HISTORY OF TAXATION IN INDIA

Income is the money that an individual or business receives in exchange for providing a good
or services.  A formal tax system was in existence in India since the time of Maurya dynasty.
The higher class of citizens contributed 1/6th of their income as tax. It is said that even before
the Mauryas, tax was mentioned in Manu Smruti, one of the most ancient scriptures of India.
The subsequent Mughal invaders brought with them their own taxation system. The infamous
Jezia was a tax imposed on the non-Islamic people of the land. In India, it was abolished by
Akbar.

The income tax as we know today was first introduced in India in 1860 by the British. It was
introduced to compensate for the losses sustained by the government due to the rebellion of
1857. Income tax is defined as the annual charge levied on both earned income (wages,
salaries or commission) and unearned income like dividends, interest or rent. In addition to
financing a government’s operations, progressive income taxation is designed to distribute
wealth creation more evenly in a population and to serve as buffer in case of fluctuations in
the economic cycle. There are two basic types of income tax: personal income tax and
corporation income tax1.

The Income Tax Act was passed in India in 1886, and there have been constant revisions and
refinements in the Act since then. After the first World War, a new Income Tax Act was
passed, in 1918, again to counter the residual effects of economic devastation caused by the
war. This income tax Act was in place till 1922, when it was replaced by another Act. After
40 years, and 15 years after India gained freedom from the British, the income tax Act was
modified again. The current Income Tax Act has been adopted in 1961, and bought into force
with effect from April 1, 1962. It encompasses the whole of India, including Sikkim, Jammu
and Kashmir. The Central Board of Revenue bifurcated and created a separate Board for
Direct Taxes called as the Central Board of Direct Taxes under the aegis of Central Board of
Revenue Act, 1963.

 Currently, there are five broad heads under which income is taxed by the
govt. of India:

 Income from salary

 Income from business or profession
 Income from capital gains
 Income from property
 Income from other sources

Each successive government amends the Act with an aim to finance government operations,
and to try and distribute wealth more evenly. A noticeable feature of the Income Tax Act of
India is that agricultural income in India is not taxable. Income tax in India (and all other
countries) is assessed annually for the previous financial year.
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https://www.levare.co.in/articles/history-taxation-india
India currently has a three tier setup for taxation. The central government and the state
government can both impose tax. The State government in turn can delegate taxation to the
local governing bodies like the municipal corporations and grampanchayats. It is said that
that the Indian tax system is one of the most complex in the world, including the likes of
income tax, wealth tax, property tax, gift tax, sales tax, VAT, custom duty, excise duty (now
replaced by GST),  corporate tax, income tax and a plethora or other taxes? Indeed, it is one
of the reasons why there is a high demand in India for income tax consultants, GST
consultants, auditors, and other professionals2.

As a nation evolves, its needs change. India is no exception. No doubt as the nation
progresses, the tax structure of India will undergo many refinements. For example, the Goods
and Services Tax (GST), which has replaced the Central and State indirect taxes such as
VAT, excise duty and service tax, was implemented in India on July 1, 2017. GST has been
already introduced in more than 160 countries, starting from France where it was introduced
way back in 1954. So, it can be safely said that GST is a tired and tested taxation solution;
India need not worry unnecessarily about its effectiveness.

CONSTITUTION PROVISIONS REGRDING TAXATION3

The roots of every law in India lie in the Constitution, therefore understanding the provisions
of the Constitution is foremost to have a clear understanding of any law. The Constitutional
provisions regarding taxation in India can be divided into the following categories: 

 Only by the authority of law can taxes be levied. (Article 265)

 Levy of duty on tax and its distribution between centre and states (Article
268, Article 269, and Article 270)
  Restriction on power of the states to levy taxes (Article 286)

 Sale/purchase of goods which take place outside the respective state

 Sale/purchase of goods which take place during the import and export of the
goods

 Taxes imposed by the state or purpose of the state (Article 276, and Article 277)
 Taxes imposed by the state or purpose of the union (Article 271, Article 279,
and Article 284)
  Grants-in-Aid (Article 273, Article 275, Article 274, an Article 282)

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https://www.levare.co.in/articles/history-taxation-india
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https://blog.ipleaders.in/law-taxation-constitution-india/
  ARTICLE 265

Without the ‘authority of law,’ no taxes can be collected is what this article means in simple
terms. The law here means only a statute law or an act of the legislature. The law when
applied should not violate any other constitutional provision. This article acts as an armour
instrument for arbitrary tax extraction.

In the case Tangkhul v. Simirei Shailei, all the villagers were paying Rs 50 a day to the head
man in place of a custom to render free a day’s labour. This was done every year and the
practice had been continuing for generations. The Court, in this case, held that the amount of
Rs. 50 was like a collection of tax and no law had authorized it, and therefore it violated Art
265. Article 265 is infringed every time the law does not authorize the tax imposed.

 ARTICLE 266

This article has provisions for the Consolidated Funds and Public Accounts of India and the
States. In this matter, the law is that subject to the provisions of Article 267 and provisions
of Chapter 1 (part XII), the whole or part of the net proceeds of certain taxes and duties to
States, all loans raised by the Government by the issue of treasury bills, all money received
by the Government in repayment of loans, all revenues received by the Government of India,
and loans or ways and means of advances shall form one consolidated fund to be entitled the
Consolidated Fund of India. The same holds for the revenues received by the Government of
a State where it is called the Consolidated Fund of the State. Money out of the Consolidated
Fund of India or a State can be taken only in agreement with the law and for the purposes and
as per the Constitution.

 ARTICLE 268

This gives the duties levied by the Union government but are collected and claimed by the
State governments such as stamp duties, excise on medicinal and toilet preparations which
although are mentioned in the Union List and levied by the Government of India but
collected by the state (these duties collected by states do not form a part of the Consolidated
Fund of India but are with the state only) within which these duties are eligible for levy
except in union territories which are collected by the Government of India.

 ARTICLE 269A

This article is newly inserted which gives the power of collection of GST on inter-state trade
or commerce to the Government of India i.e. the Centre and is named IGST by the Model
Draft Law. But out of all the collecting by Centre, there are two ways within which states get
their share out of such collection 
 1. Direct Apportionment (let say out of total net proceeds 42% is directly
apportioned to states). 
2. Through the Consolidated Fund of India (CFI). Out of the whole amount in CFI a
selected prescribed percentage goes to the States.

 ARTICLE 270

This Article gives provision for the taxes levied and distributed between the Union and the
States:  

 All taxes and duties named within the Union List, except the duties and taxes
named in articles 268, 269 and 269A, separately.  
 Taxes and surcharges on taxes, duties, and cess on particular functions which are
specified in Article 271 under any law created by Parliament are extracted by the
Union Government. 
 It is distributed between the Union and the States as mentioned in clause (2). 
 The proceeds from any tax/duty levied in any financial year, is assigned to the
states where this tax/duty is extractable in that year but it doesn’t form a part of
the Consolidated Fund of India. 
 Any tax collected by the centre should also be divided among the centre and states
as provided in clause (2). 
 With the introduction of GST 2 sub-clauses having been added to this
Article- Article 270(1A) and Article 20(1B7).
The Supreme Court of India has set a famous judicial precedent under Article 270 of the
Constitution of India in the case T.M. Kanniyan v. I.T.O. The SC, in this case, propounded
that the Income-tax collected forms a part of the Consolidated Fund of India. The Income-tax
thus extracted cannot be distributed between the centre, union territories, and states which are
under Presidential rule.

 ARTICLE 271

At times the Parliament for the Union Government (only when such a requirement arises),
decides to increase any of the taxes /duties mentioned in article 269 and Article 270 by
levying an additional surcharge on them and the proceeds from them form a part of the
Consolidated Fund of India. Article 271 is an exception to Article 269 and Article 270. The
collection of the surcharge is also done by the Union and the State has no role to play in it. 

o Cess and surcharge

There seems to be a lot of confusion between cess and surcharge. Cess is described in Article
270 of the Constitution of India. Cess is like a fee imposed for a particular purpose that the
legislation charging it decides. Article 271 deals with a surcharge which is nothing but an
additional tax on the existing tax collected by the union for a particular purpose. Proceeds
from both the cess and surcharge form part of the Consolidated Fund of India In the case
of m/s SRD Nutrients Private Limited v. Commissioner of Central Excise, Guwahati, the
Supreme Court was presented with the question:  If on excisable goods an education cess can
be levied before the imposition of cess on goods manufactured but cleared after imposition of
such cess. The judgement given in this case was in favour of the manufacturer but the judges,
Justice A K Sikri and Justice Ashok Bhushan observed that education and higher education
cess are surcharges.

o Grants-in-aid

The constitution has provisions for sanctioning grants to the states or other federating units. It
is Central Government financial assistance to the states to balance/correct/adjust the financial
requirements of the units when the revenue proceeds go to the centre but the welfare
measures and functions are entrusted to the states. These are charged to the Consolidated
Fund of India and the authority to grant is with the Parliament.

 ARTICLE 273

This grant is charged to the Consolidated Fund of India every year in place of any share of
the net proceeds, export duty on products of jute to the states of Assam, Bihar, Orissa, and
West Bengal. This grant will continue and will be charged to the Consolidated Fund of India
as long as the Union government continues to levy export duty on jute, or products of jute or
the time of expiration which is 10 years from its commencement.

 ARTICLE 275

These grants are sanctioned as the parliament by law decides to give to those states which are
in dire need of funds and assistance in procuring these funds. These funds /grants are mainly
used for the development of the state and for the widening of the welfare measures/schemes
undertaken by the state government. It is also used for social welfare work for the Scheduled
tribes in their areas.

 ARTICLE 276

This article talks about the taxes that are levied by the state government, governed by the
state government and the taxes are collected also by the state government. But the taxes
levied are not uniform across the different states and may vary. These are sales tax and VAT,
professional tax and stamp duty to name a few.

 ARTICLE 277

Except for cesses, fees, duties or taxes which were levied immediately before the
commencement of the constitution by any municipality or other local body for the purposes
of the State, despite being mentioned in the Union List can continue to be levied and applied
for the same purposes until a new law contradicting it has been passed by the parliament.

 ARTICLE 279
This article deals with the calculation of “net proceeds” etc. Here ‘net proceeds’ means the
proceeds which are left after deducting the cost of collection of the tax, ascertained and
certified by the Comptroller and Auditor-General of India.

  ARTICLE 282  

It is normally meant for special, temporary or ad hoc schemes and the power to grant
sanctions under it is not restricted.  In the case Bhim Singh v. Union of India & Ors the
Supreme Court said that from the time of the applicability of the Constitution of India,
welfare schemes have been there intending to advance public welfare and for public purposes
by grants which have been disbursed by the Union Government. seen that Article 282 can be
used for a public purpose but at times in the name of public purpose it can even be misused.

 ARTICLE 286

This article restricts the power of the State to tax

1) The state cannot exercise taxation on imports/exports nor can it impose taxes outside the
territory of the state.
2) Only parliament can lay down principles to ascertain when a sale/purchase takes place
during export or import or outside the state. (Sections 3, 4, 5 of the Central Sales Tax Act,
1956 have been constituted with these powers)

 ARTICLE 289

State Governments are exempted from Union taxation as regards their property and income
but if there is any law made by the parliament in this regard then the Union can impose the
tax to such extent.

SOME OTHER TAX-RELATED PROVISIONS

1. Article 301 which states that trade, commerce and inter-course are exempted from
any taxation throughout India except for the provisions mentioned in Article 302,
303, and 304 of the Indian Constitution, 1949.
2. Article 302 empowers the parliament to impose restrictions on trade and
commerce in view of public interest. 
3. Article 303– Whenever there is the scarcity of goods this article comes in play.
Discrimination against the different State Governments is not permitted under the
law except when there is a scarcity of goods in a particular state and this
preference to that state can be made only by the Parliament and in keeping with
the law.
4. Article 304– permits a State Government to impose taxes on goods imported from
other States and Union Territories but it cannot discriminate between goods from
within the State and goods from outside the State. The State can also exercise the
power to impose some restrictions on freedom of trade and commerce within its
territory.
  ARTICLE 366

Apart from all these provisions, there are other provisions also that require mention such
as Article 366 which gives the definition of:

 Goods;
 Services;
 Taxation;
 State;
 Taxes that are levied on the sale/purchase of goods;
 Goods and service tax etc.  

IMPORTANT DEFINATIONS UNDER THE INCOME TAX ACT, 1961

 ASSESSMENT YEAR AND PREVIOUS YEAR

As per Section 2(9) of the Income Tax Act, 1961, states that assessment year means the 12
month period beginning on the 1st day of April every year. The assessee is required to file the
income tax return of the previous year in the assessment year. As per S.2(34) of Income Tax
Act, 1961, unless the context otherwise requires, the term “previous year” means the previous
year as defined in section 3.

As per Section.3 of Income Tax Act, 1961, the term “previous year” means the financial year
immediately preceding the assessment year

Say, for example, the year starting from 1st April 2018 and ending on 31st March 2019 is the
assessment year 2018-19, the previous year would be 2017-18. The rates of assessment year
are taken into consideration.

 PERSON
 A person is defined under section 2(31) of the act. The term ‘person’ includes –

1. An individual.
2. A Hindu Undivided Family.
3. A Company.
4. A Firm.
5. An association of persons or body of individuals whether incorporated or not; 
6. A local authority; and 
7. Every artificial judicial; person not falling within any of the preceding  
  ASSESSEE
Any individual who has income earned or losses incurred, and is liable to pay taxes on these
to the government in a particular assessment year, is an assessee.

 Categories of the assessee –

1. Normal Assessee

 a person against whom proceedings are going on under the Income Tax Act,
despite the fact that any tax or other amount is payable by him or not;
 a person who has undergone loss and filed a return of loss u/s 139(3);
 a person by whom some amount of interest or tax or penalty is payable under the
income tax Act;
 any person who is entitled to refund of tax under this Act.

2. Representative Assessee

 A person may not be liable for his own income or loss but he might also be liable
for the income or loss of other persons say for example agent of a non-resident,
guardian of a minor or a lunatic person, etc. In such cases, the person responsible
for the assessment of the income of such a person is called representative assessee.
Such a person is deemed to be an assessee.

3. Deemed Assessee

 In the case of a deceased person who has died after writing down his will, the
administrators of the property of the deceased are deemed as assessee.
 In case if a person dies intestate (without writing down his will) the eldest son or
other legal heirs of the deceased person are deemed as assessee.
 In case a minor, lunatic or an idiot person has income taxable under the Income
Tax Act, their guardian is deemed to be an assessee.
 In case a non-resident has income in India, any person acting on his behalf is
deemed as an assessee.

4. Assessee-in-default

 A person is deemed as an assessee-in-default if he fails to fulfill his statutory

obligations. In case an employer is paying a salary or a person who is paying
interest, it is their duty to deduct TDS and deposit the amount of tax so collected
in Government treasury. If he fails to deduct TDS or deducts tax but does not
deposit it in the treasury, he is known as assessee-in-default.
  CONCEPT OF INCOME

The Income Tax Act does not define the term Income but section 2 (24) of the Act describes
the various receipts which are included under the ambit of income. 

1. Profits and gains.

2. Dividends 
3. Voluntary contributions received by a charitable trusts 
4. The value of any perquisite or profit in lieu of salary. 
5. Any capital gains. 
6. Any winnings from lotteries, 
7. Crossword puzzles etc.

 
 The definition of Income as per section 2 (24) is inclusive but not
exhaustive of the below-mentioned items:
o Any illegal income arising to the assessee4 
o Any income that is received at irregular intervals 
o Any Taxable income that has been received from a source outside India
o Any benefit that can be measured in money
o Any subsidy or relief or reimbursement 
o Gift the value of which exceeds INR 50,000 without any consideration by an
individual or HUF.
o Any prize
o Causal incomes like winning from lotteries or horse race gambling etc.

 AGRICULTURAL INCOME

Agricultural income is any rent or revenue by means of cash or in-kind, derived from a land,
which is used for an agricultural purpose and land should be situated in India. Income from
agricultural should be produced by a cultivator or a rent receiver of that produce in-kind,
which can be fit to take that into the market. 

The income should be derived from the sale by a cultivator or a rent receiver of that product
which is produced or received by him, no process can be performed other than the process to
render it fit for the market.  You can read more about agricultural income.
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