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History of Income Tax in India – Evolution & Reforms

Ever wondered when Indians started paying income tax? The answer might surprise you - it all started during British rule in 1860! Let's trace this fascinating journey.

Pre-Independence Era

1860: The Beginning

First Income Tax: Introduced by Sir James Wilson (British Finance Minister) to recover losses from the 1857 Revolt (First War of Independence)

Rate: 2% on income above ₹200 (₹200 was huge in 1860!)

Duration: Temporary - abolished in 1865

1886: Return of Income Tax

Re-introduced to fund Afghan War expenses

Rate: Varied from 2.5% to 6.25%

Coverage: Only high-income earners (British officials, zamindars)

1918: Income Tax Act, 1918

First comprehensive Income Tax law in India

Features:

  • Defined taxable income
  • Introduced tax administration
  • Created assessment procedures

Rate: Up to 25% (post-World War I)

Post-Independence:India's Own Tax System

1922: Major Overhaul

Income Tax Act, 1922 replaced 1918 Act

First Indian Finance Minister: Sir Basil Blackett

Innovations:

  • Super tax on higher incomes
  • Agricultural income exemption
  • Corporate tax separately

1947: Freedom & Tax Continuity

After independence, Income Tax Act 1922 continued (with modifications)

First Budget by Independent India: RK Shanmukham Chetty (Feb 1948)

Top Tax Rate: 97.75% (Yes, really! To fund nation-building)

1961: Modern Income Tax Act

Birth of Current Law

Income Tax Act, 1961 passed on September 1, 1961

Applicable from: April 1, 1962 (Assessment Year 1962-63)

Finance Minister: Morarji Desai

Why New Act Needed?

  • 1922 Act had too many amendments (unmanageable)
  • Social & economic changes post-independence
  • Need for simpler, modern law

###Features of IT Act 1961

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Major Tax Reforms Timeline

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1975: Tax Deduction at Source (TDS)

Introduced to widen tax base and ensure compliance

Concept: Deduct tax at source (salary, interest, rent) before payment

Impact: Major revenue collection tool (₹7 lakh crore+ annually now)

1985-86: Long-Term Fiscal Policy

Finance Minister: VP Singh

Reforms:

  • Reduced tax rates (from 97.75% to 50%)
  • Simplified tax slabs
  • Encouraged voluntary compliance

1991: Economic Liberalization

Finance Minister: Dr. Manmohan Singh

Tax Reforms:

  • Top rate reduced to 40%
  • Corporate tax rationalized
  • Market-oriented approach

1997: Self-Assessment Scheme

Revolutionary change!

Earlier: Tax officer calculated tax Now: Taxpayer self-assesses, files return

Less harassment, more compliance

2000s: Digital Revolution

2003: PAN (Permanent Account Number) made mandatory for high-value transactions

2006: e-Filing of returns started

2010: Digital Signature introduced

2020: Pre-filled returns (auto-populated data)

Recent Major Reforms

1. Goods & Services Tax (GST) - 2017

Not income tax, but replaced indirect taxes

Impact on IT: Simplified for businesses

2. Budget 2020 - New Tax Regime

Choice offered:

  • Old Regime: Higher rates with deductions (80C, 80D, HRA)
  • New Regime: Lower rates, no deductions

Example:

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3. Budget 2023 - Tax Rebate

Section 87A rebate increased to ₹7 lakh

Meaning: No tax up to ₹7 lakh income (in new regime)!

Tax Rates Evolution

YearTop Income Tax RateRationale
18602%Fund war expenses
194797.75%Nation-building, reduce inequality
198550%Encourage compliance
199740%Economic reforms
201730% + 4% CessCurrent standard
202330% + 4% (but nil up to ₹7L rebate in new regime)Simplification

Tax Collection Growth

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335x growth from 1991 to 2023!

Key Takeaways

Journey:

  • 1860: First income tax (2%) by British
  • 1922: First comprehensive Act
  • 1961: Current Income Tax Act (still in force!)
  • 1975: TDS introduced
  • 1997: Self-assessment
  • 2006: e-Filing
  • 2020: New tax regime optional
  • 2023: ₹7 lakh tax-free in new regime

Philosophy evolved:

  • Earlier: High rates (97.75%!), complex
  • Now: Moderate rates (30%), simplified, technology-driven

Summary

  • 1860: First income tax (2%) to fund war, temporary
  • 1922: First Indian Income Tax Act
  • 1961: Current IT Act came into force (April 1, 1962)
  • 1975: TDS system introduced (₹7L cr+ collection now)
  • 1997: Self-assessment replaced tax officer assessment
  • 2006: e-Filing started, now 95%+ returns filed online
  • 2020: New tax regime introduced (lower rates, no deductions)
  • 2023: ₹7 lakh tax-free in new regime (Section 87A rebate)
  • Collection: From ₹57 cr (1947) to ₹19 lakh cr (2024) - 335x growth!

Quiz Time! 🎯

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Next Chapter: Direct vs Indirect Taxes - Understanding the Difference! 💰

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