Section 1 of the Income Tax Act, 1961 begins with the marginal note ‘Short title, extent and commencement’. The Act is to called the Income-tax Act, 1961 per sub-section 1. The Act extends to the whole of India per sub-section 2. The Act came into force on April 1, 1962 per sub-section 3. The history of Income Tax in India is later back to the 1800s, In 1860 the tax was first introduced in India by Sir James to cover the losses incurred by the government as a result of the military mutiny of 1857. In 1918, a new income tax was passed and it was again replaced by another new law passed in 1922. This Act remained in force till the assessment year 1961-62 with several amendments. In discussion with the Ministry of Law, the Income Tax Act, of 1961 was eventually passed. The Income Tax Act, of 1961 came into force on 1 April 1962. It applied to the whole of India and Sikkim (including Jammu and Kashmir).
Since 1962, many far-reaching amendments to the Income Tax Act have been made every year by the Union budget. In this article, we will be concerned about the brief history of income tax in India and Section 1 of the Income-tax Act, 1961.
What is the Income Tax Act 1961?
The Income Tax Act 1961 is the set of rules and regulations upon which the Income Tax Department levies, administers, collects and recovers taxes. It contains 298 sections, 23 chapters and several important provisions which contain all the aspects of taxation in India.
Now, the nature of the Income Tax Act 1961 can be classified into – direct and indirect taxes. The taxpayer must pay direct taxes at a certain percentage based on his/her income. While the latter is levied by the government indirectly during the sale of goods and services.
History of Income Tax in Ancient India
In India, the system of direct taxation has come into force in one form or another since ancient times. In both the Manu Smriti and the Arthasastra, references have been made to a variety of tax measures. The thorough analysis given on this subject by Manu Smriti and the Arthasastra has clearly shown the existence of a judicious system of taxation even in ancient times. Not only that, taxes were levied on various classes of individuals such as actors, dancers, singers, and every stratum. Taxes in ancient times were payable in the form of gold coins, livestock, grain, raw materials, and also personal service.
Manu Smriti-Manusmrti is the oldest and predominant source of income tax provisions. Manusmrti emphasizes the strategic imposition and regulation of corporate income tax.
According to him, taxation must not be a painful experience for subjects. Taxation must be right enough to meet a reasonable revenue target and also feel right to the masses.
The income tax provisions under Manusmrti are:
- Merchants would pay 20% of income
- Artisans would pay 20% of the income
- Farmers would pay 1/6, 1/8, or 1/10 of the value of the total production.
Rates vary according to circumstances affecting crop production. In addition, merchants and artisans were required to pay an income tax in the form of gold or silver.
Arthashastra-Arthashastra is one of the more prominent sources of tax laws and regulations in India. The Arthashastra could be considered the primary Indian text mentioning public finance, financial administration, and financial laws in a structured manner.The book was written by Kautilya around 2300 BC. It has been accredited to have a huge impact on the development of the income tax system in India.
Kautilya suggested a tax system according to the principle of “maximum welfare for society”.
The text contemplated the creation of a defined tax code. The principles, tax rates, and duties of tax collectors were predetermined in the book.
The schedule of each payment, due dates, quantity, and type of commodities received were also coded. The book also mentions the taxation of export and import of goods, tolls, etc.
The income tax provisions as stated in the Arthashastra are;
- Farmers would pay 1/6 of production flat rate for land taxation
- The rich would pay higher taxes and the less privileged would be levied lower taxes
- Book rule with limited flexibility to tax collectors
Income Tax Act 1860-The taxation policy adopted by the British Government of India had the greatest influence on the present taxation system of India. The policy of income tax laws that were structured under the British Indian government could be credited to the well-known incident of mutiny. The mutiny of 1857 by the Indian soldiers of the British army caused huge losses to the then-British government.
The Income Tax Act was introduced in 1860 to cover the losses suffered as a result of the rebellion. The Act of 1860 was applied for 5 years and was repealed accordingly.
The salient features of the Income Tax Act, of 1860 are;
- Exemption of income from agricultural production from taxation
- Life insurance premiums were exempt from tax
- Hindu undivided family was approached as a separate taxable unit
Income Tax Act 1918-Some major changes were made by the Income Tax Act of 1918 in the income tax system. For the very first time, income and deductions of a contingent or non-occurring nature were also included in the calculation of taxable income.
The salient features of the Income Tax Act, of 1860 are as follows;
- Non-recurring income in the course of business or professional activity was also included in the calculation of net profit
- Non-recurring deductions have been included in the calculation of taxable income.
Income Tax Act 1922-The Income Tax Act of 1922 was the most notable milestone in the history of the Income Tax system in India. The Act was introduced to represent the primary organized income tax structure in India.
The 1922 Act provided much-needed flexibility in India’s income tax system. In addition, it established a proper system of tax administration in India, which continued to function for the next 40 years.
The Income Tax Act, of 1922 features are;
- The tax rate was determined according to the budget requirements of the given period
- Changes in the law were no longer necessary for changes in the tax rate
Tax regime after independence-The Income Tax Act of 1922 was the main income tax code in India till 1962. The Act then saw many changes since its enactment.
Although a new law, the Income Tax Act, 1961 was passed by the government in 1961. The history of income tax in India came in a new era after the enactment of the same. The 1961 Act is the Income Tax Act in India to date. The Income Tax Rules of 1962 governed the Act.
The salient features of the Income Tax Act, of 1961 are as follows;
- Income tax is levied under five heads;
- Income from salary
- Income from business and profession
- Income from capital gains
- Income from house property
- Income from other sources
- A revenue audit system for tax calculation was introduced for the first time in India
- The system of competence assessment carried out by tax officials came into force
Analysis of Section 1 of the Income Tax Act, 1961-Section 1 of the Income Tax Act, 1961 provides for the “Short title, scope and commencement”. The Act is called the Income-tax Act, 1961 under sub-section 1. The Act applies to the whole of India under sub-section 2. The Act came into force on 1st April 1962 under sub-section 3.
It is for the Parliament and Legislatures of the various States to levy the tax and this power is derived from the corresponding entries in the lists contained in the Seventh Schedule as provided in Article 246 of the Constitution of India, 1950 to levy income-tax has been conferred on Parliament vide Entry 82 of List I of the Seventh Schedule. Thus, Parliament as the competent authority enacted the Income Tax Act, of 1961, which came into force on 1 April 1962.
The Act received the assent of the President on September 13, 1961, and came into force on April 1, 1962, from the assessment year 1962-1963.
This Act applies to the whole of India. Currently, India consists of 28 states and 8 union territories.
Initially, the Act did not apply to the state of Sikkim. Sikkim became a State and part of India by virtue of the Constitution (36th Amendment) Act with effect from 26 April 1975. Article 371F contains special provisions for Sikkim and its clause (n) empowers the President by notification to extend to the State any legislation in force in any State in India as of the date of notification. Thus, two notifications were issued extending the Income-tax Act, of 1961 to the State of Sikkim with effect from the assessment year 1989-90. However, by virtue of Section 26 of the Finance Act, 1989, the Income-tax Act, 1961 was extended to the State of Sikkim with effect from the assessment year 1990-1991 onwards.
Main Objectives of Income Tax Act 1961
The main objectives of the Income Tax Act 1961 are as follows:
Price Stability
The IT Act maintains price stability in the economy by laying out regulations for direct taxes. It serves as a measure to control private spending, thereby keeping a check on the inflation of commodity prices.
Full Employment
This Act reduces the income tax rates in order to promote higher demand for goods and services. This, in turn, leads to increased employment opportunities, thus fulfilling the objective of full employment.
Non-Revenue Objective
A higher tax rate is applicable for wealthy people compared to the poor. In this way, the Income Tax Act encourages a progressive taxation system that addresses the inequality in wealth among its citizens, carrying out its non-revenue objective.
Cyclical Fluctuations Control
When there is an economic boom, the income tax rates are increased, while in times of recession, it is reduced. In this way, the Act maintains control over cyclical fluctuations in the value of money.
Reducing Balance of Payment Issues
The Income Tax Act imposes customs duties on the import of certain goods. This helps encourage the domestic production of goods, thereby reducing the balance of payment difficulties for the authorities.
Scope of Income Tax Act 1961
| Income Type | Residential Status | ||
| Resident and Ordinarily Resident (ROR) | Resident but not-Ordinarily Resident (RNOR) | Non-Resident (NR) | |
| Income received or deemed to be received in India | Taxable | Taxable | Taxable |
| Accrued income in India | Taxable | Taxable | Taxable |
| Income accrues from outside India, but the profession or business is inside the country. | Taxable | Taxable | Non-taxable |
| Income accrues from outside India, but the profession or business is outside the country. | Taxable | Non-taxable | Non-taxable |
| The untaxed past foreign income brought into the country. | Non-taxable | Non-taxable | Non-taxable |
Provisions of Income Tax Act 1961
There are several provisions in the Income Tax Act 1961. Some of the notable ones are:
- Appeal under Section 260A to the High Court and Section 261 to the Supreme Court
- Annual information and financial transaction statement
- Appearance by an authorised representative
- Income taxability
- Undertaking transactions mode
- Assessing tax authorities
- Instructions to subordinate authorities
- Appeal application for reference by the Income Tax Officer
FAQs
Q: What are the main objectives of the Income Tax Act 1961?
The main objectives of the Income Tax Act are promoting price stability, full employment, economic development, reduction of BOP difficulties, controlling cyclical fluctuations and non-revenue objectives.
Q: How many sections are there in the Income Tax Act 1961?
There are 298 sections and 23 chapters in the Income Tax Act. Some of the most important sections are Section 80C, Section 80CCD, Section 80CCC, Section 80TTA and Section 80TTB.
Q: Who is liable to pay income tax in India?
Individuals, Hindu Undivided Families (HUFs), companies, firms, and other entities that meet the specified criteria for taxable income are liable to pay income tax.
Q: What are the different sources of income taxable under the Income Tax Act?
Taxable income can arise from various sources, including salary, business or profession, capital gains, house property, and other sources such as interest and dividends.
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