HIDAYATULLAH NATIONAL LAW UNIVERSITY

Uparwara, Naya Raipur

HISTORICAL ANALYSIS OF TAXATION

TAXATION LAW
2019-20

SUBMITTED TO

DR. ARCHANA GHAROTE

(ASSISTANT PROFESSOR, FACULTY OF TAXATION LAW)

SUBMITTED BY

RADHIKA SHARMA

SEMESTER V,

SECTION C

ROLL NO. 113

 H i s t o r i c a l A n a l y s i s o f T a x a t i o n | ii

DECLARATION

I, Radhika Sharma hereby declare that the project work entitled, ‘Historical Analysis of
Taxation’ submitted to H.N.L.U., Raipur is record of an original work done by me under the
able guidance of Dr. Archana Gharote, Faculty Member, H.N.L.U., Raipur.

Radhika Sharma
B.A., LL.B. (H)
Semester V
Section - C
Roll no.-113
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ACKNOWLEDGEMENTS

The practical realization of this project has obligated the assistance of many persons. I express
my deepest regard and gratitude for Dr. Archana Gharote, Faculty of Taxation Law. Her
consistent supervision and invaluable guidance have been of immense help in understanding
and carrying out the nuances of the project report.
I take this opportunity to also thank the University and the Vice Chancellor for providing
extensive database resources in the Library and through Internet.
Some printing errors might have crept in, which are deeply regretted. I would be grateful to
receive comments and suggestions to further improve this project report.

Radhika Sharma
B.A., LL.B. (H)
Semester V
Section - C
Roll no.-113
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TABLE OF CONTENTS

INTRODUCTION……………………………………………………………………………. v
RESEARCH METHODOLOGY……………………………………………………….….…vi
NATURE OF STUDY………………………………………………………………….….…vi
TYPE OF STUDY……………………………………………………………………………vi
SOURCES/ TYPE OF DATA………………………………………………………………. vii
LIMITATION OF STUDY…………………………………………………………………. vii
PROBLEM…………………………………………………………………………………. viii
RATIONALE………………………………………………………………………………. viii
OBJECTIVES – HYPOTHESIS………………………………………………………...…. viii
REVIEW OF LITERATURE………………………………………………………......……. ix
CHAPTERIZATION…………………………………………………………………………ix
Chapter 1 - THE ORIGIN OF TAXATION ..........................................................................1

Chapter 2 - HISTORY OF TAXATION AROUND THE WORLD ....................................2

2.1. Egypt ...............................................................................................................................2

2.2. Persian Empire ................................................................................................................3

2.3. Greece .............................................................................................................................4

2.4. Roman Empire ................................................................................................................4

2.5. Great Britain....................................................................................................................5

2.6. America ...........................................................................................................................6

Chapter 3 - HISTORY OF TAXATION IN INDIA…………………………………….….8

3.1. Ancient Period ...............................................................................................................8

3.2. Initial Period (1860-1886).............................................................................................11

3.3. Pre-Independence Period (1886-1947) .........................................................................11

3.4. Post-Independence Period.............................................................................................11

3.5. Brief evolution of Indirect Taxation in India ................................................................12

CONCLUSION………………………………………………………………………………14
SUGGESTION……………………………………………………………………………….15
BIBLIOGRAPHY……………………………………………………………………………16
 Historical Analysis of Taxation |v

INTRODUCTION

A tax is a mandatory financial charge or some other type of levy imposed upon a taxpayer (an
individual or a legal entity) by a state or the functional equivalent of a state in order to fund
various public expenditures. A failure to pay, or evasion of or resistance to taxation, is
punishable by law. Taxes consist of direct or indirect taxes and may be paid in money or as its
labour equivalent. One of the most important uses of taxes is to finance public goods and
services. Since public goods and services do not allow a non-payer to be excluded, or allow
exclusion by a consumer, there cannot be a market in the good or service, and so they need to
be provided by the government or a quasi-government agency, which tend to finance
themselves largely through taxes.

Most countries have a tax system in place to pay for public/common/agreed national needs and
government functions: some levy a flat percentage rate of taxation on personal annual income,
some on a scale based on annual income amounts, and some countries impose almost no
taxation at all, or a very low tax rate for a certain area of taxation.

When tax forms such an important and essential part of our world, it is necessary for us to
understand the true historical origins of tax. This is especially imperative, in order to use
taxation as an efficient and effective tool in the society.

The basic principles of taxation are nearly as old as human society—the history of taxes
stretches thousands of years into the past. Several ancient civilizations, including the Greeks
and Romans, levied taxes on their citizens to pay for military expenses and other public
services. Taxation evolved significantly as empires expanded and civilizations become more
structured.

This project will make a historical enquiry into the history of taxation through the years. It will
explore the inception of the idea of taxation and its development and evolution through time.
A special emphasis in this project will also be placed on the Indian historical perspective, so
as to truly understand the current Indian taxation legislation, in light of the yesteryears.
 H i s t o r i c a l A n a l y s i s o f T a x a t i o n | vi

RESEARCH METHODOLOGY

This research work is descriptive and analytical in nature. It is essentially a doctrinal research.
It describes and aims to study the basic and fundamental historical nature of taxation around
the world, with special emphasis being placed on India. It also focuses on understanding the
implications of the evolution of taxation in the current scenario. The main aim was to address
a theoretical research problem that how taxation law evolved over years around the world and
the major focus being the evolution in India.
It is a qualitative ethnographic study, which aims to produce contextual real- world knowledge
about the historical analysis of the evolution of the taxation law. This methodology is more
interpretative and as a researcher by taking this into account and by conducting vast study in
this area the result has been influenced.

NATURE OF STUDY

Given a study of this kind, a descriptive analytical method has been followed to carry out the
study. This project report is based on Descriptive research methodology. Secondary and
Electronic Resources have been largely used to gather information about the topic.
Books and other references as guided by the Faculty have been primarily helpful in giving this
project a firm structure. Websites, dictionaries and articles have also been referred.
Footnotes have been provided wherever needed, either to acknowledge the source or to point
to a particular provision of law.

TYPE OF STUDY

It is an observational study where the data is collected under controlled experimental

conditions’ and from archived databases and published sources. A case control study has been
 H i s t o r i c a l A n a l y s i s o f T a x a t i o n | vii

done where the cases and controls are matched and the difference in outcomes from one arm
of the study to the other is observed to make the project report.

SOURCES OF DATA

This study is done with the help of secondary data. This secondary information has been
obtained from published sources such as books, journals, newspapers, official websites,
government publications etc.
Established practices have been followed to use the secondary data without infringing the
copyrights, thereby, giving the proper citations and the references. The material such as texts
and books have been used primarily which are available in the library to obtain the true result.

LIMITATION OF STUDY

The qualitative data from secondary sources was collected to make the project report which
provided a validity to the reliable report but there is a limitation of this study as well. The type
of methodology used has hinged on the key assumptions made and ways around the limitations
of the data. This method assume a particular model for the data, classically the normal and
traditional approach, or maybe a non- parametric analysis, necessarily is the data is qualitative
as opposed to quantitative the method might be under the classical/frequent paradigm, or might,
as is seen more and more in modern science, be under the Bayesian paradigm.
Lastly, there may be unavoidable biases in the data, such as potential missing data. Also, the
quality of the collected data may strongly affect the usefulness of the findings of the study.
Even if there are large amounts of data, if it is of poor quality it is useless for making informed
statements about the phenomenon of interest.
Time and resources also govern how much data can be collected and the depth and
sophistication of the study. There are scientific standards, and these need to be observed for
findings to have credence. Therefore, due to paucity of time the author has dealt in brief with
the issues.
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PROBLEM

The problem of the study revolves around the Historical analysis of how the Taxation evolved
around the world in the different countries. The main focus of the problem is to find out the
evolution of the taxation in and around India and how the direct taxation was evolved in India
with special emphasis to the different periods which resulted in the strict formations with
straight – jacket formulas.

RATIONALE

The Rationale to the object sought to be achieved by the study is that how the implications of
the taxation law affected India and how the procedure and process was adopted before the
independence and after the independence period. The report is made with a rationale to make
a historical and deep analysis of how the evolution began in the primary time to understand the
traditional and classical taxation procedure.

OBJECTIVES OF STUDY

The broad objective of the study is to understand the basic and fundamental historical nature
of taxation around the world as well as to understand the implications of the evolution of
taxation in the current scenario. There is a special emphasis placed on the growth and
development of the taxation system in India

The specific objectives or the interrelated objectives of the study are as follows:

Firstly, this project traces the origins of taxation – when and how did the concept
emerge and how did it influence the then population of the world.
 H i s t o r i c a l A n a l y s i s o f T a x a t i o n | ix

Secondly, there will be an analysis of the how the taxation system evolved in different
parts of the world – namely Egypt, the Persian Empire, Greece, the Roman Empire,
Great Britain and lastly America.

Thirdly, this project will study in depth the evolution of taxation system in India. This
has been divided into different stages. The first stage explores the idea of taxation
during ancient times through two primary literary works of that time i.e. the Manusmriti
and the famous Arthashastra (authored by Kautilya). The second stage explores the
development of taxation in the pre-independence period i.e. during the rule of the
British. The third stage moves on to the post-independence era.

Lastly, this project will also make a brief analysis of the evolution of indirect taxation
in India, especially in light of the recently implemented Goods and Service Tax.

REVIEW OF LITERATURE

J. Felix Raj, Indian Economy: Economic Ideas, Development, and Financial Reforms,
Deep and Deep Publications, 2009.
This book talks about Indian economy in depth with special reference to how the
taxation system developed in and around India and the implication of the same around
the world.

Charles Adams, “For Good and Evil: The Impact of Taxes on the Course of
Civilization” (Madison Books, 2001).
This book provides the glimpses of how in the primary time the problems were faced
relating to the taxation system and the implication of the same on the evolution of
taxation law.

Girish Ahuja, Ravi Gupta, Bharat’s Systematic Approach to Income Tax, Service Tax
& VAT, Bharat Law House, 2010.
 Historical Analysis of Taxation |x

This book provides an insight into the tax sector of India. The aim of the book is to help
and enable the readers in understanding the intricate problems relating to Income Tax
and GST.

David Ricardo, The Principles of Political Economy and Taxation, Paper Back
Edition, 2004.
This book gives a deep insight into the economy and taxation in 1817 around the world.
David Ricardo is credited with synthesizing the Taxation in 19th century.

IFA, Evolving Trends in International Taxation: India and Globally, Hardcover

Edition, 2018.
IFA (International Fiscal Association) have taken a lead to connect with the Experts in
the field of International Taxation and has compiled their thoughts in this publication.
This publication is a compilation of 28 articles vide which more than 40 Tax experts
deliberates the core critical issues of the taxation world and also throw light on the
major tax developments in India and globally.

Dr. H.C. Mehrotra, Dr. S.P. Goyal, Direct Tax Law and Practice, 40th Edition A.Y.
2019-20.
The second and updated edition explains the Model Conventions with reference to, inter
alia, the Indian decisions, CBDT Circulars, overseas jurisprudence, Australian Taxation
Office (ATO) rulings, and Technical Explanations to the Indian treaties with US and
Australia.

CHAPTERIZATION

This project has been divided into 3 chapters. Chapter 1 deals with the origin of
Taxation and its evolution. Chapter 2 deals with the history of taxation around the world
and Chapter 3 deals with the history of taxation in India and explain the indirect taxation
with reference to GST.
 Historical Analysis of Taxation |1

Chapter 1: THE ORIGIN OF TAXATION

¶ The word ‘tax’ first appeared in the English language only in the 14th century. It is a word
of Middle English origin: from Old French taxer, from Latin taxare - to censure, charge,
compute, and from Greek tassein – to fix.

¶ Before that, English used the related word ‘task’, derived from Old French. For a while, ‘task’
and ‘tax’ were both in common use, the first requiring labour, the second, money. ‘Tax’ then
developed its meaning to imply something wearisome or challenging. So, words like ‘duty’
began to be used to suggest a more appealing purpose.

¶ According to a publication on the Association of Municipal Assessors of New Jersey

(AMANJ) website , “the earliest known tax records, dating from approximately six thousand
years B.C., are in the form of clay tablets found in the ancient city-state of Lagash in modern
day Iraq,”.1 This early form of taxation was kept to a minimum, except during periods of
conflict or hardship.

¶ The Greeks, Egyptians and Romans also enforced tax policies that they used to fund
centralized governments. The Greeks levied several types of taxes that are still enforced in
many developed countries, including taxes on property and goods. Unlike early Greek taxation,
the Roman policies began to weigh heavily on its citizens as the power and corruption of the
empire’s central government grew. The excessive tax burden on productive Roman citizens
during the 4th and 5th centuries was a leading cause of the nation’s eventual economic
collapse.2

¶ Early taxation was not limited to European and Mediterranean civilizations, ancient Chinese
societies also levied taxes on their citizens. The Chinese instituted a form of property tax
around 600 B.C. that required 10 percent of cultivated land to be dedicated to the central
government.3 All produce generated from the dedicated portion of land was taken as a tax.

1
Richard Henry Carlson, “A Brief History of Property Tax”
(http://www.amanj.org/sites/default/files/files/Carlson.pdf).
2
Bruce Bartlett, “How Excessive Government Killed Ancient Rome” The Cato Journal, Vol.14 No.2 (Fall1994)
(http://www.cato.org/pubs/journal/cjv14n2-7.html).
3
Edward Harper Parker, Authorama: “Ancient China Simplified, Chapter XVI – Land and People.”
(http://www.authorama.com/ancient-china-simplified-17.html).
 Historical Analysis of Taxation |2

¶ Property taxes were used in Egypt, Babylon, Persia, and China and throughout the ancient
world. Most people were poor and lived in hovels. The primary focus of early property taxation
was land and its production value.
¶ Taxation has existed in various forms since civilization began. In days of old, the source of
wealth was land and its proceeds. Before the existence of a monetary system, taxes were paid
by a percentage of crops raised. Some of the most common forms of taxation over the millennia
were poll taxes, tariffs on goods, and property taxes on the value of land, buildings, and other
personal property.
¶ As it can be seen, taxes were prevalent all around the world, in one form or the other. It was
a common feature throughout the ancient and middle ages. The next chapter will explore the
different techniques used, all around the world, throughout history, in order to achieve the
objective of taxation.

Chapter 2: HISTORY OF TAXATION AROUND THE WORLD

2.1. Egypt
¶ Taxation was a fact of life for all the pharaoh's subjects throughout ancient Egyptian times.
Administrative texts, literary texts, letters and scenes from tombs have provided archaeologists
and historians with definite but fragmentary evidence of taxes and tax collectors.
¶ The first known system of taxation was in Ancient Egypt in the first dynasty of the Old
Kingdom.4 The earliest and most widespread form of taxation was the corvée and tithe (one-
tenth of personal income). The corvée was forced labour provided to the state by peasants too
poor to pay other forms of taxation (labour in ancient Egyptian is a synonym for taxes).5
Records from the time document that the Pharaoh would conduct a biennial tour of the
kingdom, collecting tithes from the people.

4
Taxes in the Ancient World, University of Pennsylvania Almanac, Vol. 48, No. 28, 2 April 2002.
5
David F. Burg (2004). “A World History of Tax Rebellions” pp. vi–viii. (Routledge, 2004).
 Historical Analysis of Taxation |3

Early taxation is also described in the Bible. It states "But when the crop comes in, give a fifth
of it to Pharaoh. The other four-fifths you may keep as seed for the fields and as food for
yourselves and your households and your children".6Joseph was telling the people of Egypt
how to divide their crop, providing a portion to the Pharaoh.
¶ Ancient Egypt had a thriving culture that began around 5,000 B.C. and lasted thousands of
years. Taxes were levied against the value of grain, cattle, oil, beer and land. Approximately
one in a hundred people were literate; they were called scribes. Some of the scribes were tax
assessors. They kept records about who owned title to lands along with the size of their fields.
At various times they collected annual or biannual data by counting cattle and checking the
crop yields. The most common taxpayers were the farmers, from whom assessors coerced
collection. If a taxpayer did not or was not able to pay, he was brought before courts that
immediately dispensed justice. A typical tax rate was ten percent of all production.
¶ Tax assessors were highly valued people because of their skills with hieroglyphics and their
ability to collect revenue. Often when a king died, the assessor was the only staff person not
killed and buried along with the king; so valued was his service. There were tombs and
monuments for assessors in Egypt and Syria that rivalled those of some kings. In Egypt, the
famous Rosetta Stone was actually a tax document granting exemption to priests.

2.2. Persian Empire

¶ Since the Persians didn't have coined money, ancient households had to pay taxes in kind,
and they paid different taxes throughout the year. Poll taxes required each man to deliver a cow
or sheep to the authorities. Merchants transporting goods from one region to another were
subject to tolls, duty fees, and other taxes. To avoid as many of these as possible, they
frequently resorted to smuggling.
¶ Almost everything was taxed--livestock, the boat trade, fishing, even funerals--but probably
the most burdensome obligation a household faced was its labour obligation. This was called
"going" or "burden" in Babylonian languages. A free man, head of his household, owed the
government many months of labour service. If he were lucky, his service might entail
harvesting the government's barley fields or digging the silt out of canals. If he were unlucky,
he had to do military service, leaving the security of home to fight wars abroad, perhaps never

6
Genesis 41:33-36
 Historical Analysis of Taxation |4

to return. Not unnaturally men who could afford it avoided this labour service: they either sent
a slave or hired someone on their behalf. Technically, substitution was illegal, but it was widely
practiced. Those who couldn't afford a substitute took more drastic measures. Law No. 30 of
Hammurabi's Law Code begins, "If a soldier or sailor abandons his field, orchard or home
because of the labour obligation and runs away"--and the consequence was forfeiture of his
family's land and livelihood.
¶ In the later periods of time, a regulated and sustainable tax system was introduced by Darius
I the Great in 500 BC. The Persian system of taxation was tailored to each Satrapy (the area
ruled by a Satrap or provincial governor). At differing times, there were between 20 and 30
Satrapies in the Empire and each was assessed according to its supposed productivity. It was
the responsibility of the Satrap to collect the due amount and to send it to the treasury, after
deducting his expenses (the expenses and the power of deciding precisely how and from whom
to raise the money in the province, offer maximum opportunity for rich pickings). The
quantities demanded from the various provinces gave a vivid picture of their economic
potential. For instance, Babylon was assessed for the highest amount and for a startling mixture
of commodities; 1,000 silver talents and four-month supply of food for the army. This tax was
exclusively levied on Satrapies based on their lands, productive capacity and tribute levels.

2.3. Greece

¶ In times of war the Athenians imposed a tax referred to as eisphora. No one was exempt from
the tax which was used to pay for special wartime expenditures. The Greeks are one of the few
societies that were able to rescind the tax once the emergency was over. When additional
resources were gained by the war effort the resources were used to refund the tax.
¶ Athenians imposed a monthly poll tax on foreigners, people who did not have both an
Athenian Mother and Father, of one drachma for men and a half drachma for women. The tax
was referred to as metoikion.7

2.4. Roman Empire

¶ The earliest taxes in Rome were customs duties on imports and exports called portoria.
Caesar Augustus was considered by many to be the most brilliant tax strategist of the Roman

7
Charles Adams, “For Good and Evil: The Impact of Taxes on the Course of Civilization” (Madison
Books, 2001)
 Historical Analysis of Taxation |5

Empire. During his reign as "First Citizen" the publicani were virtually eliminated as tax
collectors for the central government. During this period, cities were given the responsibility
for collecting taxes. Caesar Augustus instituted an inheritance tax to provide retirement funds
for the military. The tax was 5% on all inheritances except gifts to children and spouses. The
English and Dutch referred to the inheritance tax of Augustus in developing their own
inheritance taxes.
¶ During the time of Julius Caesar, a 1% sales tax was imposed. During the time of Caesar
Augustus, the sales tax was 4% for slaves and 1% for everyone else.
¶ In 60 A.D. Boadicea, queen of East Anglia led a revolt that can be attributed to corrupt tax
collectors in the British Isles. Her revolt allegedly killed all Roman soldiers within 100 miles;
seized London; and it is said that over 80,000 people were killed during the revolt. The Queen
was able to raise an army of 230,000. The revolt was crushed by Emperor Nero and resulted in
the appointment of new administrators for the British Isles.

2.5. Great Britain

¶ The first tax assessed in England was during occupation by the Roman Empire. When Rome
fell, the Saxon kings-imposed taxes, referred to as Danegeld, on land and property. The kings
also imposed substantial customs duties.
¶ The 100-year War (the conflict between England and France) began in 1337 and ended in
1453. One of the key factors that renewed fighting in 1369 was the rebellion of the nobles of
Aquitaine over the oppressive tax policies of Edward, The Black Prince.
¶ Taxes during 14th century was very progressive; The 1377 Poll tax noted that the tax on the
Duke of Lancaster was 520 times the tax on the common peasant. Under the earliest taxing
schemes an income tax was imposed on the wealthy, office holders, and the clergy. A tax on
movable property was imposed on merchants. The poor paid little or no taxes. The King's Writ
stated that individuals should be taxed according to status and means. Hence the idea of a
progressive tax on those with the ability to pay was developed very early.

¶ Other prominent taxes imposed during this period were taxes on land and various excise
taxes. To pay for the army commanded by Oliver Cromwell, Parliament, in 1643, imposed
excise taxes on essential commodities (grain, meat, etc.). The taxes imposed by Parliament
extracted even more funds than taxes imposed by Charles I, especially from the poor. The
excise tax was very regressive, increasing the tax on the poor so much that the Smithfield riots
 Historical Analysis of Taxation |6

occurred in 1647. The riots occurred because the new taxes lowered rural labourers’ ability to
buy wheat to the point where a family of four would starve. In addition to the excise tax, the
common lands used for hunting by the peasant class were enclosed and peasant hunting was
banned.
¶A precursor to the modern income tax we know today was invented by the British in 1800 to
finance their engagement in the war with Napoleon. The tax was repealed in 1816 and
opponents of the tax, who thought it should only be used to finance wars, wanted all records
of the tax destroyed along with its repeal. Records were publicly burned by the Chancellor of
the Exchequer but copies were retained in the basement of the tax court.8

2.6. America

¶ In Colonial America, Colonists were paying taxes under the Molasses Act which was
modified in 1764 to include import duties on foreign molasses, sugar, wine and other
commodities. The new act was known as the Sugar Act. Because the Sugar Act did not raise
substantial revenue amounts, the Stamp Act was added in 1765. The Stamp Act imposed a
direct tax on all newspapers printed in the colonies and most commercial and legal documents.
¶ In post-revolution America, in 1794, settlers west of the Alleghenies, in opposition to
Alexander Hamilton's excise tax of 1791, started what is now known as the "Whiskey
Rebellion" The excise tax was considered discriminatory and the settlers rioted against the tax
collectors. President Washington eventually sent troops to quell the riots. Although two settlers
were eventually convicted of treason, the President granted each a pardon.9
¶ The first income tax suggested in the United States was during the War of 1812. The tax was
based on the British Tax Act of 1798 and applied progressive rates to income. The rates were
.08% on income above $60 and 10 percent on income above $200. The tax was developed in
1814 but was never imposed because the Treaty of Ghent was signed in 1815 ending hostilities
and the need for additional revenue.
¶ The Tax Act of 1861 proposed that "there shall be levied, collected, and paid, upon annual
income of every person residing in the U.S. whether derived from any kind of property, or from
any professional trade, employment, or vocation carried on in the United States or elsewhere,

8
Charles Adams “Those Dirty Rotten Taxes: The Tax Revolts that Built America” (Touchstone, 1999).
9
William H. Rehnquist, “Grand Inquests: The Historic Impeachments of Justice Samuel Chase and President
Andrew Johnson.William” (Morrow & Company, 1992).
 Historical Analysis of Taxation |7

or from any source whatever. The 1861 Tax Act was passed but never put in force. Rates under
the Act were 3% on income above $800 and 5% on income of individuals living outside the
U.S.
¶ The Tax Act of 1862 was passed and signed by President Lincoln July 1, 1862. The rates
were 3% on income above $600 and 5% on income above $10,000. The rent or rental value of
one’s home could be deducted from income in determining the tax liability. The Commissioner
of Revenue stated "The people of this country have accepted it with cheerfulness, to meet a
temporary exigency, and it has excited no serious complaint in its administration." This
acceptance was primarily due to the need for revenue to finance the Civil War.
¶ Although the people cheerfully accepted the tax, compliance was not high. Figures released
after the Civil War indicated that 276,661 people actually filed tax returns in 1870 (the year of
the highest returns filed) when the country's population was approximately 38 million. The Tax
Act of 1864 was passed to raise additional revenue to support the Civil War. Senator Garret
Davis, in discussing the guiding principle of taxation, stated "a recognition of the idea that
taxes shall be paid according to the abilities of a person to pay."
¶ Taxes rates for the Tax Act of 1864 were 5% for income between $600 and $5000; 7.5% for
income between $5001 and $10,000; 10% on income above $10,000. The deduction for rent or
rental value was limited to $200. A deduction for repairs was allowed.
¶ With the end of the Civil War the public's accepted cheerfulness with regard to taxation
waned. The Tax Act of 1864 was modified after the war. The rates were changed to a flat 5%
with the exemption amount raised to $1,000. Several attempts to make the tax permanent were
tried but by 1869 "no businessman could pass the day without suffering from those burdens".
The tax was repealed in 1872 and in its place was installed significant tariff restrictions that
served as the major revenue source for the United States until 1913. In 1913 the 16th
Amendment was passed, which allowed Congress authority to tax the citizenry on income from
whatever source derived.

¶ It should be noted that the Tax Act of 1864 was challenged several times. The Supreme Court
unanimously supported the tax. After the war the tax was declared unconstitutional by the same
court because it represented direct taxation on the citizenry which was not allowed under the
Constitution.
 Historical Analysis of Taxation |8

Chapter 3: HISTORY OF TAXATION IN INDIA

3.1. Ancient Period

¶ There is enough evidence to show that taxes on income in some form or the other were levied
even in primitive and ancient communities. References to taxes in ancient India are found in
“Manusmriti” and Kautilya’s “Arthashastra”.
¶ Manu, the ancient sage and law-giver stated that the king could levy taxes, according to
Sastras. The wise sage advised that taxes should be related to the income and expenditure of
the subject. He, however, cautioned the king against excessive taxation and stated that both
extremes should be avoided namely either complete absence of taxes or exorbitant taxation.
According to him, the king should arrange the collection of taxes in such a manner that the
subjects did not feel the pinch of paying taxes. He laid down that traders and artisans should
pay 1/5th of their profits in silver and gold, while the agriculturists were to pay 1/6th, 1/8th and
1/10th of their produce depending upon their circumstances. The detailed analysis given by
Manu on the subject clearly shows the existence of a well-planned taxation system, even in
ancient times. Not only this, taxes were also levied on various classes of people like actors,
dancers, singers and even dancing girls. Taxes were paid in the shape of gold-coins, cattle,
grains, raw-materials and also by rendering personal service.
¶ The learned author K.R.Sarkar commends the system of taxation in ancient India as follows:
"Most of the taxes of Ancient India were highly productive. The admixture of direct taxes with
indirect Taxes secured elasticity in the tax system, although more emphasis was laid on direct
tax. The tax-structure was a broad based one and covered most people within its fold. The taxes
were varied and the large variety of taxes reflected the life of a large and composite
population".10
¶ However, it is Kautilya's Arthasastra, which deals with the system of taxation in a real
elaborate and planned manner. This well-known treatise on state crafts written sometime in
300 B.C., when the Mauryan Empire was as its glorious upwards move, is truly amazing, for
its deep study of the civilisation of that time and the suggestions given which should guide a
king in running the State in a most efficient and fruitful manner. A major portion of Arthasastra
is devoted by Kautilya to financial matters including financial administration. According to

10
K.R. Sarkar, “Public Finance in Ancient India” (Abhinav Publications, 2003).
 Historical Analysis of Taxation |9

famous statesman, the Mauryan system, so far as it applied to agriculture, was a sort of state
landlordism and the collection of land revenue formed an important source of revenue to the
State. The State not only collected a part of the agricultural produce which was normally one
sixth but also levied water rates, octroi duties, tolls and customs duties. Taxes were also
collected on forest produce as well as from mining of metals etc. Salt tax was an important
source of revenue and it was collected at the place of its extraction.
¶ Kautilya described in detail, the trade and commerce carried on with foreign countries and
the active interest of the Mauryan Empire to promote such trade. Goods were imported from
China, Ceylon and other countries and levy known as a “Vartanam” was collected on all foreign
commodities imported in the country. There was another levy called “Dvarodaya” which was
paid by the concerned businessman for the import of foreign goods. In addition, ferry fees of
all kinds were levied to augment the tax collection.
¶ Collection of Income-tax was well organised and it constituted a major part of the revenue of

the State. A big portion was collected in the form of income-tax from dancers, musicians, actors
and dancing girls, etc. This taxation was not progressive but proportional to the fluctuating
income. An excess Profits Tax was also collected. General Sales-tax was also levied on sales
and the sale and the purchase of buildings was also subject to tax. Even gambling operations
were centralised and tax was collected on these operations. A tax called “Yatravetana” was
levied on pilgrims. Though revenues were collected from all possible sources, the underlying
philosophy was not to exploit or over-tax people but to provide them as well as to the State and
the King, immunity from external and internal danger. The revenues collected in this manner
were spent on social services such as laying of roads, setting up of educational institutions,
setting up of new villages and such other activities beneficial to the community.
¶ However, he regarded revenue and taxes as the earning of the sovereign for the services which

were to be rendered by him to the people and to afford them protection and to maintain law
and order. Kautilya emphasised that the King was only a trustee of the land and his duty was
to protect it and to make it more and more productive so that land revenue could be collected
as a principal source of income for the State. According to him, tax was not a compulsory
contribution to be made by the subject to the State but the relationship was based on Dharma
and it was the King's sacred duty to protect its citizens in view of the tax collected and if the
King failed in his duty, the subject had a right to stop paying taxes, and even to demand refund
of the taxes paid.
 H i s t o r i c a l A n a l y s i s o f T a x a t i o n | 10

¶ Kautilya has also described in great detail the system of tax administration in the Mauryan
Empire. It is remarkable that the present-day tax system is in many ways similar to the system
of taxation in vogue about 2300 years ago. According to the Arthasastra, each tax was specific
and there was no scope for arbitratiness. Precision determined the schedule of each payment,
and its time, manner and quantity being all pre-determined. The land revenue was fixed at 1/6
share of the produce and import and export duties were determined on advalorem basis. The
import duties on foreign goods were roughly 20 per cent of their value. Similarly, tolls, road
cess, ferry charges and other levies were all fixed. Kautilya's concept of taxation is more or
less akin to the modern system of taxation. His overall emphasis was on equity and justice in
taxation. The affluent had to pay higher taxes as compared to the not so fortunate. People who
were suffering from diseases or were minor and students were exempted from tax or given
suitable remissions. The revenue collectors maintained up-to-date records of collection and
exemptions. The total revenue of the State was collected from a large number of sources as
enumerated above. There were also other sources like profits from Stand land (Sita) religious
taxes (Bali) and taxes paid in cash (Kara). Vanikpath was the income from roads and traffic
paid as tolls.
¶ He placed land revenues and taxes on commerce under the head of tax revenues. These were
fixed taxes and included half yearly taxes like Bhadra, Padika, and Vasantika. Custom duties
and duties on sales, taxes on trade and professions and direct taxes comprised the taxes on
commerce. The non-tax revenues consisted of produce of sown lands, profits accuring from
the manufacture of oil, sugarcane and beverage by the State, and other transactions carried on
by the State. Commodities utilised on marriage occasions, the articles needed for sacrificial
ceremonies and special kinds of gifts were exempted from taxation. All kinds of liquor were
subject to a toll of 5 precent. Tax evaders and other offenders were fined to the tune of 600
panas. Kautilya also laid down that during war or emergencies like famine or floods, etc. the
taxation system should be made more stringent and the king could also raise war loans. The
land revenue could be raised from 1/6th to 1/4th during the emergencies. The people engaged
in commerce were to pay big donations to war efforts. Taking an overall view, it can be said
without fear of contradiction that Kautilya's Arthasastra was the first authoritative text on
public finance, administration and the fiscal laws in this country. His concept of tax revenue
and the on-tax revenue was a unique contribution in the field of tax administration. It was he,
 H i s t o r i c a l A n a l y s i s o f T a x a t i o n | 11

who gave the tax revenues its due importance in the running of the State and its far-reaching
contribution to the prosperity and stability of the Empire. It is truly a unique treatise.

3.2. Initial Period (1860-1886)

¶ Tax in its modern form was introduced in India for first time in 1860 by the British
Government to overcome the financial crisis following the events of 1857. Initially
Government introduced it as a temporary measure of raising revenue under the Income Tax
Act, 1860 for a period of five years. Different tax rates were prescribed for different heads of
income. In the year 1867, it was transformed as licence tax on trade and profession. In the year
1869, the licence tax was replaced by Income Tax again. The assessments were made on
arbitrary basis leading to inequality, unpopularity and widespread tax evasion. Income Tax was
withdrawn in the year 1874. After the great famine of 1876-78, the Government introduced
local Acts for income tax in different provinces. With several amendments these Acts remained
in force till 1886. Thus, the period from 1860 to 1886 was a period of experiments in the context
of income tax in India.

3.3. Pre-Independence Period (1886-1947)

¶ In 1886, a new Income Tax Act was passed with great improvements than the previous Acts.
This Act with several amendments in different years continued till 1918. In 1918, a new Act
was passed repealing all the previous Acts. For the first time, this Act introduced the concept
of aggregating income under different heads for charging tax. In 1921, the Government
constituted “All India Income Tax Committee” and on the basis of recommendation of this
committee a new Act (Act XI of 1922) was enacted. This Act is a landmark in the history of
Indian Income Tax system. This Act made income tax a central subject by shifting the tax
administration from the Provincial Governments to the Central Government. During this period
the Board of Revenue (Central Board of Revenue) and Income Tax Department with defined
administrative structure came into existence.

3.4. Post-Independence Period

¶ The Income Tax Act 1922 continued to be applicable to independent India. During the early
post-independence period, the Income Tax legislation had become very complicated on
account of innumerable changes. During this period tax evasion was wide spread and tax
 H i s t o r i c a l A n a l y s i s o f T a x a t i o n | 12

collection was very expensive. In 1956, the Government of India referred the Act to a Law
Commission to make the Income Tax Act simpler, logical and revenue oriented.
¶ The Law Commission submitted its report in September 1958 and in the meantime the Govt.
also appointed a Direct Taxes Administration Enquiry Committee to suggest the measures for
minimizing the inconvenience to the assesses and prevention of tax evasion. This committee
submitted its report in 1959. The recommendations of the Law Commission and the Enquiry
Committee were examined and extensive tax reform programme was undertaken by the
Government of India under the supervision of Prof. Nicholas Kaldor.
¶ The Income Tax Bill 1961, prepared on the basis of the Committee’s recommendations and
suggestions from Chamber of Commerce, was introduced in the Lok Sabha on 24.4.1961. It
was passed in September 1961 by Lok Sabha. The Income Tax Act 1961 came into force on
April 1, 1962. It applies to whole of India including the state of Jammu and Kashmir. It is a
comprehensive piece of legislation having 23 Chapters, 298 Sections, various sub sections and
14 schedules. Since 1962, it has been subjected to numerous amendments by the Finance Act
of each year to cope with 5 changing scenario of India and its economy. Moreover, the Central
Board of Direct Taxes is empowered to amend rules and to clarify instructions as and when it
becomes necessary.
¶ Besides this, amendments have also been made by various Amendment Acts e.g. Taxation
Laws Amendment Act 1984, Direct Taxes Amendment Act 1987, Direct Taxes Law
(Amendment) Acts of 1988 and 1989, Direct Taxes Law (Second Amendment) Act 1989 and
at last the Taxation Law (Amendment) Act 1991. As a matter of fact, the Income Tax Act 1961
has been amended drastically. It has therefore become very complicated both for administration
and taxpayers.

3.5. Brief evolution of Indirect Taxation in India

¶ In the year 1935, Government of India Act, 1935 made tax on sales of goods a provincial
subject. Following suit, in 1939 sales tax was introduced in India in the State of Madras. In the
few following years, sales tax was introduced in the State of Punjab and various other states
followed in later years. In 1974, the L.K. Jha Committee suggested the introduction of value
added tax (VAT) in India. As a result, after 8 years, MODVAT or modified VAT, was
introduced on select commodities. Yet again in 1991, Raja Chelliah Committee recommended
VAT. However, no action was taken in this regard.
 H i s t o r i c a l A n a l y s i s o f T a x a t i o n | 13

¶ Regardless, the decision to implement service tax in India was taken in the year 1994. After
5 years, the Centre announced its decision to introduce VAT throughout India. As a
consequence of this, in the year 2002, CENVAT or Central VAT was introduced on all
commodities at the central level. In 2003, VAT was first introduced in the state of Haryana.
After a couple of years, it was implemented in 24 States/UTs including Punjab, Chandigarh,
Himachal Pradesh, Jammu & Kashmir and Delhi. By 2006, VAT had been implemented in 5
more States including Rajasthan.
¶ In the time period from 2006- 2007, a proposal for GST (Goods and Services Tax) was first
mooted in the Budget Speech for the financial year. Negotiation with states started began soon
after. An Empowered Committee of State Finance Ministers (EC) was engaged for this very
purpose. This EC released its First Discussion Paper. In the year 2011, a Constitution
Amendment Bill on GST was introduced and in August 2013, a Parliamentary Standing
Committee submitted its report and the recommendations of Standing Committee were
incorporated in the said Bill. A month later, a Revised Bill was sent to the EC for consideration.
In March 2014, after incorporating recommendations of the EC, another revised Bill was sent
to the EC.
¶ Finally, in December 2014, the Constitution Amendment Bill was introduced in the Lok
Sabha and on May 5, 2014, Lok Sabha subsequently passed the GST Bill. However, the
Opposition, led by the Congress demanded that the GST Bill be again sent back to the Select
Committee of the Rajya Sabha due to disagreements on several statements in the Bill relating
to taxation. Finally, in August 2016, the Amendment Bill was passed. Over the next 15 to 20
days, President Pranab Mukherjee gave his assent to it. The Act was passed in accordance with
the provisions of Article 368 of the Constitution, and has been ratified by more than half of the
State Legislatures, as required under Clause (2) of the said article. There still remain 5 states
that have not ratified said Act. These are: Jammu and Kashmir, Karnataka, Kerala, Manipur
and West Bengal.
 H i s t o r i c a l A n a l y s i s o f T a x a t i o n | 14

CONCLUSION

Since the beginning of civilization, taxes have been a major source of revenue for most
governments. It is often believed that “Taxes are what we pay for a civilized society.” There
have been good taxation policies created by admirable assessors like Aristides the Just and
disastrous ones invented by corrupt leaders such as the latter Roman emperors.

While modern assessors are mandated to develop more fair and accurate assessments than most
of our predecessors, the pressure to have a fair tax system has always existed. It is not enough
to have an equitable tax system; the taxpayers need to understand that they are paying their fair
share.

Taxation deserves significant attention in a developing economy as it is one of the major

sources of government revenue. Tax system of India has come a long way, dating back to the
colonial era till now. A number of committees have been constituted from time to time to
suggest changes in the existing tax structure.

Thus, tax policymakers and tax administrators have been continuously adapting tax system to
reflect changing economic, social and political circumstances. Moreover, restructuring of tax
system has been a major component of fiscal reforms initiated since 1991 in an effort to keep
pace with the changing global scenario. The main objective of these changes has been to
enhance tax revenue by enlarging tax base, encouraging voluntary tax compliance and
simplifying procedural rules.

The tools at our disposal, combined with advances in methodology and the lessons of the past
have put us in a more favourable position to make intelligent decisions. Our everyday decisions
have significant consequences on residential and commercial taxpayers. We need to have a
balanced view that considers our obligations to both the taxpayers and their jurisdictions.
People make the difference in making the system better or worse. Those people are us. It is up
to us to think, work hard, be prospective, anticipate problems, and come up with creative
solutions to those problems.
 H i s t o r i c a l A n a l y s i s o f T a x a t i o n | 15

SUGGESTIONS

Tax collection merits critical consideration in a creating economy as it is one of the real
wellsprings of government income. Duty arrangement of India has progressed significantly,
going back to the pioneer time till now. Various advisory groups have been established every
now and then to propose changes in the current assessment structure.

Consequently, charge policymakers and duty executives have been constantly adjusting
expense framework to reflect evolving monetary, social and political conditions. Additionally,
rebuilding of duty framework has been a noteworthy part of monetary changes started since
1991 of a push to keep pace with the changing worldwide situation. The principle target of
these progressions has been to improve charge income by broadening expense base,
empowering deliberate assessment consistence and rearranging procedural standards.

The apparatuses available to us, joined with advances in approach and the exercises of the past
have placed us in an increasingly great position to settle on keen choices. Our regular choices
have critical results on private and business citizens. We need a fair view that considers our
commitments to both the citizens and their locales. Individuals have the effect in aggravating
the framework better or. Those individuals are us. It is dependent upon us to think, buckle
down, be planned, envision issues, and concoct imaginative answers for those issues.

While present day assessors are commanded to grow more reasonable and precise evaluations
than a large portion of our ancestors, the strain to have a reasonable expense framework has
consistently existed. It isn't sufficient to have an even-handed expense framework; the citizens
need to comprehend that they are paying a considerable amount.
 H i s t o r i c a l A n a l y s i s o f T a x a t i o n | 16

BIBLIOGRAPHY

Books Referred:

Charles Adams, “For Good and Evil: The Impact of Taxes on the Course of
Civilization” (Madison Books, 2001).
Charles Adams “Those Dirty Rotten Taxes: The Tax Revolts that Built America”
(Touchstone, 1999).
K.R. Sarkar, “Public Finance in Ancient India” (Abhinav Publications, 2003).
William H. Rehnquist, “Grand Inquests: The Historic Impeachments of Justice Samuel
Chase and President Andrew Johnson.William” (Morrow & Company, 1992).
David F. Burg (2004). “A World History of Tax Rebellions” (Routledge, 2004).
J. Felix Raj, Indian Economy: Economic Ideas, Development, and Financial Reforms,
(Deep and Deep Publications, 2009).

Journals Referred:

Bruce Bartlett, “How Excessive Government Killed Ancient Rome” The Cato Journal,
Vol.14 No.2 (Fall1994).
“Taxes in the Ancient World”, University of Pennsylvania Almanac, Vol. 48, No. 28,
2 April 2002.

Websites Referred:

• https://www.britannica.com/
• www.heinonline.org
• www.jstor.org
• http://www.amanj.org/sites/default/files/files/Carlson.pdf
• http://www.cato.org/pubs/journal/cjv14n2-7.html
• http://www.authorama.com/ancient-china-simplified-17.html