Trends and Issues in Income-Tax Policy and Reform in India

 A BRIEF UNDERSTANDING : The system of taxation in India is still now very much primitive. For development of any nation and for civilization imposition of tax within the framework of logical structure is utmost necessary. Revenue raised is utilised for meeting the expenses of government as well as to carry out developmental works. In this context the felicitous version of Justice Holmes is worth–mentioning - “Taxes are what we pay for civilized society. I like to pay taxes. With them I buy civilization”. In India too, attempts are being incessantly made to formulate a simplified and rational tax structure although the effectiveness of such attempts is debatable.
 TYPES OF TAXES : Imposition of tax in India is performed basically in two ways – by charging tax directly on income, wealth etc. which is known as Direct Tax and by levying tax directly on sales, production, import, export etc. which is known as Indirect Tax. The direct tax which is paid by individual to the Central Government of India is known as Income Tax. It is imposed on our income and plays a vital role in the economic growth & stability of our country. For years the Government is generating revenue through this tax system.
 HISTORY OF REFORMS : The system of taxation in India can be trailed to a long period ago. Kautilya, the author of the famous book ‘Arthashastra’ wrote about taxation. In ancient India, subjects used to pay a share of their income to the king. In lieu of that, the king provided them with the administration, security from foreign aggression and other civic amenities. During the British rule, financial crunch faced by the Government consequent to the Sepoy Mutiny of 1857 prompted the Government to introduce the first Income-tax Act that was enacted in the year 1860. It remained in force for a period of 5 years. Thereafter it was renewed as License Tax on trades and professions in 1867. This Act of 1887 was the improved version. It introduced the definition of agricultural income and the exemption it granted in respect of agricultural income has continued to be a feature of all subsequent legislations. In 1868, the License Tax was re-introduced as Certificate Tax with almost the same legislations with minor changes. In 1869, the Certificate Tax was again replaced by Income-tax. Remarkably, agriculture income was taxed in this enactment. This Act was in force for one year and for the next four years annual legislations were made to enforce taxation. After the great famine of 1876-78, the British were compelled to revive the system of direct taxation again in the year 1877. With several amendments these Acts remained in force till 1886. In 1886, a new Income-tax Act was passed with great improvements than the previous Acts. Aggregation of income under different heads was not given much importance except for the purpose of determining the threshold limit of taxable income. With amendments in the years 1903, 1916 and 1917 this Act continued till 1918. In 1918, a new Income-tax Act was passed recasting the existing one. Aggregation of income under different heads for the purpose of charging Income-tax was first conceptualised. The Indian Income Tax Act, 1922 which came into being as a result of the recommendations of the All India Income Tax Committee is a milestone in the evolution of Direct Tax Laws in India. Its importance lies in the fact that the administration of the Income Tax hitherto carried on by the Provincial Governments came to be vested in the Central Government. This Act marked an important change from the Act of 1918 by establishing the charge in the year of assessment on the income of the previous year instead of merely adopting the previous year's income as a measure of income of the year of assessment. It made a departure by abandoning the system of specifying the rates of taxation in its own Schedules. It left the rates to be announced by the Finance Acts, a feature which survives to this day. It also enabled loss under one head of income to be set-off against profits under any other head, so that the tax was chargeable only on net income. During the period of 1922 and 1939 this Act was amended for twenty times. After exhaustively amending the Act in 1939, it was amended for twenty-nine times during the period of 1939 and 1956. In 1956 the Government constituted a Law Commission to simplify the Act. In the meantime the Government also constituted a Direct Taxes Administration Enquiry Committee chaired by Mahavir Tyagi to minimise the inconveniences of the assessees and to prevent evasion of taxes. Income-tax Act was enacted for the last time in 1961 on the basis of above recommendations from 1st April,1962, which is still in force.
 POST 1922 SCENARIO : The rapid changes in administration of direct taxes, during the last decades, reveal the history of socio-economic thinking in India. Due to these brisk changes except in the bare outlines, the traces of the I.T. Act, 1922 can hardly be seen in the 1961 Act as it stands amended to date. Hence it was necessary to reorganise the set up of the IT Department and undergo structural changes as well.
The Income-tax Act, 1922, gave, for the first time, a specific nomenclature to various Income-tax authorities. In 1924, Central Board of Revenue Act constituted the Board to oversee the administration of the Income-tax Act. Commissioners of Income- tax were appointed separately for each province and Assistant Commissioners and Income-tax Officers were provided under their control. The amendments to the Income tax Act, in 1939, made two vital structural changes: (i) appellate functions were separated from administrative functions by introducing Appellate Assistant Commissioners and (ii) a central charge was created in Bombay. In 1940, with a view to exercising effective control throughout India, the very first attached office of the Board, called Directorate of Inspection (Income Tax) - was created. As a result of separation of executive and judicial functions, in 1941, the Appellate Tribunal came into existence. In the same year, a central charge was created in Calcutta also.
World War II brought unusual profits to businessmen. During 1940 to 1947, Excess Profits Tax and Business Profits Tax were introduced. In 1951, the 1st Voluntary Disclosure Scheme was introduced as per recommendation of the report of Income-tax Investigation Commission known as Vardhachari Commission. It was during this period, in 1946, that a few Group 'A' officers were directly recruited. Later on in 1953, the Group 'A' Service was formally constituted as the 'Indian Revenue Service'.
This era was characterised by considerable emphasis on development of investigation techniques. In 1947, Taxation on Income (Investigation) Commission was set up which was annulled by the Supreme Court in 1956 but the necessity of deep investigation had by then been realised. In 1952, the Directorate of Inspection (Investigation) was set up. It was in this year that a new cadre known as Inspectors of Income Tax was created to handle the increase in 'large income' cases. Thus in 1954, the Internal Audit Scheme was introduced in the Income-tax Department. Taxation Enquiry Commission known as John Mathai Commission set up.
In 1957, I.R.S. (Direct Taxes) Staff College started functioning in Nagpur to impart training in an organised manner to the Group A officers mentioned earlier. Today this attached office of the Board functions under a Director-General. It is called the National Academy of Direct Taxes. By 1963, the I.T. department, burdened with the administration of several other Acts like Wealth Tax, Gift Tax, etc., had expanded to such an extent that it was considered necessary to put it under a separate Board. Consequently, the Central Board of Revenue Act, 1963 was passed to form The Central Board of Direct Taxes.
The developing nature of the economy of the country invited both steep rates of taxes and black incomes. In 1965, the Voluntary Disclosure Scheme was brought in followed by the 1975 Disclosure Scheme. Finally, the need for a permanent settlement mechanism resulted in the creation of the Settlement Commission. In 1968 the report of rationalisation and simplification of tax structure (Bhoothalingam Committee) received and eventually Administrative Reforms Commission set up.
A very important administrative change occurred during this period. The recovery of arrears of tax which till 1970 was the function of State authorities was passed on to the departmental officers. A whole new wing of Officers - Tax Recovery Officers was created and a new cadre of post of Tax Recovery Commissioners was introduced w.e.f. 1-1-1972 and the system of Permanent Account Number introduced for the assesses was mooted. A special Cell for dealing with Smugglers' cases created and Smugglers and Foreign Exchange Manipulators (Forfeiture of Property) Act, 1976 introduced w.e.f. 25-1-1976.
In order to improve the quality of work, in 1977, a new cadre known as IAC (Assessment) and in 1978 another cadre known as CIT (Appeals) were created. The Commissioners' cadre was further reorganised and five posts of Chief Commissioners (Administration) were created in 1981.
 To conclude : Taxation has developed into an instrument that promotes economic growth, stability and efficiency and has become a major device through which governments implement their political thinking and secure the participation of the masses in its policies and progress. A well-administered tax system is a good weapon against many odds. In such a tax system, it is the government, and not the taxpayers, which decides the economic sectors to be assisted and which not to. The time frame of 1947-77 has ushered in an era of build-up of the Income-tax as a major contributor to the economy. Although nine important taxes were introduced and significant attempts were made to bolster the tax administration, keeping in view the newly achieved independence and the aftermath of the World War II. The goal of the new laws is to establish an overall tax system which conforms to national conditions and generally accepted international practices, while at same time reflecting the requirements of the market economy, and facilitating macro control and economic development.
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Courtesy:
1. www.incometaxindia.gov.in – the national website of the IT Deptt., Govt. of India.
2. Law and Practice of Direct and Indirect Taxes – Dr. CH Sengupta.
3. Income-tax Reform in India – V.V. Borkar {ISBN : 8171544916}
4. Incentives and Institutional Reform in Tax Enforcement -Dilip Mookherjee & Arindam Das Gupta, Jan. 1998.