This article is written by Shraileen Kaur, a student at ICFAI University, Dehradun. In this exhaustive article, the author discusses in detail the concept of direct taxes, its origin and historical evolution, developments in the direct taxation system, types of direct taxes, and its reforms. 

This article has been published by Sneha Mahawar. 

Introduction

Recently, India emerged as the fastest-growing economy, with a current growth rate of 8.7 percent. Not just this, the country full of cultures, traditions, and tourist attractions has also surpassed the United Kingdom to become the fifth largest economy in the world. India even received the title of ‘Emerging Economy of the World’. 

In order to sustain these growth rates and continue growing in every single business cycle, it is crucial to make optimum use of the available resources. Plan and policy execution requires resources in order to be successful. Resources can take the form of people, places, politics, economies, cultures, money, materials, territory, technology, and other natural and human aspects. In the current situation, the Government of India has taken on a number of duties, including resource exploitation, industrialization, modernisation, security, and the transformation of the economy and society to meet future demands. They must carry out a variety of tasks in order to fulfil their responsibilities. Large-scale public spending is necessary for these functions. Massive public funding is needed to cover these expenses. The primary source of public funding is taxes. It is a cutting-edge tool that encourages social economic development and national cohesiveness.

India is a sovereign democratic nation with 28 states and 8 union territories supported by a three-tier federal tax structure. India has a well-established tax structure with clearly defined jurisdiction boundaries between the governments at the central, state, and local levels. The central government imposes numerous direct as well as indirect taxes on people and goods, respectively. Stamp duty, Securities Transaction Tax (STT), Entertainment Tax, and Value Added Tax are examples of indirect taxes. Direct taxes include personal income tax, inheritance tax, corporation tax, and gift tax. As per the current scenario, the government at the central level is highly dependent on corporation tax which constitutes a total of 20 percent of the overall tax collection. 

The last ten years have seen significant reforms in the Indian taxation structure. In order to improve adherence, tax payment simplicity and regulation, tax rates and tax rules have been thoroughly reviewed. Even after 75 years of independence, India witnesses an ongoing effort to rationalise the tax system.

The scope of direct taxes is not limited to Indian territory. Countries all over the globe have been using direct taxes as a basic source of public funding for development since time immemorial. For instance, in the United States of America, the word ‘Direct Taxes’ holds great significance backed by the Constitution of the United States. As per its Constitution, any direct taxes levied by the federal government shall be distributed among the states in proportion to their respective populations.  In the European Union, member states continue to be solely in charge of direct taxation in their respective countries.

The federal principle of taxation

Before understanding the meaning of direct taxes, it is essential to understand their basis and origin. This is where the federal principle of taxation comes into the picture.

As per the federal principle of taxation, the power to impose and regulate taxes is distributed among the Union, state, and local governments so that each has its own domain. However, it is assumed that governments at all 3 levels will coordinate with each other by maintaining individual autonomy. The provisions of the Indian Constitution govern the division of taxation authority between the Union Government and the State Government. On the other hand, the State grants local bodies their powers and responsibilities in regard to the imposition, regulation, and collection of taxes at the local level. In the case of the Union Territories, the taxation authority is delegated by the Central Government. No tax may be imposed or collected in India without the authority of the law, according to Article 265 of the Constitution. As a result, each tax imposed or collected must be supported by a corresponding law, approved by the State Legislature or the Parliament.

The Central Government, through the Parliament of India, and State Governments, through the State Legislature, are each given a certain amount of legislative authority under Article 246 of the Indian Constitution. Three lists are used in Schedule VII of the Constitution to specify how functions and resources are allocated. These lists are stated as below – 

List	Name	Function(s)
List – I	Union List	According to Article 246(1) of the Indian Constitution, the President, the Lok Sabha, and the Rajya Sabha have the sole authority to enact legislation pertaining to any of the subjects listed in List I of the Seventh Schedule of the Constitution of India. The Union list also includes all the other subjects which do not form a part of the State List or Concurrent List.
List – II	State List	According to Article 246 of the Indian Constitution, the State Government [the Governor, Legislative Assembly, and Legislative Council (if it exists)] has the only authority to enact legislation for the State with regard to any topic listed in List II of the Seventh Schedule to the Constitution.
List – III	Concurrent List	According to Article 246(2) of the Constitution, any State’s legislature, as well as Parliament, has the authority to pass laws pertaining to any of the issues included in List III of the Seventh Schedule.

The Central Government has the authority to impose taxes on income, business profits, inheritance, customs duties, central excise, gifts, etc. In contrast, the state government collects taxes such as state excise, tax on agricultural income, stamp duty, commercial sales tax, land revenue, and professional tax, among others. The taxes levied by the local bodies include octroi tax, sewage and drainage tax, water tax, real estate taxes, etc. The authority for all issues pertaining to direct taxes in India has been delegated to the Central Board of Direct Taxes (CBDT) at the national level. The Central Board of Revenue Act of 1963 grants the Central Board of Direct Taxes its jurisdiction.

What does ‘direct taxes’ mean in general

A direct tax, as opposed to a tax placed upon a transaction, is generally one that is levied against a single individual (whether juristic or natural) or piece of property (such as real and personal assets, animals, harvest, income, etc.). In this view, a taxable transaction only results in the imposition of an indirect tax, such as a sales tax or Value Added Tax (VAT).

People have the choice to participate or not in such exchanges. In contrast, a direct tax in the general sense is imposed on a person, usually unconditionally. An example of this would be a poll tax or head tax, which is levied based on the person’s life or presence, or a real estate tax, which is levied on the owner’s rights of ownership rather than commercial usage.

The individual who bears and pays direct tax is expected to be the same. Direct taxpayers do not obtain full or partial refunds of their taxes from other sources.

Direct taxation and indirect taxation are conflicting in this regard. To evaluate whether a tax is direct or indirect, it is possible to examine who bears the burden of the payment of taxes by using the concept of fiscal incidence. In general, direct taxation is declarative, which means it is established either by the person concerned or by a third party.

In the 18th century, individuals were primarily concerned with escaping authoritarian systems of government and preserving individual liberty, which is why they were so concerned with the unconditional, inexorable nature of the direct tax.

Adam Smith, in his famous book – “An inquiry into the nature and the causes of the wealth of nations,” discussed direct taxes in detail. He even extensively made a distinction between direct and indirect taxation for the first time. Adam Smith stated that –

“It is thus that a tax upon the necessaries of life operates exactly in the same manner as a direct tax upon the wages of labour… if he is a manufacturer, he will charge upon the price of his goods this rise of wages, together with a profit; so that the final payment of the tax, together with this overcharge, will fall upon the consumer.”

This type of taxation was deemed objectionable by the Pennsylvania Minority, a group of delegates to the U.S. Constitutional Convention in 1787, who abstained from the document given to the countries for approval. They explained the same in the following passage – 

“The power of direct taxation applies to every individual. It cannot be evaded like the objects of imposts or excise and will be paid because all that a man hath will he give for his head. This tax is so congenial to the nature of despotism, that it has ever been a favourite under such governments. The power of direct taxation will further apply to every individual … however oppressive, the people will have but this alternative, either to pay the tax or let their property be taken for all resistance will be in vain.”

Direct taxes

A direct tax is one that is paid by an individual or group of people to the institution that levies it. Examples of direct taxes include taxes on assets, real estate, personal property, gifts, inheritance, and income. All these taxes are payable by the competent taxpayer to the concerned government directly.

A tax is known as a direct tax when the onus of payment of such a tax cannot be transferred from one person or business to another individual or corporate entity. Income tax and corporate tax are two of the most prominent types of direct taxes. 

Direct taxes in India

According to the Income Tax Act of 1961, a person who falls into one of the seven below-mentioned groups is subjected to a direct tax on their whole income earned. 

1. An Individual;
2. A Hindu Undivided Family (HUF);
3. A Company;
4. A Firm;
5. An Association of Persons (AOP) or A Body of Individuals (BOI);
6. A Local Authority, and
7. Every Artificial Judicial Person (AJP) who does not fall into any of the above-mentioned groups.

The government collects direct tax during the whole financial year, starting from April of the relevant year till March of the next year. For instance, the financial year 2022 began in April 2022 and will end in March 2023. Multiple due dates have been set for the taxes to be collected from various taxpayer groups. In some circumstances, the government collects direct taxes throughout the entire financial year with plenty of advance notices to increase and encourage payment of taxes. In India, the three methods of collecting taxes that are most frequently used are-

1. Advance and Self-Assessment Tax; 
2. Tax Deducted at Source (TDS); and 
3. Tax Collected at Source (TCS).

Corporate tax, income tax, and capital gain tax are the three dominant direct taxes levied in India.

Corporate taxes, such as the – 

• Minimum Alternative Tax (MAT), 
• Fringe Benefits Tax (FBT), 
• Dividend Distribution Tax (DDT), and 
• Securities Transaction Tax (STT), is levied against corporate companies.

While Minimum Alternative Tax is frequently levied against businesses that report little to no or no tax liability during a given fiscal year. Fringe benefits that a corporation offers its employees are subject to the Fringe Benefits Tax. The Dividend Distribution Tax is levied on the number of dividends announced, disbursed, or payable to shareholders by domestic corporations, while the Securities Transaction Tax is levied on the taxpayers at the time they make the purchase or sale of stocks and other tradable securities of corporations listed on the Indian stock exchanges like the Bombay Stock Exchange (BSE) or National Stock Exchange (NSE).

In contrast to income tax, which is levied on both the person and other assessees based on their yearly personal income, capital gain tax is levied on all assessees who receive money from the sale or gain of their holdings and other assets.

Direct taxes in the United States of America

In the United States of America, direct taxes are based on the main guiding principle of “ability to pay”. According to this economic concept, individuals with more means or higher earnings should pay more in taxes. According to some critics, this deters people from working hard and increasing their income because they must pay additional taxes on every single penny that they earn. Similar to India, direct taxes in the United States of America cannot be transferred to another person or organisation. The person or entity upon whom the tax is imposed is liable to pay it.

Indirect taxes are placed on one institution, say a merchant, and paid by another, such as sales tax paid by the customer in a retail context. In contrast, direct taxes are assessed on only one entity, such as a merchant, and are paid by the same entity. 

Corporate Tax

In the United States, corporate tax is one of the most prominent taxes levied on corporations. 

For instance, if a production facility reports a total revenue of $10 million with the following details- 

Particulars	Amount or Percentage
Cost of Goods Sold (COGS)	$600,000
Operating Costs	$200,000
Earnings Before Interest, Taxes, Depreciation, and Amortisation (EBITDA)	$500,000
Debt	NA
Amortisation	NA
Depreciation	NA
Corporate tax rate	23 Percent

Considering the above-mentioned particulars, the direct tax levied on the production unit shall be – 

= $500,000*23/100

= $500,000*0.23

= $115,000

Federal Income Tax and other direct taxes

Another illustration of a direct tax is the federal income tax paid by an individual. For instance, if an individual earns $700,000 per year and pays the government $80,000 in taxes, the $80,000 would be considered a direct tax.

Other direct taxes, such as the real estate taxes that owners are compelled to pay, are widespread in the United States. These are typically based on the estimated worth of the property and are compiled by local authorities.

Other direct taxes in the United States and elsewhere include usage taxes (such as automobile licence and registration fees), inheritance taxes, gift taxes, and so-called sin taxes on things like alcohol and cigarettes.

Origin and historical evolution of direct taxes

Origin of direct taxes in the United States of America

The adoption of the 16th Amendment to the U.S. Constitution in 1913 gave rise to the present distinction between direct taxes and indirect taxes. Prior to the enactment of the 16th Amendment, direct taxes in the United States were to be proportionally distributed among the residents of each state. For instance, a state would only be obligated to contribute direct taxes equal to 75% of the total tax burden of the larger state if its population was 75% of that of the other region.

Due to proportionality considerations, this out-of-date legislation led to a situation where the federal government was unable to enact numerous direct taxes, for instance, a personal tax on income. The 16th Amendment, however, altered the tax structure and made it possible to impose multiple indirect and direct taxes.

Origin of direct taxes in India

Kalidas, in his book ‘Raghuvansham’, stated that just like the Sun takes moisture from the Earth and returns it a thousand times over, the head of state simply collects taxes from his citizens for their benefit. 

There is enough evidence to demonstrate that direct taxes were imposed even in prehistoric and ancient cultures. Contrary to popular opinion, taxes on income and wealth are not a modern invention. The word “tax” comes from the word “taxation,” which is another word for an estimate. These were occasionally collected in an arbitrary manner and charged on the sale and purchase of goods or livestock. Caesar Augustus was the first individual known in history to have issued a proclamation mandating taxation of all people, around two thousand years ago.

The historical evolution of direct taxes in India is divided into numerous periods. These periods are described below – 

Ancient period 

This period is known as the period of Indus Valley Civilisation, taking place around 3300 BC to 1500 BC. The Indus Valley civilization is considered one of the world’s earliest civilizations by anthropologists, and this assertion is further supported by archaeological data. According to the investigations conducted, the three primary towns namely Mohenjodaro, Harappa, and Dholavira were the initial units from where this civilization flourished. These primary towns were connected by the river valleys of the Indus, Ravi, and Sutlej and situated just below the Himalayan Range. The Indus Valley civilization is a subject about which we know relatively little. This is due to the fact that the Indus civilization’s writing system and signs have not yet been decoded and no other human civilization or culture has left any information about them. During the investigation, the archaeologists discovered a gate in Harappa that was large enough for oxcarts to move through easily, either entering or leaving the city. They speculate that a duty (tax) could be levied at this gate on commodities entering or leaving a city. 

According to the evidence from the archaeological excavation, the Indus civilization had scales for trade and taxation as well as regulated weights of various sizes. Smaller and greater weight categories were available.

For measuring a certain kind of commodity, cubical weights (24 pounds) may be employed. Therefore, the existence of a consistent weight and measurement system demonstrates the occurrence of a well-developed and organised commerce system. Perhaps the king used these scales to levy taxes on the trading of commodities. All the cities in the Indus Valley had uniform weights, which indicates that the merchants and the rulers prioritised fair commerce and direct taxes were imposed on the traders.

Vedic period

The Vedic Period started in 1500 BC and lasted till 1000 BC. The Vedas, Varta, and Manusmriti were the primary sources of these religions, philosophies, or teachings. The Vedas include the Purana, Itihasa, and Upavedas, among other things. The Atharvaveda, Samaveda, Yajurveda, and Rigveda were the four Vedas. The word “Varta” connotes a thorough understanding of a certain field of work (or profession). Manu, a famous sage and source of law, wrote the Manusmriti. There was a portrayal of purusharthas in the Veda, which has been divided into Dharma (righteousness), Artha (wealth), Kama (pleasure), and Moksha (spiritual). Budgets for expenditure, taxes, and investment are all included in the Artha Purusharthas.

Flocks and agricultural production were the king’s primary sources of wealth during the Vedic era. According to the Atharvaveda, the monarch was required to obtain the farmer’s ‘Bhag’ in exchange for his approval of the peasant’s goods and cows. In the Vedic era, taxation was only done on a voluntary basis. At the king’s consecration, a prayer was made to God Indra on the monarch’s behalf in hopes of securing favourable weather conditions that would result in strong crop yields and allow the monarch to collect enough taxes from the masses or compel his subjects to do so. 

According to Altekar, the citizens of that time were not obligated to pay the king’s taxes on a continuous basis. The word “balitta,” which refers to ordinary people, was used in the Rigveda, along with the phrase “Bali,” which denoted the tax placed on them. Generally, the term “Bali” refers to a sacrifice made voluntarily to a deity in order to win their favour. The same thing happened when the citizens offered the monarch a tax in exchange for his favour. The king has a duty to safeguard his subjects against dangers in exchange for the Bali (taxes) he receives from them. By reading the research studies on the Vedic taxation system, it is discovered that trade and business were well organised in the past. 

Niska had four suvarnas, according to Vishnu and Manu. This is how Manu explains it in Manusmriti:

5 Krisnala	1 Masa
16 Masa	1 Suvarna
4 Suvarna	1 Pala (Niska)
10 Pala	1 Dharana

Manu claimed in Manusmriti that the ruler had the sole authority to impose and collect taxes in accordance with the sastras. Additionally, he suggested that it be reasonable and linked to revenue and expenses. While taxing his citizens, a just philosophy should be followed. It was said in Manusmriti and Shanti Parva that direct taxes should be charged for the protection and betterment of their subjects as well as for the common good. Additionally, it was stated that direct taxes have to be applied in accordance with people’s financial capacities. 

Manu placed a strong focus on comfortability when imposing heavy taxes. He said it was important to avoid causing the taxpayer any unjustified hardship. Explaining the need for taxation,  Manu stated in Manusmriti that “As the leech, the calf, and the bee take their nourishment little by bit, exactly so, the king must draw from his domain reasonable annual taxes”. Manu declared in Manusmriti that traders and artisans should pay 1/5th of their earnings in taxes, farmers should pay 1/6th, 1/8th, or 1/10th of their harvest depending on the situation, and classical musicians and other artisans should pay some ad-hoc contribution for personal services rendered.

Post-Vedic period

This period started in 1000 BC and lasted until 600 BC. Sutras and Smiritis from the Post Vedic Period describe direct taxes. In Smritis, the words “Sangrahita” (treasurer) and “Bhagduth” (tax official) may be found. There was a depiction of heritage, convention, ritual, regulations, taxation system and behavioural guidelines that were accepted by the society in the Dharmasutras. 

The phrase “eater of his subjects” was used to characterise the monarch in the Dharmasutras. The term “Bali” was employed in the Dharmasutras and Smritis to denote the royal fellowship. To safeguard his subjects from danger, the king is entitled to tax or collect Rajkar on 1/6th of the agricultural output. According to Narada, a citizen was required to give the monarch a gift of one-sixth of the harvests or earnings for the benefit and defence of the kingdom. According to the Bodhayana Dharmasutras, the king received a tax, or 1/6th of his subjects’ revenue, which was referred to as a levy. The monarch’s obligation to defend his subjects is in place of this tax. An extensive list of the methods the monarch may use to collect taxes from labourers and artisans is mentioned in the Gautam Dharmasutra. 1/20th of the item sold, 1/5th of the livestock owner’s charge, 1/10th of the export, and 1/20th of the material imported. Brahmins received particular privileges, according to the Dharmasutra. The king was forbidden from charging his people high taxes because doing so could result in punishment. In Jatak, it was customary for the king to levy taxes in accordance with the dictates of the local religion. The general public was to impose taxes on the monarch if he disobeyed his raja dharma. While collecting taxes, the king behaved like the sun and bestowed gifts on the population like rain.

Epic period

It is also known as the Poetic Period, ranging between 600 BC and 400 BC. The Epics Ramayana and Mahabharata are collections of numerous poems that give us plenty of opportunities to learn about India’s historical culture and governmental taxation structure. The tax was a choice rather than a required payment throughout the Epic period. The association was founded on dharma, and the king had a responsibility to protect the people from whom he had received taxes. If the king disregarded this duty, the individuals were entitled to stop tax payments and even request a refund. The word “Bali,” which means “what the ruler accepts from the subjects,” was used in the Mahabharata. It represented a sixth of the output. 

Mauryan and Post-Mauryan period 

This period ranged from 320 BC to 319 AD. Politics became a significant field of study during the Maurya dynasty, and the taxation theory was created. The Arthasastra of Kautilya was regarded as a repository of this information. The most significant sources of income during the reign of the Mauryans were land revenues and direct taxes. Another significant tax was the Udakabhagam (water tax), which was levied on farmers who used 1/3 to 1/5 of the produce’s water for irrigation. In addition to these, taxes have also been levied on a variety of other areas, including customs duties, sales taxes, tolls, and entry taxes. The enormous book “Arthasastra,” which Kautilya wrote in 300 BC, is what made him renowned. This was the first reputable book on public finances, management, and financial legislation. It addresses the taxation system and gives the monarch instructions on how to administer the country effectively. Because the health of the government’s finances was a key factor in determining its ability to exercise power, Kautilya placed a high value on public investment and taxation. He said, “The authority of governance flows from the Treasury, and the Land, whose jewel is the Treasury, is obtained by the Public purse and Army.” When drafting the economic strategy, Kautilya placed a strong emphasis on the financial side.

When discussing the topic of public finances, Kautilya emphasises the following occurrence.  

“Expenditure should not exceed income.” 

“Expenses on tax management should be reduced at all costs.”

The soundness of the public exchequer and the reduction of the expense of tax management are stressed by Kautilya. It can be accomplished by creating a rationalised or optimised tax structure. Therefore, the state should make every effort to raise revenue and decrease spending. During the reign of the Mauryans, Kautilya exhausted every source of income that could be obtained for the monarch’s cash reserves. Nearly all the sources from which income can be made to strengthen the royal treasury are defined by Kautilya in the Artha sastra.

Thus, it is clear that taxation was well-planned and systematic throughout the reign of Maurya. For the sake of the general good, they levy taxes. Taxation laws have established concepts that are comparable to those in use today. 

Ashoka was the final ruler during the Mauryan era. Small states were created as a result of the division of the Magadha regions following his death. The central government systems deteriorate as a result of this separation. On necessities and small products, taxes were levied. Taxes were taken from the people with compulsion.

As a result, there was irrational dysregulation among the people, which caused the sovereign empire to fall. We discovered traces of kar, visti, and praney in the Shank King of Ujjayani’s historical records. Different forms of taxes were denoted by these words. The people had to contribute their hard manual labour as a tax to the king if they were unable to pay taxes to him in the form of money or part of their output.

Gupta and Post-Gupta period

The period between 324 AD and 800 AD is said to be the period of the Gupta Empire, which also includes the Post-Gupta period. The Gupta era was known as the Golden Age of India due to its features, which included high standards of language arts, rule of law, artistic and intellectual accomplishments, and a taxation system. A solid financial administration system existed during the Gupta era. There were coins made of both sterling silver and gold. It was said in Kamandaka-Nitisara that for an excellent government, the sources of funding should be numerous while the goods used for disbursements should be few.

There should be plenty of jewels and precious metals in the state treasury. The king must collect these resources in a just and legal manner. The state treasury was viewed as the benchmark for effective governance. One-sixth part of the benefits attained by spiritualists is to be given to the king, according to Abhigyan Shakuntalam. As payment for his efforts, the king was entitled to receive 1/6 of the crop for the welfare of the people. By levying fines, the state also generates income. The sum that must be penalised for each crime committed by the criminals is specified in both Gupta-era inscriptions and Brahaspati and Narada literary works. Therefore, in addition to paying land revenue tax, the citizens of the Gupta dynasty also had to pay other forms of taxes. However, the tax load was minimal when compared to the Mauryan era.

Period of Delhi Sultanate

The period between 1206 AD and 1526 AD is considered the period of the Delhi Sultanate. Mohammad Ghori overcame Prithviraj Chauhan to establish the Delhi Sultanate, which ended when Babur defeated him. The king, or “sultan,” who governed all operations, including the military, was known as the Delhi Sultan. The five lineages of Slave, Khilji, Tughlaq, Sayyid, and Lodhi can be used to categorise the Delhi Sultanate period. New political organisations in India evolved with the formation of the Delhi Sultanate. New institutions and administrative structures were introduced for effective administration. Qutub-ud-din Aibak declared himself to be the ruler of India after Mohammad Ghori passed away in 1206, and he adopted the title of Sultan. He designated Delhi as the capital of India. The financial theory of the “Hanafi School” of Sunni jurists had an impact on the financial policies of the Delhi Sultanate. The governance of the Sultanate was based on the Holy Quran as well as Sharia. The organisation of revenues was done in a methodical, unified, and centralised manner. The Delhi Sultan levied a variety of charges to strengthen the sultanate’s resources. Out of them, land revenue was the Sultan’s primary source of income. In the Delhi Sultanate, there were three types of land.

Mughal period

The Mughal period started in 1526 AD and lasted till 1765 AD. Babur overthrew Ibrahim Lodi, the final Sultan of the Delhi Sultanate, and thus began the Mughal Empire in India in 1526. In terms of the organisational structure, the Mughals incorporated several elements from the Delhi Sultanate. In order to administer the empire efficiently, the Mughals created a new geographical unit called Suba. A Subedar, or Provincial Governor, chosen officially by the Emperor over each Suba, was in charge of that area. A Diwan who oversaw the department of revenue was present in each Suba. Chief Diwan kept watching over them. Financial and income management fell under the purview of the Diwan-i-Kul (Chief Diwan), who answered directly to the monarch. The Mughal era saw the prevalence of both coercive and organised tax methods. The Mughals had numerous ways to maintain the treasury. One of the main sources of income came from land sales. The entire tax structure was redesigned by the legendary Mughal Emperor Akbar. Along with decentralising the annual evaluation method, he also introduced a 10-year settlement plan, where the tax rate per unit of area was fixed using data from the previous 10 years. He made a number of improvements and amendments in this regard. 1/3 to 1/2 of the produce was charged at various rates. Akbar requested that the land tax evaluation and collections be revised and systematised in 1570–1571 by Muzaffer Khan and Raja Todar Mal, who also worked as a revenue officer under Sher Shah Suri. Over time, Raja Todar Mal conducted an extensive study of Gujarat’s territory. 

Based on the outcomes of this study, Todar Mal’s Bandobast, a set of tax administrative reforms, was implemented. In order to improve the emperor’s finances, Todar Mal rebuilt the system of taxation. They recommended implementing the Mansabdar system. Taxes were gathered in cash by a conversation at the agreed-upon crop value. Mansabdar and the jagir system were introduced in this period. Both civil and military governance were built on it. Under the Mansabdar system, a person was given a post or place indicating their position in the formal structure and their pay. The nobility rank was streamlined by the creation of this framework.

Pre-independence Period

The time period between 1765 and 1947 is regarded as the period of pre-independence. The major and only reason for the collapse of the Mughal Dynasty was the East India Company. The company initially acted as a company who would trade and paid dividends to the royal family and later on took over the whole of India. The Mughal Emperor Shah Alam II was incapable of managing and exercising authority over his subjects in the provinces of Bengal, Bihar, and Orissa in 1765. Therefore, he gave the East India Company the Diwani rights (relative to the collecting and management of taxes) in these regions in exchange for Rs. 26 lakh per year to be remitted to the royal treasury in Delhi. In the beginning, the company proposed India as a location to conduct business, but later on, through its political objective, the company fully seized control of these regions. The business held both the position of trader and monarch until 1833. 

By establishing a monopoly in trade with China and India, they generated enormous profits. Up to the 1857 military uprising, the corporation was required to pay a yearly dividend to Britain in the sum of nearly £600,000. Land acquisition and taxes were the main sources of income during that time. They were responsible for around half of the overall revenue. Other sources of income for the company included stamp duty, alcohol excise, transportation duty, customs, entry tax, salt, opium, cigarettes, agriculture tax, and other taxes. They created a tax scheme of this kind that was advantageous to both the firm and the British monarch. The business also distinguished between indirect and direct taxes and attempted to achieve the best possible equilibrium between the two. The corporation imposed additional taxes in an effort to boost revenue. These direct and indirect taxes are – 

Taxes	Meaning
Sayar	A tax on agricultural producers, inaccurate receipts, transportation fees, and municipal responsibilities
Wheel Tax	A charge is imposed on chariots, carriages, and carts.
Moturpha	A tax levied on commerce, business, and occupation.
Pilgrim Tax	Individuals who came “in pursuit of the light of God” were forced to accept it.
Licence Fee	It was imposed on people who wanted to establish their shops and stalls.

The British Crown took power from the East India Company as a consequence of the First War of Independence in 1857 by enacting the Act for the efficient governance of India in 1858. At that time, the Viceroy and India Council were the means by which the British monarch governed and regulated India. The taxation system collapsed and became immobilised as a result of the military rebellion. There has been a lot of debate on how to make it better. Finding new sources of income and cutting back on government spending were the two main topics that came up throughout the conversation.

However, it should not be assumed that the history of direct taxation in India came to an end with this. There have been numerous developments in direct taxes post-India got independence in 1947. 

Developments in direct taxes during the independence struggle in India

The Indian Income Tax Act of 1860

One of the major developments concerning direct taxation in India is the introduction of the Indian Income Tax Act of 1860.  

Sir James Wilson, the finance secretary of Viceroy Lord Canning’s Council, introduced the income tax for the very first time in 1860 to compensate for the damages incurred as a result of India’s First War of Independence in 1857. This was a historic year for the Indian economic structure. It was founded on Manu’s belief that the nation should be taxed. The Governor General approved this legislation on July 24, 1860. The legislation was broken down into 21 parts and 259 sections. Sir J. Wilson developed the idea of triple evaluation, which consists of three components: a tax on all earnings, a system of permits for professions and the arts, and a tobacco tax. In addition, the import tax was raised from 5% to 10%.

The Income Tax Act of 1860, which was substantially parallel to the British Act of the same era, contained four schedules for enforcing the obligations, which were as follows: 

1. Every type of financial gain and profits deriving from property and land in India; 
2. Yearly basis revenue from any recruitment, export, and occupation in India; 
3. Any consideration, return on capital, or endowment payable in India to any individual, whether domiciled in India or not; and 
4. Any pension, remuneration, or superannuation is payable to any individual residing in India.  

Since the Indian Income Tax Act of 1860 did not perform up to expectations a licence tax on businesses and professions were introduced. This tax was later substituted by the certificate tax in 1868. In 1874, the Indian Income Tax Act was abolished.

More than five million people are thought to have starved to death in the severe famine of 1877. Money was needed to deal with the famine. Then Finance Minister Sir J. Strachey suggested creating an insurance fund to provide assistance in such a circumstance. In addition, they implement local licensing tax laws in several regions. It was altered multiple times as a result of several technical and legal problems. This law was still in effect in 1886. A new piece of legislation was passed in 1886 to address the needs of the day. It offers a thorough basis for the income tax system. Income tax was levied under this statute at a fixed rate of 5% on earnings over Rs. 2000. For various income groups, there were eight distinct tax categories in 1917.

The super tax, which is an additional income tax, was also imposed. The statute was repeatedly modified because of the evolving circumstances, and it was in effect until 1917. The notion of divisions and the aggregate of income were introduced by a new income tax legislation that was enacted in 1918 and was in effect until 1921. Along with this, there were other additional ways to earn money, including customs duties, octroi, transportation duty, entertainment tax, home tax licence, stamp duties, excise taxes, property tax, processing fees, tax on salt and opium, and tax on a variety of other goods and services.

The Income Tax Act of 1922

The historical development of socio-economic thought in India is reflected in the fast development of recent years in direct tax management. Since the Income Tax Act of 1922 has undergone such rapid development from 1922 to the present, it is difficult to find any legacies of it in the Income Tax Act of 1961 as it has been changed to this point. In these conditions, it was only logical for the Income Tax department’s organisational structure to change structurally in addition to growing.

Beginning in the year 1922, the Income-tax Department had a documented administrative history. Various Income-tax authorities were given a defined designation for the first time by the Income Tax Act of 1922. This created the groundwork for a sound taxation structure. The Board was established by the Central Board of Revenue Act in 1924 as a statutory entity with operational duties for the implementation of the Income Tax Act. Each province had its own set of commissioners of income tax, who were in charge of assistant commissioners and income-tax officers.

The Income Tax Act was modified in 1939, and these amendments resulted in two significant structural variations: 

1. The separation of appellate roles from administrative duties, which led to the creation of a new class of officials known as Appellate Assistant Commissioners; and 
2. The establishment of a fundamental command in Bombay. 

The first affiliated office of the Board, known as the Directorate of Inspection (Income Tax), was established in 1940 with the goal of exerting effective supervision over the development and regulation of the operations of the Income-tax Department across India. In 1941, the Appellate Tribunal was created as a result of the independence of the executive organ from the judicial organ of the government. Calcutta also saw the creation of a central charge that same year.

These are some of the noteworthy points regarding the development of direct taxes in India – 

1. Businesses saw unusual earnings as a result of World War II. The Excess Profits Tax and Business Profits Tax were implemented between 1940 and 1947, with the Department taking over the management of both taxes. These were subsequently abolished in the years 1946 and 1949, respectively.
2. The first voluntary reporting program was implemented in 1951. This program is aimed at disclosing income tax by individuals on a voluntary basis. A few Group “A” officers were officially hired during this time period in 1946. The “Indian Revenue Service” was officially incorporated as the Group “A” Service later in 1953.

Developments in direct taxes after independence

The advancement of investigative tactics received a lot of attention at this time. The Taxation on Income (Inquiry) Commission was established in 1947 and was later deemed ultra vires by the Apex Court in 1956, but by that time it was clear that a thorough investigation was necessary. The Directorate of Inspection (Investigation) was established in 1952. A new group known as the Inspectors of Income Tax was established this year. The surge in “large income” situations required that administrative officers double-check their work. The Internal Audit Scheme was thus implemented by the Income-tax Department in 1954.

As was previously said, the department originally hired a few Group A officers in 1946. There was a need to train them. Potential recruits were transferred to Bombay and Calcutta, where they received training. The Nagpur campus of the Indian Revenue Service (Direct Taxes) Staff College opened its doors in 1957. Today, a Director-General supervises the functioning of this Board-attached position. The National Academy of Direct Taxes is its official name. By 1963, the Income Tax department had grown to such a size that it was deemed necessary to place it under a distinct Board due to the responsibility of administering numerous other Acts, such as the Wealth Tax Act, Gift Tax Act, Enforcement Directorate Act, etc. The Central Board of Revenue Act, 1963 as a result, was passed. Under this Act, the Central Board of Direct Taxes was established. 

Black money and high tax rates were both brought about by the country’s economic boom. The Voluntary Disclosure Scheme was implemented in 1965, succeeded by the Disclosure Scheme in 1975. The Settlement Commission was finally established as a result of the requirement for a long-term settlement system.

During this time, there was a significant taxation reform. The settlement of tax arrears, which prior to 1970 was the responsibility of State officials, was transferred to administrative officers. With effect from January 1, 1972, a new cadre of posts known as Tax Recovery Commissioners was instituted, along with a whole new branch of officers known as Tax Recovery Officers. In order to raise the standard of the work, two new cadres—IAC (Assessment) and CIT (Appeals)—were established in 1977 and 1978, respectively. In 1981, five Chief Commissioners (Administration) positions were added following a further reorganisation of the Commissioners’ cadre.

Reforms in the field of direct tax in recent years

Tax reforms

Tax reforms included 2 major forms of reforms, namely policy reforms and administrative reforms.

The following are some significant policy and administrative reforms that have been implemented in recent years:

1. The policy changes comprise of –

• A major reduction in rates of taxes;
• The elimination or decrement of significant incentives;
• The implementation of presumption-based taxation policies;
• Streamlining of tax laws, notably those pertaining to capital gains; and
• Expanding the tax base, etc.

2. Among the administrative reforms are –

• Digitalization, which involves assigning taxpayers a special identification code that is increasingly used as a special corporate identity number; and
• Re-aligning the organisation’s human resource pool with its evolving business requirements.

Digital reforms

With the establishment of the Directorate of Income Tax (Systems) in 1981, the Income-tax Department began to use computers. At first, computerization of challan operations was implemented.

In 1984–1985 in major cities, three computer centres were officially established for this purpose, utilising SN–73 systems. By 1989, 33 prominent cities had been added to this. Later, the allocation of TAN and PAN under the old sequence and payroll reporting were added to the list of computerised operations. Batch processing and dumb interfaces were employed in these data centres to enter data.

The government established a working group in 1993 to suggest the computerization of the department. A comprehensive strategy for computerization was adopted by the Indian government in October 1993, based on the Working Group’s report. As a result, Regional Computer Centers equipped with RS6000/59H Servers were established in Delhi, Mumbai, and Chennai from 1994–1995. Officials in these cities were initially given personal computers in stages. All LAN/WAN users were to be networked as part of the plan. As a result, networks with leased data lines were set up in Delhi, Mumbai, and Chennai in Phase I between 1995 and 1996. In 1996–1997, Delhi saw the establishment of a national computer centre. 

A consolidated software application was created and implemented between 1997 and 1999. The additional 33 computer centres in a number of important cities were then equipped with mid-range servers of the RS6000 type in 1996–1997. Through wired connections, these were linked to the National Informatics Centre. Between 1997 and 1999, PCs were gradually distributed to officers at various levels, up to and including ITOs. In phase II, offices were added to the network and connected to RCCs and NCCs in 57 cities. All these helped to keep the data regarding payment and collection of direct taxes in an organised manner and error-free. 

Structural Reforms

To ensure better administration of direct taxes, especially income tax, the Department of Income Tax underwent major structural reforms. 

The Cabinet approved the structural reforms for the Income-tax Department at its meeting on August 31, 2000, in order to accomplish the following goals:

• Increasing performance and efficiency;
• A rise in government revenues;
• Enhanced services for tax-paying citizens;
• A decrease in spending through reducing the personnel;
• Better career opportunities across the commission;
• Implementing information technology; and
• The uniformity of job standards

The department has worked to attain the aforementioned goals by employing a multifaceted approach that includes:

1. functionalizing existing business processes to rethink them;
2. expanding the total number of officials to streamline the scope of tax management for greater accountability, administration, and regulation of workload, as well as to enhance services to tax-paying citizens and
3. reorient, re-train, and redistribute the personnel with the proper incentives, such as career growth.

Timeline of major changes in the Income-tax department

Significant changes that had an impact on the administrative structure of the Income-tax department in India :

 that had an impact on the administrative structure of the Income-tax department:

1939-1999

Year	Major changes
1939	Separating appellate functions from inspection operations. A new class of officers called AACs was created.A central charge was established in Bombay, and the Commissioners of Income Tax’s jurisdiction was expanded to include specific sorts of cases.
1940	The Income-tax Directorate of Inspection was established. The excess Profits Tax was first enacted on January 9, 1939.
1941	The Income Tax Appellate Tribunal was established. Calcutta was the site of the establishment of the central charge.
1943	Establishing Special Investigations Branches.
1946	Several Class-I officers were recruited directly. High-denomination notes were demonetized. Revocation of the Excess Profits Tax Act.
1947	Enactment of the Business Profits Tax (for the period April 1, 1946, to March 31, 1949).
1951	The Income-tax Investigation Commission, often known as the Vardhachari Commission, delivered its report. Launch of the Voluntary Disclosure Program.
1952	Establishment of the Inspection (Investigation) Directorate. The Inspector of Income-tax has been designated as an I.T. authority.
1953	The Estate Duty Act of 1953 went into effect on October 15, 1953. The recommendations of the commission established by the Taxation of Income (Investigation Commission) Act, 1947, were implemented by Act XXV of 1953.
1954	Income-tax Department introduces an internal audit programme. The John Mathai Commission, a tax investigation body, was established.
1957	The Wealth Tax Act of 1957 was put into effect on April 1, 1957. The I.R.S.(DT) Staff College began operations in Nagpur, and four Regional Training Institutes (RTIs) stationed in Bombay, Calcutta, Bangalore, and Lucknow opened much later.
1958	The Gift-tax Act of 1958 went into effect on April 1, 1958. The Law Commission’s report was received.
1959	The report of the Direct Taxes Administration Enquiry Committee was submitted.
1960	A directorate of inspection for periodicals, investigation, and statistics was established. Selection and regular classes of Inspectors were combined into one grade.
1961	The Direct Taxes Administrative Enquiry Committee was established, along with the Direct Taxes Advisory Committee. With effect from April 1, 1962, the Income-tax Act of 1961 was enacted. The Department has for the first time adopted Revenue Audit. Introduced is a new mechanism for evaluating the work done by income-tax officers.
1963-1964	Under the Central Board of Revenue Act of 1963, the Central Board of Revenue was divided into two boards, with the Central Board of Direct Taxes (CBDT) serving as the board specifically responsible for direct taxes. As of January 1, 1964, an officer from the department held the position of Chairman of the CBDT for the first time. In 1964, the Companies (Profits Sur-tax) Act was unveiled. Introducing the Annuity Deposit Scheme in 1964.
1965	The Voluntary Disclosure Scheme was launched.
1966	Introduction of a functional scheme.Creation of the Special Recovery Unit. The Directorate of Inspection was given control over the newly established Intelligence Wing (Investigation).
1968	In the Income Tax Department, a unit called the Valuation Cell was established. The Bhoothalingam Committee’s report on the restructuring and modernization of the tax system was received. Commission on Administrative Reforms established.
1969	Direct recruitment for Class II Income-tax Officers had taken place. The Income-tax Department had created the position of IAC (Audit).
1970	The position of Additional Commissioner of Income Tax was established and eliminated after a year. Tax Recovery Officers were now in charge of recovering duties that had previously been carried out by Income Tax Officers. Before that, representatives of the State Government performed the duties of a tax recovery officer.
1971	With effect from 1.1.1972, a new group of positions known as Tax Recovery Commissioners was established. The Direct Taxes Enquiry Committee’s report has been received. Introduction of the Summary Assessment Scheme on April 4, 1971.
1972	To manage the cases of large industrial homes, the Directorate of Inspection (Investigation) established a Special Cell. With the addition of a new Chapter XXA to the Income Tax Act of 1961 regarding the acquisition of movable properties in certain circumstances of transfer to prevent tax evasion, a new cadre of positions known as IAC(Acq.) was created, and IAC was appointed as the Competent Authority. The creation of the Directorate of Organization and Management Services (Income-tax). Internal Audit Officer (I.T.O.) position was created. The Income-tax Department introduced the Bradma Scheme. A permanent Account Number System was introduced. According to the Income-tax Act of 1961 and the Wealth-tax Act of 1957, valuation officers are given legal authority.
1974	The Compulsory Deposit Scheme (Income-Tax Payers) Act was first passed in 1974. Introducing the first version of the Income Tax Officers’ Action Plan. Introduction of the management buyout concept.
1975	Implementation of the Voluntary Disclosure Scheme for Income and WealthA special cell has been established to handle cases involving smugglers.
1976	A new Chapter XIXA Chapter XIXA of the Income Tax Act of the Income Tax Act was added with effect from April 1, 1976, thanks to the Settlement Commission and the Taxation Laws (Amendment) Act of 1975. Introduced with effect from 25 January 1976, the Smugglers and Foreign Exchange Manipulators (Forfeiture of Property) Act. There has been an introduction of a new departmentalization of accounts scheme. The interim report of the Choksi Committee was delivered.
1977	IAC (Assessment), a new cadre of positions, was created.
1978	A new group of Commissioners known as Commissioners were given appellate functions (Appeals).establishing the Directorate of Inspection (Recovery). By dividing the responsibilities of the Directorate of Inspection, a new directorate known as the Directorate of Inspection (Vigilance) was created (Investigation). The final report of the Choksi Committee was delivered.
1979	The Directorate of Inspection was replaced with a new directorate called the Directorate of Inspection (Publication & Public Relations) (RS&P).
1980	The Hotel Receipt Tax Act of 1980 went into effect on January 1, 1981.
1981	Creation of the Economic-Administrative Reforms Commission. Directorate of Inspection (Intelligence), Directorate of Inspection (Survey), and Directorate of Inspection (Systems) are the three new directorates that were established. A separate Director of Inspection (Audit) was appointed inside the Directorate of Inspection (Income Tax and Audit). Reorganisation of the Directorate of Inspection (RS&P) and redesignation of the Directorate of Inspection (P&PR) as the Directorate of Inspection (Printing & Publications). The National Academy of Direct Taxes has taken over as the name of the I.R.S. (DT) Staff College in Nagpur.Adoption of the Special Bearer Bonds (Immunities & Exemptions) Act. The Central Board of Direct Taxes has appointed a Director General (Special Investigation) and a Director General (Investigation) to oversee the operations of several Directorates. There are now five Chief Commissioner (Administration) positions. There were a couple of positions designated as Commissioner of Income-tax (Inv.) and Commissioner of Income-tax (Recovery).
1982	Special Cell, once a part of the Directorate of Inspection (Investigation), has been renamed the Directorate of Inspection (Special Investigation). The Directorate of Income-tax (Organisation and Management Services) designated DIT (Systems) to coordinate efforts to implement electronic data processing in the IT Deptt. The advent of the computer age was signalled by the installation of an EDP system and data entry system powered by microprocessors. Tax on Hotel Receipts is no longer levied. Under the direction of the National Academy of Direct Taxes, the Regional Training Institute in Nagpur began operations.
1983	The vigilance structure was reorganised, and the Dy. Director (Vigilance) and Asst. Director (Vigilance) staff numbers were increased. Challan and PAN processing systems have been designed and developed using computers.
1984	The Taxation Laws (Amendment) Act of 1984 was passed to simplify processes for better work management, protect taxpayers from discomfort, eliminate anomalies, and rationalise some laws.
1985	To effectively check for tax evasion, the position of Director General (Investigation) was created. Estate duty is no longer levied on deaths that occur on or after March 16, 1985, according to the E.D.(Amendment) Act of 1985. With effect from 1.4.1985, the Compulsory Deposit Scheme (Income Tax Payers) Act 1974 was repealed.The Interest Tax Act of 1974 was repealed on March 31, 1985. Since January 1, 1985, a new “Reward Scheme” has been in place to encourage officers.
1986	The Taxation Laws (Amendment and Miscellaneous Provisions) Act revised the I.T. Act and the W.T. Act and established the Settlement Commission. Introduced the notion of block assets for depreciation. In major cities, four offices of Appropriate Authority have been established for purchasing real estate where unreported funds have been invested.
1987	The installation of three new Settlement Commission benches has received government permission. The L.K. Jha Committee was established to simplify and rationalise tax laws. Calcutta is home to the Office of the Directorate General (Tax Exemption). The Direct Tax Law(Amendment) Act of 1987 made the following authorities uniform the previous year: Inspectoration DirectorCommissioner of Income Tax, InspectorAsst. Appellate CommissionerTax Officer, Grade ATax Officer, Grade BIncome Tax Directory. Income Tax CommissionerAssistant Commissioner of TaxesRevenue Officer5. The Expenditure Tax Act of 1987 became effective.
1988	1988 saw the introduction of the Benami Transactions Prohibition Act. In order to qualify for a 50% interest rebate under section 220(2), the government proposed a “Time Window Scheme” that required taxpayers to pay both the tax and the remaining interest. From 1 July 1988 until 30 September 1988, the scheme was in effect. Director General is in charge of and is responsible for CIT (Central) (Investigation). Government officials decided that the Chief Commissioner would have responsibility over the cadre for Group “C” and “D” posts, while the CBDT would have jurisdiction over Group “A” and “B” posts. A notification from the President of India dated 7 November 1988 extending the Direct Tax Law to the State of Sikkim.
1989	In order to oversee the Directorate of Income Tax (Research, Statistics, Publication & Public Relations) and the Directorate of Income Tax (Organisation and Management Services) starting in September 1989, the DGIT (Management Systems) created an attached office.
1990	Introduced a gift tax bill on May 31, 1999.Upgrade of 65 Asst. Commissioner of Income Tax posts to create 65 new Dy. Commissioner of Income Tax jobs.
1991	Reviving the 1974 Interest Tax Act Direct reporting to the Board was established by the Directorate of Income Tax (Systems).
1992	To broaden the tax base, the Rs. 1400 Presumptive Taxation programme was implemented. It was eliminated to hold the position of Director General of Income-Tax (Management Systems).
1993	40 extra Commissioner of Income-tax (Appeals) jobs have been created. Set up authority for advance rulings. A thorough staged cadre evaluation for Groups B, C, and D was started.
1994	2068 more Group B, C, and D postings have been authorised a new PAN is unveiled. In Chennai, Delhi, and Mumbai, Regional Computer Centers (RCCs) have been established.
1995	Introduced a new search assessment process. The National Academy of Direct Taxes introduced “Seminar Twenty-Five” and celebrated 50 years of instruction.
1996	Income tax rates were drastically lowered. In some places, legal measures to broaden the tax base on particular economic indicators have been enacted. The supposed tax scheme was abandoned. The Voluntary Disclosure Scheme was established in 1997.
1997	Introduced the Minimum Alternate Tax. In Delhi, the National Computer Centre (NCC) was established.
1998	Direct appeals to the High Court are now possible according to Section 260A.To increase the tax base, a scheme and a fine for not filing a return were implemented in 1/6. For presents given after 1.10.1998, there is no longer a gift tax. Kar Vivad Samadhan Scheme was launched in 1998. Regional Training Institutes celebrated their silver jubilee. Dy. Commissioner was added to the title of Assistant Commissioner (Senior Time Scale), and Joint Commissioner was added to the title of Dy. Commissioner (Junior Administrative Grade).
1999	For the purpose of receiving a refund, providing bank account and credit card information on the required form is required. Prima-facie modifications are to be eliminated, and acknowledgements are to act as hints. In 1999, the Samman Scheme was established to recognise deserving taxpayers.

2000 – till today

Year	Major Changes
2000	To improve efficiency and handle the increased workload, the Department’s restructuring process got underway. Total number of sanctioned employees decreased from 61,031 to 58,315. At structural levels, several rationalisation efforts have been implemented. The Interest Tax Act expired on April 4, 2000.
2001	As a result of the Department’s restructuring, there was less stagnation at all levels, and many employees received promotions in various grades. The pattern of jurisdiction was updated. At the DGIT/DIT level, new positions were created in the fields of research, international taxation, and infrastructure.
2002	Introduced computerised return processing across the nation. The Kelkar Committee Report made the following recommendations, among others: Outsourcing of the department’s non-core tasks; Reducing exemptions, deductions, reliefs, rebates, etc. The Income Tax Department’s national website (www.incometaxindia.gov.in) was established as a crucial interaction between the Department and taxpayers.
2003	Under the National e-Governance Awards, the Department’s national website took home the Silver Medal in the category of “Government Websites.”
2004	The idea of an AIR (Annual Information Return) was developed as a way to broaden the tax base. In order to broaden the tax base and strengthen Direct Tax Collection, the Fringe Benefits Tax (FBT) was implemented.STT, or Securities Transaction Tax, was implemented.
2005	The introduction of Tonnage Tax for Shipping companies with effect from January 6, 2005, the Banking Cash Transaction Tax (BCTT) was introduced.
2006	A project was started to make it possible for income tax returns to be filed electronically. For the purpose of assisting individuals and HUF taxpayers in filing their Return of Income, the Tax Return Preparer Scheme (TRPS) was established. To investigate complaints from the general public about taxes, the institution of the Income Tax Ombudsman was established in 12 cities around the nation.
2007	The Refund Banker Scheme was introduced in Patna and Delhi fees. To standardise service delivery to the taxpayers, Sevottam Scheme was launched. Aayakar Seva Kendra (ASK), the first single-window service centre that prioritises the needs of citizens, was established for the centralised receipt and registration of a number of different types of documents, including income tax returns. After raising its share from 34.76% in 1997-1998 to 52.75% in 2007-2008, the Income Tax Department became the Government’s top source of revenue mobilisation. Over 700 offices in over 500 cities are connected via the All India Tax Network (TAXNET). A single centralised database (PDC or Primary Data Centre) was created by combining 36 distinct regional databases (RCC). A 360-degree taxpayer profile-drawing system called the Integrated Taxpayer Data Management System (ITDMS) was introduced.
2008	Cyber Forensic Labs were established with the purpose of locating pertinent digital data during search and survey operations, recovering concealed, password-protected or deleted data and storing returned data in a way that would allow it to be used as evidence in legal processes. Under the National e-Governance Awards for the 2007–2008 fiscal year, the Electronic Filing of Income Tax Returns Project received a Silver Award for “Outstanding Performance in Citizen-Centric Service Delivery.”
2009	To process paper and electronic returns in bulk, a centralised processing centre was established in Bengaluru. The Centre functions in a jurisdiction freeway with no contact with taxpayers.
2010	The “Excellence in Governance and Administration” Prime Minister’s Award was given to the Integrated Taxpayer Data Management System (ITDMS). The National e-Governance Awards presented CPC Bengaluru with the Gold Award for “Excellence in Government Process Re-engineering” for the 2010–2011 fiscal year. The Direct Taxes Code Bill, 2010 was tabled in Parliament to streamline the Income-tax Act, of 1961, which has been in effect for 50 years.
2011	To more efficiently handle the rise in tax information interchange and transfer pricing difficulties, the CBDT’s Foreign Tax Division was reinforced. For effective tax administration, a variety of IT efforts were implemented. The adoption of the “Sevottam” idea by CBEC and CBDT, the ability for taxpayers to track the settlement of refunds and credits for prepaid taxes online, as well as the expansion of processing capacity, are among them.
2012	To make it easier for small taxpayers who are subject to presumed taxation to comply, a new streamlined form called “Sugam” was established.
	Senior citizens were excluded from paying advance tax if they had no income from a business or profession. The goal of TRACES (TDS Reconciliation, Accounting and Correction Enabling System) was to provide stakeholders with an integrated one-stop platform for services connected to TDS operations. The Department’s Cadre Restructuring was approved by the Government in order to add 20,751 new positions and carry out different initiatives to improve the Department’s efficiency. The key components of the restructure that have been accepted are, in brief, as follows: A 1080 increase in the number of assessment units (AUs) from 3420 to 4500 was made to improve the tax administration. Each Range will receive an additional Assessing Officer; A rise in the number of Administrative CsITs working on assessment-related tasks, from 228 to 250;114 Special Ranges will be established, with sufficient people to maintain them;620 reserves have been created within the IRS cadre; The separation of the CIT postings into the HAG and SAG scales based on functional criteria; Upgrades to all 116 of the current CCsIT posts at the HAG+ and Apex scales, combined with a post increase; Adding three more RTIs to the training setup to strengthen it; Increasing the number of CIT Appeals and giving them supporting staff will strengthen the Appellate/Advocacy Structure. The ITAT needs to strengthen its advocacy structure.
2014	Launched with improved new features and information, the Income Tax Department’s new national website is located at www.incometaxindia.gov.in.The Tax Administrative Reforms Commission (TARC), which was established by the SIT to look into black money in Swiss bank accounts, was led by Dr. Parthasarathi Shome. In its report, the TARC reviewed the applicability of tax laws and policies in light of international best practices and made recommendations for changes that would improve the effectiveness and efficiency of tax administration.

Difference between direct and indirect taxes

Although the precise definitions vary depending on the jurisdiction, in general, a direct tax, say, income tax is a tax levied against a person or piece of real estate as opposed to a tax levied against a transaction, which is referred to as an indirect tax. Regardless of whether the person paying the tax is the real taxpayer or if a third entity, typically a customer, is supporting the taxes owed, there is a difference between direct and indirect taxes. Although the term itself has no potential consequences, it may be used in both economic and political studies.

According to Dalton, taxes affect expansion and prosperity by rearranging and altering the number of resources available. The operations of the government depend on it.

Direct and indirect taxes are two possible categories of taxes. To distinguish them, J. S. Mills introduced the phrase “incidence of taxation.” He said that direct tax, often known as the incidence of tax, falls on the same person who also bears its burden. On the other hand, indirect tax is applied when the tax burden is transferred to a different party.

Basis	Direct Taxes	Indirect Taxes
Meaning	Direct taxes are the taxes that are levied on income earned by individuals and also on the economic activities that are done by people.	Indirect taxes are the taxes that are levied on the goods and/or services that are offered to people at large.
The burden of payment	Under direct taxes, the burden of payment of taxes has to be borne by the person on whom the tax is imposed. Such a burden cannot be shifted	Under indirect taxes, the burden of payment of taxes is borne by the person buying the concerned goods and services rather than the person who is selling them. Hence, under indirect taxes, the burden of taxes can be shifted to other people.
Payment of taxes	Under direct taxes, payment of taxes is done directly by the concerned individual.	Under indirect taxes, taxes are paid by one individual, however, such taxes are collected by other people. Generally, it is the consumer from whom the taxes are collected and it is the seller who pays the taxes to the concerned authorities.
Collection of taxes	It is relatively difficult to collect taxes under direct taxes as the people barely disclose their actual income.	Comparatively, it is easier to collect indirect taxes as the tax liability can be determined by looking into the sales figure of the entity.
Time of payment	Payment of direct taxes is made after the income is actually earned by the individual.	Indirect taxes are paid either at the time of buying goods and services or before the goods or services reach the concerned taxpayer.
Examples	Examples of direct taxes are – Gift tax, income tax, wealth tax, etc.	Examples of indirect taxes – Goods and services tax, service tax, excise duty, etc.

Types of direct taxes

In India, there are different types of direct taxes imposed. Some of them are mentioned below –

Income Tax 

Income tax refers to the tax levied on the amount earned by an individual. Such an amount can be in the form of wages, salaries, profits, etc. Income tax is payable based on a person’s earnings. The percentage of taxable income that must be collected is decided by a number of tax slabs that are set by the Indian government. Income Tax Returns (ITR) are required to be filed by the taxpayer each year. According to their ITR, people might get a rebate or may be required to pay taxes. Individuals who fail to file their ITR face severe fines along with imprisonment.

Wealth tax

Depending on who owns the properties and their market value, the tax has to be paid annually. Regardless of whether a person owns a property that produces income or not, wealth tax is still required to be paid in this situation.

Depending on their place of residence, businesses, Hindu Undivided Families (HUFs), and residents are all required to pay wealth tax. For securities like gold deposit bonds, equity investments, residential real estate, commercial real estate that has been rented for more than 300 days, and residential real estate that is held for industrial and technical use, payments of wealth tax are exempted.

Corporate tax

Except for shareholders, domestic enterprises are subject to corporate tax. Corporate tax must also be paid by foreign firms on income earned in India. Taxes must be paid on any income derived from the sale of property, technical service charges, dividend payments, royalty payments, or interest earned on any India-based asset, security or firm.  Additionally, the following taxes are covered by corporate tax:

Securities Transaction Tax (STT)

Any income obtained through taxable trading activities is subject to payment of the tax.

Dividend Distribution Tax (DDT) 

It is imposed on domestic corporations that publish, disburse, or receive payments from shareholders in the form of dividends. Foreign businesses, however, are not subject to the DDT tax.

Cost-of-Living Tax 

It is also known as Fringe Benefits Tax. Businesses that give transportation, maids, and other employees benefits must pay the fringe benefits tax. Many businesses began offering their employees various advantages in an effort to lower the profit on booked entries and keep those benefits below their input costs. Consequently, the profit is decreased, which results in reduced government revenue.

As a result, employers are required to pay the government-imposed Fringe Benefits Tax (FBT), which is essentially a tax, rather than providing benefits to their employees. It was an effort to fully impose a tax on those perks, which avoided paying the tax.

Minimum Alternate Tax (MAT)

A charge known as the Minimum Alternate Tax (MAT) is applied to zero-tax firms whose accounts have been prepared in accordance with the Companies Act.

Estate Tax

Estate tax, which is also known as inheritance tax, is paid according to the size of the estate, or the amount of money that a person leaves behind after passing away. The idea of taxing inheritance does not, however, exist in India at the moment. Actually, with effect from 1985, the inheritance or estate tax was eliminated. When a person passes away, his or her lawful heirs will inherit any property that belongs to that person. Without a question, this occasion is a gift given without expecting anything in return.

Capital Gain Tax

Capital gain tax is a type of direct tax that is levied on revenue obtained from the sales of assets or investments.

Capital assets include stakes in farming, stocks, equities, companies, artistic work, and homes. Capital gain taxes can be divided into long-term and short-term categories based on how long they are held.

Short-term gains apply to any assets sold within 36 months of the date of acquisition. These assets, however, are different from securities. If any money is made from the selling of assets that have been owned for longer than 36 months, long-term assets are evaluated. In such event, long-term capital gain tax is levied.

Benefits of Direct Taxes

There are actually many benefits to paying taxes directly, despite the fact that it is rigidly enforced on everyone who is not eligible for an exemption. Some of the benefits of direct taxes are as follows –

Encourages equality and equity

Direct taxes strive for equality and equity between taxpayers and citizens of a country because they are determined on an individual’s capacity to pay. Depending on how much money each person makes, they are each charged at a different tax slab.

Facilitates certainty and reliability

Direct taxes have the advantage of being decided upon and rendered final before being paid. As long as the compensation does not vary, the annual tax rate for income tax remains constant from year to year.

Enhances resilience

Taxes are the government’s source of income, and as they vary, so do the government’s revenues. They can move up or down.

Saves both money and time

Taxes are already collected at the point of revenue generation, therefore the authorities do not require to spend money on the collection of taxes. Some businesses use time and money-saving automatic paycheck deduction technologies.

Drawbacks of Direct Taxes

Drawbacks associated with direct taxes are as follows – 

Tax evasion

This component of the taxes may be their biggest drawback. The possibility of tax evasion through deceptive tactics is increased by the current legal restrictions. Many people lower their tax obligations by changing their financial information to hide income.

Social disharmony

Due to the fact that not every person is obligated to pay these taxes, there is a chance for social unrest. It might cause criminal activity, and inferiority concerns in poor people leading to social inequality.

Complexity in the procedure

Taxpayers are required to follow specific procedures and protocols in order to file and deposit direct taxes. For taxpayers, it complicates and inconveniently prolongs the entire process.

Increased Burden on the taxpayer

It is an ugly truth that the ultimate burden of taxes is borne by the public at large. With the advancement of time, the income of the people is not increasing much. However, the case is not the same for taxation and inflation. The government claims that the tax slabs have been increased as the income of the people has also increased. Unfortunately, they fail to notice that with an increase in income, inflation also increases leading to the same standard of living with higher cost. At this point, an increase in direct taxation will be a ‘well in front, a ditch behind’ situation, especially for middle-class people. 

Canons of Taxation

In the modern world, it is believed that the idea of direct taxes is based on the canons of taxation. It is stated that among numerous canons of taxation, direct taxation is based on the ‘canon of equality’. 

In order to accomplish its goals, a tax system should choose and uphold distinctive standards or principles. These principles are given the name of canons. Adam Smith presented the initial set of such standards. The four maxims with relation to taxes are recommended by Adam Smith in his well-known work “An inquiry into the nature and causes of the wealth of nations”. 

The term “taxation canon” refers to these adages. His articulation of the rules governing taxation has barely gone unnoticed. Adam Smith outlined the following four principles or canons for taxation – 

Canon of equality

The canon of equality states that – 

“The subjects of every state ought to contribute towards the support of the government, as closely as practicable, in proportion to their respective talents, that is, in proportion to the revenue which they respectively receive under the protection of the state.” In this case, equality does not indicate that all people who pay taxes must pay the same amount, but rather that they must pay in accordance with their means.

They promoted the idea of proportional tax liability. It requires that the wealthy should pay to the expense of the public not just in accordance with their income, but also in some other way. This canon has elements of both economics and ethics.

Canon of certainty

The amount of tax that each person is required to pay should be definite and not discretionary, according to Smith’s statement regarding this canon. 

“To the person paying tax and to everyone else, the time of payment, the method of payment, and the amount to be paid should all be obvious and clear. Insolence and corruption are caused by taxation uncertainty.”

Therefore, for the interest of the taxpayer, they should be aware in advance of how much and when they must pay tax. This canon is designed to shield taxpayers from pointless harassment by tax authorities.

Canon of Convenience

This is yet another crucial taxation principle that plays a prominent role in direct taxes. Every tax should be imposed at the time or in the manner that is most likely to make it pleasant for the individual contributing to pay it, according to Adam Smith’s definition of this canon. Taxes ought to be collected in a way that causes the taxpayer the least amount of inconvenience.

In accordance with this canon, the method and date of tax payment should, to the greatest extent feasible, be appropriate for the taxpayer. Excessive inconvenience for the taxpayer should be prevented.

Canon of Economy

In his subsequent canon, Adam Smith wrote that “any tax ought to be so constructed, both to take out and to retain out of the pockets of the individuals as little as possible, over and above what it brings into the public purse of the state.” It implies that the expense of tax collecting should be as low as possible. The majority of the revenue received that is not used for tax collection goes into the government’s public treasury. There have been multiple times when governments across the globe have used this canon to reduce the pressure on the government treasury by decreasing direct tax collection expenses. Even India is putting efforts to digitise the income tax collection system to decrease its expenses following the same canon. 

Additional Taxation Canons

Other than the 4 major canons of taxation, there are numerous other canons of taxation. These canons have been mentioned below – 

These tax canons have a solid philosophical foundation and show an understanding of the real-world applications of the tax system and its impacts. Numerous principles were, however, put out by others in light of changes in economic psychology and contemporary state difficulties.

Canon of Least Aggregate Scarifies

In accordance with this canon, the burden of tax placed on the taxpayer should be as low as possible. Because of this, no tax is assessed on a person whose income is at or below the threshold also known as the exemption limit needed to meet their basic needs. For instance, in India following this canon different tax slabs were introduced depending on the income of the individual.

Canon of Productivity 

It is additionally referred to as the self-reliance or availability of fiscal resources. This canon deals with the first basic objective of the direct tax i.e., raising revenue. For the treasury to be able to cover its expenses, the taxation mechanism should be capable of generating adequate money. No necessity for deficit financing should ever arise for the government. 

Canon of Elasticity

The productivity concept is closely related to this canon. The taxation system ought to be flexible. It implies that the system must be flexible enough to adjust in response to financial demands and changing environment. This canon states that direct taxes should be flexible enough to include everyone. As per this canon, direct tax rates should change depending on the situation. 

Canon of Buoyancy

This canon is based on the famous rule in physics – the Rule of Buoyancy. Under this canon, even if the tax rates and coverage are left unchanged, the tax revenue should naturally tend to rise in parallel with an increasing trend in the national income. In India, the tax buoyancy is decreasing over the past few years. Following this, the 15th Finance Commission of India recommended several revenue-increasing strategies and action plans in order to make direct tax collection in India buoyant. 

Canon of Flexibility

The Canon of Flexibility states that the concepts of elasticity and flexibility are two distinct concepts. Elasticity requires flexibility as a requirement.

In line with the flexibility canon, it should be feasible for the government to modify the tax structure both in terms of its scope and rates without unreasonable delay to accommodate shifting economic and financial needs. This canon is often used by the government in India to substantiate the frequent changes in the tax slabs.

Canon of Uniformity

According to this principle, there should be consistency in taxation rates, exemptions, and other regulations in order to simplify matters and ensure that everyone is treated fairly. In India, efforts are made by authorities to make the taxation system uniform. However, in a country like India where income inequality is at its peak ensuring uniformity, especially in direct taxes is quite challenging.

Canon of Simplicity

The tax system shouldn’t be overly complex because this makes it challenging to manage and comprehend, which leads to ambiguity and a rise in legal issues. The approach should be straightforward, logical, and easy. To make the tax process simple and uniform, the Government of India introduced the One Nation, One Tax and One Market Scheme. 

Canon of Diversity

This canon holds that the treasury should not be subjected to a great deal of volatility by the country’s reliance on a small number of sources of tax collection. They ought to build a variety of public sources of revenue so that each fellow resident can make a contribution based on their financial capacity. However, it’s also best to avoid having too many different types of taxes, as this contradicts the economic canon and results in needless collection costs. Different countries follow this canon to introduce different taxes with fewer rates rather than a single tax with a very high tax rate. 

Constitutional Provisions related to direct taxes in India

The term “Constitution” refers to a set of fundamental rules that govern any organisation or state. The Indian Constitution is the country’s highest law. It is the primary source of authority for all legislation in India. Here are certain provisions from where the direct taxes derives its power in India – 

Preamble

The following is stated in the Preamble of the Indian Constitution, which outlines its goal, aim, desire, and source of authority:

The Preamble of India talks about 3 types of justice namely – Social, Economic and Political. Taxation is justified on the grounds of economic justice in India. The taxation system in India is based on the same, especially income tax. The Preamble of India also states about equality in terms of status and opportunity. It seeks to promote equality among the public at large by imposing taxes on all as per their respective capacities. 

The Preamble of India mentions fraternity for assuring the dignity of the individual and promoting the unity and integrity of the nation. Through the taxation system, the poor are exempted to pay taxes. For instance, income tax. Poor people can use this exemption to fulfil their basic needs. On the other hand, the taxes collected by the government can be used for the social and economic development of the nation leading to unity and integrity of the nation. 

The Government of India has passed various laws, including one on taxation, to carry out the objectives of the preamble. If the constitution contains a clause that allows it, a law may be lawfully forced onto the population. The preamble and the aim of the law must coincide. The constitutional requirements relating to taxation laws must therefore be understood before one can analyse the contents of taxation legislation.

According to Article 265 of the Constitution of India, no tax may be imposed or collected unless authorised by law. It indicates that the government has the authority to impose taxes.

Schedule 7 of the Constitution of India

The Seventh Schedule to the Indian Constitution outlines and describes the division of duties and responsibilities between the Union and the States. It consists of 3 lists which are as follows – 

List	Function(s)
List I – Union List	It mentions all the areas where the Central Government is empowered to make laws.
List II – State List	It mentions all the areas where the State Government is empowered to make laws.
List III – Concurrent List	It mentions all the areas where both the Central Government as well as the state governments are empowered to make laws.

List I – Union List

The Union List consists of certain entries related to taxes and duties. These entries are listed below – 

Entries related to taxes and duties	Description of the entries
Entry 77	Fees taken in the Apex Court (Cannot be regarded as taxes, direct or indirect tax)
Entry 82	Taxes levied on the income of the individual along with exceptions provided to the income earned through agriculture.
Entry 83	Custom duties inclusive of duties paid on export
Entry 84	Excise duties apply to tobacco and other products made or produced in India, with the exception of alcoholic beverages intended for consumption by humans.  Opium, Indian hemp, and other addictive substances and narcotics, but not lavatory or medical remedies containing alcohol or any of the substances listed in this entry’s sub-paragraph (b).
Entry 85	Corporation Tax
Entry 86	Taxes are based on the capital worth of a person’s or an organization’s assets, excluding agricultural land. taxes imposed on a company’s capital.
Entry 87	In relation to property other than agricultural land, estate duty is applicable.
Entry 88	Obligations with regard to the succession of property other than farmland.
Entry 89	Terminal taxes on commodities or persons transported by rail, sea, or air, as well as taxes on rail fares and freights, are covered by Entry 89.
Entry 90	Taxes on stock exchange and futures market transactions that are not stamp duties.
Entry 91	Stamp duty rates for bills of exchange, checks, debentures, bills of lading, letters of credit, promissory notes, bills of exchange, and receipts as well as transfers of shares and debentures
Entry 92	Taxes on the purchase or sale of newspapers, as well as on advertisements published in them.
Entry 92A	Taxes on the purchase or selling of items other than newspapers when those transactions are part of interstate trade or commerce
Entry 92B	Taxes on the transfer of products between states for trade or commerce
Entry 92C	Taxes on services
Entry 96	Fees related to any of the items in the list, except any court-related fees

List II – State List

List II of the Seventh Schedule contains certain entries related to taxes and duties. These entries are stated as below – 

Entries related to taxes and duties	Description of the entries
Entry 45	Revenue from land
Entry 46	Taxes levied on income earned from agriculture
Entry 47	Duties relating to agricultural land succession
Entry 48	Agricultural land is subject to estate duty.
Entry 49	Property and building taxes
Entry 50	Mineral development-related taxes are subject to any restrictions put in place by Parliament.
Entry 51	The following items manufactured or produced in the State are subject to excise taxes, and comparable commodities manufactured or produced elsewhere in India are subject to countervailing taxes at the same rates or less severe ones: Drinking alcohol intended for human consumption Opium, Indian hemp, and other narcotic drugs and substances are included in sub-paragraph (b) of this article but do not include medical and toilet preparations that contain alcohol or any of the substances mentioned there.
Entry 52	Taxes imposed on the admission of commodities into an area for use, consumption, or sale.
Entry 53	Taxes imposed on the purchase or use of electricity
Entry 54	Taxes that are subject to the rules of List I’s Entry 92A on the sale or purchase of items other than newspapers
Entry 55	Taxes imposed on commercials that aren’t radio or television advertisements or newspaper adverts
Entry 56	Taxes on products and people transported by land, water, or air
Entry 57	Taxes on all types of vehicles, including tramcars, appropriate for use on highways, whether or not they have a mechanical propulsion system
Entry 58	Taxes on animals and boats
Entry 59	Tolls
Entry 60	Taxes on callings, occupations, and trades
Entry 61	Capitation taxes
Entry 62	Luxuries taxes, such as entertainment, amusement, betting, and gaming taxes
Entry 63	The government of India’s rates for stamp duty on papers other than those that are required to pay it
Entry 65	All courts collect fees, excluding the Supreme Court fees
Entry 66	Fees related to any of the items on the state list, but not court costs Join in on a few specific union taxes in addition to these.

List III – Concurrent List

The subjects on this list are pertinent to both the union government and state governments. The Central Government and State Governments have the authority to pass laws because of the relevance of the subjects covered in List III. The Central Government may use its authority to enact laws pertaining to each entry on Lists in the case of Union Territories. If a conflict arises between a law enacted by the central government and legislation made by a state government regarding entries on List III, the central government’s law will take precedence. There are entries for criminal law and process, trusts and trustees, civil proceedings, economic and social planning, trade unions, charitable institutions, price control factories, etc. in List III (Concurrent List).

Direct taxes and their tax rates

Income Tax

The individual will fall under a specific tax bracket depending on their age and income. The following lists the three different tax slabs:

1. Under 60-year-old residents who are also members of Hindu Undivided Families (HUFs)

Tax Slab depending on the income	Tax payable according to the slab
Income up to INR 2,50,000	No income tax under this tax slab
Income from INR 2,50,001 to 5,00,000	Tax on 5 percent on total income from INR 2,50,001 to 5,00,000 along with 4 percent cess
Income from INR 5,00,001 to 10,00,000	Tax on 20 percent on total income from INR 5,00,001 to 10,00,000 along with 4 percent cess and an additional tax of INR 12,500.
Income above INR 10,00,000	Tax on 30 percent on total income from INR 10,00,000 and above along with a 4 percent cess and an additional tax of INR 1,12,500.

2. For senior individuals who are over 60 but under 80 years of age –

Tax slab depending on the income	Tax payable according to the slab
Income INR 3,00,000	No income tax under this tax slab
Income from INR 3,00,001 to 5,00,000	Tax on 5 percent on total income from INR 3,00,001 to 5,00,000 along with 4 percent cess
Income from INR 5,00,001 to 10,00,000	Tax on 20 percent on total income from INR 5,00,001 to 10,00,000 along with 4 percent cess and an additional tax of INR 10,500.
Income above INR 10,00,000	Tax on 30 percent on total income from INR 10,00,000 and above along with a 4 percent cess and an additional tax of INR 1,10,500.

3. Indian citizens who are permanent residents and over 80 (super senior citizens) –

Tax slab depending in the income	Tax payable according to the slab
Income INR 5,00,000	No income tax under this tax slab
Income from INR 5,00,001 to 10,00,000	Tax on 20 percent on total income from INR 5,00,001 to 10,00,000 along with 4 percent cess.
Income above INR 10,00,000	Tax on 30 percent on total income from INR 10,00,000 and above along with 4 percent cess and an additional tax of INR 1,00,000.

Alternative tax slab for individuals

Finance Minister Nirmala Sitharaman has added a new tax system that have been in effect from February 1, 2020, in addition to the already mentioned current tax rates. It should be noted that the new income tax system is an alternative to the current one and is optional. 

The following clearly summarises the income tax slabs for the FY 2020–21 under the new regime:

Tax slab depending in the income	Tax payable according to the slab
Income INR 2,50,000	No income tax under this tax slab
Income from INR 2,50,001 to 5,00,000	Tax on 5 percent on total income from INR 2,50,001 to 5,00,000 along with 4 percent cess
Income from INR 5,00,001 to 7,50,000	Tax on 10 percent on total income from INR 5,00,001 to 7,50,000 along with 4 percent cess
Income from INR 7,50,001 to 10,00,000	Tax on 15 percent on total income from INR 7,50,001 to 10,00,000 along with 4 percent cess
Income from INR 10,00,001 to 12,50,000	Tax on 20 percent on total income from INR 10,00,001 to 12,50,000 along with 4 percent cess
Income from INR 12,50,001 to 15,00,000	Tax on 25 percent on total income from INR 12,50,001 to 15,00,000 along with 4 percent cess
Income above 15,00,001	Tax on 30 percent on total income from INR 15,00,001 and above along with 4 percent cess

Corporate Tax

Corporate tax implies taxes on both India-based and foreign-based companies. The tax rates for both companies are listed below – 

India-based companies

• 25% corporate tax is charged if the company’s annual revenue is less than Rs. 250 crore. However, if a company’s annual revenue exceeds Rs. 250 crores, a 30% corporate tax is imposed.
• If the taxable income is between Rs. 1 crore and Rs. 10 crores, an additional 10% of the taxable income is charged.
• A 12% surcharge will be applied if the company’s taxable income exceeds Rs. 10 crores. Cess is assessed at the rate of 4% of business tax.

Foreign-based companies

• A corporate tax of 41.2% is charged to businesses with annual revenue under Rs. 1 crore. A 3% education cess and a base tax of 40% are included in the business tax.
• A corporate tax of 42.024% is charged to businesses with annual revenue over Rs. 1 crore. The corporation tax is made up of a 2% surcharge, a 40% basic tax, and a 3% education cess.
• A 5% surcharge is added on top of the base tax for businesses with annual revenue over Rs. 10 crores.

Capital gains tax

• Short-term capital gains are assessed based on the standard tax slabs.
• The tax rate on long-term capital gains is 20% if capital gains tax is calculated taking indexation advantage into account.
• The tax rate for long-term capital gains is 10% if capital gains tax is calculated without taking indexation benefit into account.

Wealth tax

• Wealth Taxes are applied based on net worth. The sum of all taxable assets less the total amount of debt outstanding is how net wealth is determined.
• The equation for calculating net worth is Net Wealth = (Sum of All Assets) – (Sum of all debt).
• In every year that immediately precedes the assessment year, on March 31st, the value of net wealth is taken into account.
• However, starting on April 1, 2016, Wealth Tax will no longer apply to wealth that was held as of March 31, 2016.

Who pays direct taxes (Income Tax)

• By completing the necessary paperwork, income tax can be filed by an individual. ITR-1 forms should be used to file taxes for salaried individuals who make less than Rs 50 lakh per year from sources such as salaries, residential property, other sources, and agriculture.
• The ITR-2 form must be filled out by individuals and HUFs who do not get income from a profession or corporate earnings and profits.
• When filing taxes, ITR-3 forms should be used by individuals and HUFs who receive income from business and professional gains.
• The ITR-4 form should be used to file taxes for individuals, HUFs, and corporations (excluding LLP) with total earnings of less than Rs 50 lakh and income from a profession or business estimated in accordance with Sections 44AD, 44ADA, and 44AE.
• Individuals and HUFs should file their taxes using Form ITR-5 for organizations and individuals other than corporations.
• Companies needing to furnish their returns under Section 139(4A), 139(4B), or 139(4D) should report their taxes using Form ITR-6, while individuals and firms needing to file Form ITR-7 should claim any exemptions under Section 11 that they are not claiming.
• For individuals and businesses required to submit returns under Sections 139(4A), 139(4B), 139(4C), or 139(4D), respectively.

Direct Tax Code

The government seeks to consolidate India’s direct tax regulations into a single piece of legislation by enacting the Direct Taxes Code (DTC). The DTC would replace existing direct tax laws like the Wealth Tax Act of 1957 and the Income Tax Act of 1961.

History of Direct Tax Code

Direct Tax Code (2009 to 2014)

A revised discussion paper (RDP) was published in 2010 after the initial version of the Direct Taxes Code Bill was announced on August 12th, 2009.

A Standing Committee on Finance (SCF) was established by the government to collaborate with different stakeholders after DTC 2010 was introduced in Parliament. In 2012, the SCF sent a report to the Parliament. A revised version of DTC was launched in 2014 after the government considered the SCF’s recommendations. Nevertheless, it expired when the NDA government took office in the year 2014.

Direct Tax Code (2017 to 2019)

An expert committee to create a new Direct Tax Code was established in 2017 by the government led by Prime Minister Narendra Modi. On August 19, 2019, Finance Minister Nirmala Sitharaman received the report of the working group on the Direct Tax Code. It has not yet been made public. The task force’s chairman is Akhilesh Ranjan, a CBDT member. Girish Ahuja, a financial consultant, Rajiv Memani, the chairman and regional managing partner of EY India, Mukesh Patel, a practising tax lawyer, Mansi Kedia, a consultant with ICRIER, and G.C. Srivastava (retired IRS and Advocate) are the other task force members.

Direct Tax Code 2.0

The highest income tax bracket should be raised significantly, the expert panel has advised, and the corporate tax rate should be cut to 25% for both domestic and foreign businesses. This recommendation was made, according to a Business Standard report. If the panel’s recommendation to change the tax rate and rebates is implemented, income taxpayers making up to Rs 55 lakh annually may receive a sizable tax reduction.

Notable points concerning DTC 2.0 are as follows – 

• Tax savings might be substantial for those making up to Rs 55 lakh.
• Foreign companies may be required to pay branch profit tax.
• The dividend distribution tax might be eliminated.
• A plethora of rewards for new businesses
• Assessment teams to take the place of assessment officers
• A system for resolving disputes between taxpayers and CBDT
• The proposed DTC has a much smaller number of sections than the Income Tax Act, which has around 700.

Suggestions

Some recommendations are made to enhance India’s direct taxation system in light of the findings of numerous committees. Here are some of them:

• An enormous piece of legislation is the current Income Tax Act. It becomes extremely complicated and laborious due to numerous amendments and circulars, which causes a loss of revenue. Therefore, an effort should be made to create new legislation in plain and clear terms. Furthermore, it needs to be clear even to a layman.
• The payment of tax by all individuals is required. In contrast, barely 3% of people pay taxes. It is suggested that people are attempting to avoid paying taxes. They don’t have a strong desire to pay taxes. People may not understand the purpose and advantages of taxation or they may believe that tax money is misused, which could be the cause of this. Therefore, the government should encourage the people to make the best use of tax income while also promoting the goals and advantages of taxation. The government must instil in the population a sense of duty to pay taxes.
• The idea of responsible financial reporting should be adopted by the Income Tax department. Each aspect should have a set responsibility and accountability.
• Regarding many provisions of the Income Tax Act, such as gratuity, commuted amount of pension, paid leave, rent-free housing, etc., there is a difference in the current tax system between the regulation of Government Employees and Non-Government Employees.
• The discrepancy should be eliminated, and a middle ground should be sought. Regarding tax treatment, there shouldn’t be a distinction between the allowance and payment given to an MP, MLA, or MLC and an individual. The rules ought to apply to everyone.
• Implementation of a new cess is also suggested:

1. 0.25% – Women Security Cess
2. 0.50% – Solidarity Cess
3. There is an environment protection tax of 0.5% on some industries with excessive pollution levels, and the turnover must exceed INR 1 crore.
4. On non-capital transactions with a significant volume, a 0.1% surcharge ought to be applied. If a transaction has a value of one crore or more, it is referred to as high volume. 

Conclusion

The hardest thing in the world to comprehend, according to Albert Einstein, is the income tax. Lord Cairns, who was considered a specialist on the subject, had said that “tax and equity are strangers and an equitable construction cannot be laid upon the wording of taxation statutes,” which was likely reaffirmed by the greatest scientist of all time. The way of the taxpayer is undoubtedly difficult, and the legislature does little to ease that burden. The Income-tax Act is the single element of law with the greatest immediate impact on citizens and the one that changes noticeably almost every year. ​

Despite the creation of boards and panels and the periodically stated official claims of the government at the centre regarding their policies, it is questionable whether substantial reform in the conceptual approach to taxes on income has ever taken place in India.

But adjustments do occur, demonstrating the central government’s intention to widen the net, comply with some public demands for subsidies and exemptions, offer incentives for development, and close loopholes that allow for tax evasion. These amendments to an already burdensome Act must be dealt with by practitioners, taxpayers, and most importantly, subject learners. Hence, the need of the hour is to reform the direct taxes for a better tomorrow. ​

Frequently asked questions (FAQs)

Vivad se Vishwas Scheme, a crucial scheme in the field of direct taxes for dispute resolution includes which appeals?

The appeals that are still pending before the appellate forum [Commissioner (Appeals), Income Tax Appellate Tribunal (ITAT), High Court, or Supreme Court], as well as writ petitions that are still pending before the High Court, Supreme Court, or Special Leave Petitions (SLPs) pending before the Supreme Court as of the specified date, January 31, 2020, are covered under this scheme. There are also situations when the order has been made but the deadline for submitting an appeal under the Income Tax Act of 1961 against the decision has not passed. Such cases are also included in the scheme.

Similar situations, in which the Assessing Officer (AO) has given directives but the final decision has not yet been delivered by the Assessing Panel on or before the stated date, or in which the assessee has submitted objections to a draft order, are also covered. Additionally covered are situations when a modification application pursuant to Section 264 of the Income Tax Act is pending before the Senior Commissioner.  Moreover, situations where a declarant has started a legal action or sent a notification to participate in arbitration, conciliation, or mediation as described in Section 4 of the Act are also covered. ​

What are the 3 most important direct taxes other than income tax, which are often used in the corporate industry? 

The 3 crucial direct taxes in the corporate industry are as follows – 

Alternate Minimum Tax (AMT)

Companies and limited liability partnerships (LLPs) are subject to the Minimum Alternate Tax (MAT) and Alternate Minimum Tax (AMT), respectively, under the current provisions of the Income Tax Act of 1961. This implies that – “What MAT is to businesses, AMT is to LLPs”. The other types of commercial organisations, including partnership businesses, sole proprietorships, associations of people, etc., are not subject to this tax. It is proposed to change laws relating to AMT included in the Income Tax Act to say that an individual other than a corporation, who has requested a deduction under any provision other than Section 80P, shall be liable to pay AMT. This will broaden the tax base in relation to profit-linked deductions. 

According to the proposed changes, the adjusted total income will be deemed to be the person’s total income in cases where the regular income tax that must be paid for a prior year by a person (other than a corporation) is less than the alternative minimum tax that must be paid for such a prior year. He will then be responsible for paying income tax at the rate of 18.5 per cent on that total income.

Fringe Benefits Tax (FBT)

The term “benefits” refers to a broad range of perks, facilities, accommodations, or creature comforts directly or indirectly provided by an employer to former or present employees. These benefits can be as basic as compensation for phone calls, free or discounted tickets, or even pension contributions to a superannuation fund.

The Finance Bill of 2005 included the establishment of FBT, which was set at 30% of the cost of the benefits provided by the corporation. Whether or not the company had an income-tax responsibility, this tax had to be paid by the employer in addition to the income tax. However, the Indian Union Budget for 2009 eliminated the tax on fringe benefits.

Minimum Alternate Tax (MAT)

The Minimum Alternate Tax (MAT) concept was incorporated into the direct tax system to ensure that businesses that were making large profits and paying out sizable dividends to shareholders while avoiding paying corporate tax to the government by utilising the attractive schemes and exemptions made available by the Income-tax Act, 1961, paid a specific amount of book profit as the minimum alternate tax.

By the Income Tax Act of 1961, if a company’s taxable income falls below a particular threshold as a proportion of the booked profits, then by default that portion of the book profits will be regarded as taxable income, and tax must be paid on that. It is a direct tax that was put in place to discourage businesses from managing their accounts in a way that results in their paying little to no tax to the authorities. The present rate at which MAT is levied is 9 per cent along with surcharges and cess as applicable. 

What do you mean by simplification and consolidation of the Direct tax laws? 

Simplification and consolidation of direct tax laws include certain points which are stated below – 

Simplification of direct tax laws

1. The language used in the direct tax laws would be unambiguous and simple enough that can be understood even by a layman. 
2. There are numerous exceptions, exemptions and deductions, these should be reduced and a uniform system would be implemented. 
3. Cross-references in the direct tax laws would be reduced to a bare minimum. 
4. Direct tax laws would be written in such a way that the taxpayer is easily able to comprehend the text. It might also include adding content in regional languages. 

Consolidation of direct tax laws

1. There will be a merging of the direct tax laws into a single code, like that of the labour code where all the labour laws were merged into one. 
2. Contradictions among the acts like the Income Tax Act of 1961, Wealth Tax Act of 1957 and Gift Tax Act of 1958, would be removed to ensure unambiguity and uniform management. 

References

• https://www.researchgate.net/publication/346929048_Direct_Tax_Reform_in_India_An_Impact_Analysis_with_Special_Reference_to_Government_Revenue
• https://shodhganga.inflibnet.ac.in/handle/10603/186375
• https://www.researchgate.net/publication/356253774_Analytical_Review_of_Direct_Taxation_in_India
• http://ijrar.com/upload_issue/ijrar_issue_20544214.pdf
• https://directresearchpublisher.org/drjsses/files/2019/09/Das.pd

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