150 years of I-T law

T.N. PANDEY

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Substantial changes were made to the country's tax structure after Prof. Kaldor's report in 1955.

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On July 24, 2010, the income-tax legislation in India will be completing 150 years. This is a big milestone in the history of I-T Department. Income taxation in India has been in existence since ancient times. There are references to it in Manusmriti. Manu, the great law giver, said that taxes should be levied according to ' Sastras', that is, these should be just, fair and not excessive. He advocated that these should be collected in the manner the bee takes honey from the flowers. Kalidas expressed the view that the collection of taxes should be in the way Sun draws moisture from the Earth to give it back a thousand-fold.

Kautilya's Arthsastra contains detailed discussion about taxation and its methods. However, such observations seem outdated now. There was a time under the prime-ministership of Indira Gandhi when the maximum rate of tax was 97.5 per cent without taking into account wealth tax, gift tax, and so on.

Taxation by legislation

Taxation by legislation was initiated in 1860 during the British Rule to meet the financial needs consequent to the 1857 mutiny. It lasted only for five years and yielded just Rs 1.50 crore . This law was followed by 'licence tax' and 'certificate tax'.

Intermittently, other tax levies were also imposed. The 'certificate tax' levied in 1869 was abolished in 1873 but was revived because of the great famine in the country. Raising revenue through land cess, etc., continued before the Income-Tax Act, 1886 was passed.

This remained almost unaltered till after the outbreak of World War I, and laid the foundation for the next full-fledged improved Income-Tax Act of 1918, which was operative till 1922.

Thereafter the following pieces of legislation were passed: Income-Tax Act, 1922; Income-tax Amendment Act, 1939; and Income-Tax Act, 1961, which is in force at present.

In between legislation to assess excess profits, business profits, the Taxation of Income (Investigation Commission) Act 1947 (to tax evaded incomes) and few other laws were passed to deal with specific situations.

Broader coverage

Substantial changes were made to India's tax structure after Prof. Kaldor's report in 1955. Three new taxes, namely, the wealth tax, expenditure tax and gift tax (Estate duty was already in place since 1953), were introduced during 1957-58 under the integrated system of taxation advocated by Prof. Kaldor. These, barring the Wealth Tax Act, were given up later.

One major problem the tax administration faced was the extensive prevalence of the parallel economy.

Many commissions and committees were appointed to check black money. Many Voluntary Disclosure Schemes (around 15) were floated, but all of them turned out to be failures.

The tax collections in the country are buoyant because of the increase in GDP, moderate tax rates, controls via improved technologies, and so on. The total income tax collections expected in the current year are nearly Rs 4,25,000 crore. However, there are still some problematic and grey areas concerning income taxation, and they are as follows:

Need to widen the tax base, which is currently only 3 per cent of total population;

No hard measures have been taken to tackle rampant tax evasion, including money stacked in foreign banks;

A simple, efficient, stable and revenue-generating tax law is still not in place;

The exercise to reform the direct taxes law began in 1996, but is yet to be completed.

The officers of the I-T Department have not been given the due status. In a cadre of more than 6000 Gazetted Officers, not even one holds the post of Secretary to Government of India — not even the CBDT Chairman. On the contrary, the powers of the CBDT are proposed to be curtailed under the proposed Direct Taxes Code.

Lack of adequate infrastructure

There are many other problems which need to be attended to. The officials in the I-T Department are an efficient and committed lot, keen to show results. Their potential needs to be tapped better, by giving them the recognition they deserve and through well-drafted tax laws.

(The author is a former chairman of CBDT.)