensure some flexibility in the tax system.

Before 1922, the tax rate was set by the Income Tax Act itself, so changing the tax rate required changing the law itself. The Income Tax Act, of 1922 was the first to give specific names to the various income tax authorities and laid the foundation for a proper system of administration under the provisions of the Income Tax Act, of 1922, so it is the Income Tax Act, 1961 that currently applies in India.

Income Tax Act, 1961

Current Indian Income Tax Law is governed by the Income Tax Act 1961 as amended from time to time by the Annual Finance Act and other direct tax laws. This Act, which came into force on 1st April 1962, replaced the Indian Income Tax Act, of 1922 which was in effect for 40 years. In addition, a set of rules known as the Income Tax Rules 1962 was drafted to implement various provisions of the Act.

Frequently Asked Questions (FAQ)

Who is the father of income tax in India?

James Wilson is the father of income tax in India.

Who is the highest taxpayer in India?

Akshay Kumar is the highest taxpayer in India. 

Who is the youngest taxpayer in India?

Ayush Ranjan Rout is the youngest taxpayer in India.

Which state has the highest number of taxpayers in India?

Maharashtra has the highest number of taxpayers in India.

Which city in India has the highest taxpayer?

Mumbai City has the largest number of taxpayers. Mumbai is a major Indian city with a tax collection rate of around Rs 4.5 crore.

Wrapping Up

Income taxes and direct taxes collected by the state are used for national development. Therefore, all taxpayers must pay applicable taxes annually. Learn more about the different types of ITRs and income taxes to avoid confusion and ensure your taxes are paid correctly and on time. Failure to pay can lead to severe penalties and criminal prosecution.

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