 WHAT IS TAX?

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A tax which is derived from the latin word ‘taxo’ is a compulsory financial charge or some other
type of charge imposed upon a taxpayer which may be an individual or a company or any legal
entity by a governmental organization in order to fund various public expenditures. A failure to
pay, along with 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. The first known taxation
took place in Ancient Egypt around 3000–2800 BC.

Most countries have a tax system in place to pay for public, common or agreed national needs
and government functions.. Most countries charge a tax on individuals income as well as on
corporate income. Countries or subunits often also impose wealth taxes, inheritance taxes, estate
taxes, gift taxes, property taxes, sales taxes, payroll taxes or tariffs.

In economic terms, taxation transfers wealth from households or businesses to the government.
This has effects which can both increase and reduce economic growth and economic welfare.
Consequently, taxation is a highly debated topic.

 Evolution of Income Tax System in India from ancient time.2

It’s interesting to see how the income tax system evolved over the time. India practiced Taxation
as a subject for a well functioning of the society and is being followed many parts of the world.
Let’s take a look at how it evolved?

 During Ancient Times

Taxation in India has existed since ancient times. Taxation was considered a sacred duty in
Vedic times. It finds its references in many ancient books like “Srimad Bhagavatam”, “Manu
Smriti” and “Arthasastra”.

Kautilya’s “Arthashstra” deals with taxation in an elaborate and planned manner suggesting
ways to guide a king in running the state in an efficient and fruitful manner. According to him,
treasury is the root of administration.

1
History Of Taxation In India ( visited on Aug 27,2019 at 10:25 PM), https://www.jagranjosh.com
2
Evolution Of Tax System(visited on Aug 27,2019 at 10:35 pm), https://www.jagranjosh.com

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 Genesis of the Indian Taxation System In Ancient India.3

People generally think that taxes paid in today’s time are of recent origin but there are lot of
proofs and evidences from the past scenario that show taxes on income or other forms were
also levied in ancient time.

Word taxation means an estimate, however there was no systematic procedure or manner of
collecting it, in ancient times an order used to be passed from Ceaser Augustus (Roman
Emperor) that the people in the world should be taxed and it was levied as per the occupation
or turnover of businesses. These taxes were imposed to meet the needs of common citizens
as well as administrative, civil and military expenditures of the government.

Direct taxation in Indian taxation system came from ancient time. Manu Smriti and
Arthasastra were two references which could help in understanding the taxation system from
ancient time

 Manu was the law giver person who advised his kingdom about the levy of tax on
income and expenditure of people. According to him, the king was required to impose
taxes on traders, artists and agriculturists depending upon their livelihood and situations.
Tax was paid in the form of gold and silver coins, livestock’s, raw-materials and also by
providing personal services.
 As per his views or opinions, excessive Indian taxation system or nominal taxation
system both are dangerous for the kingdom.

So, he preferred that people did not feel burden by paying them. His analysis and planned tax
structure showed that there was proper manner of Indian taxation system in past time also.

 Kautilya’s Arthasastra helped the Mauryan Empire in ruling its states in a most efficient
and effective way. Kautilya dealt with financial matter of his states. He promoted the
trade and commerce of his empire by foreign countries dealing. Goods were purchased
from china and other countries by levying tax on all foreign commodities imported in
the country.
 Moreover the concerned persons who imported foreign goods paid taxes called
Dvarodaya. States collected a lot of duties called water rates, octroi duties, tolls and
customs duties, agriculture & forest produce, tolls, road cess, ferry charges.

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Genesis Of Taxation System(visited on Aug 27,2019 at 10:45),https://www.taxreturnwala.com

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  The major sources of revenue for the states were salt tax and it was collected from place
of its extraction. Sale tax, Excessive profit tax and a tax called yatravetana was levied on
the pilgrims too. Revenue was collected from all the possible sources not to over burden
the people rather provide his kingdom and their state immunity from outside danger.
Empires spent the revenue on construction of roads, villages, educational facilities and
all other benefits to their kingdom and society.

He emphasized on equity and justice in Indian taxation system. Those who were disabled or
suffering from dangerous diseases were exempted from paying taxes altogether. Goods used
on marriage or funeral, articles and gifts were also exempted from being subject to taxes. His
taxation system is also some way similar to the modern, present day Indian taxation system
where offenders and tax evaders were highly penalized. Thus we may conclude that
Kautilya’s Arthasastra was the first authoritative narration of history which the fiscal laws
were formulated. His concept of collecting revenue was a unique way of managing the
administrative system. He helped in contribution to the prosperity and stability of his Empire
and laid down the footmark in the history of economic and financial system.

 Evolution of Indian Tax System Medieval Time To Modern Time4.

The system of progressive taxation perhaps owes its origin to emperor Krishnadevraya of
Vijayanagar who maintained that taxes should not be levied at flat rates and the amount of tax
levied must depend on the income of the farmer. Tax administration was further refined by Sher
Shah Suri and later by Akbar. The treaty of 1765 gave Britishers the right to collect taxes on
behalf of the emperor. Well before the dissolution of the Mughal Empire in 1857, the British
system of District Collectors of land revenue was established.

In the aftermath of the First War of Independence in 1857, the period of British rule in India
witnessed many remarkable changes in the taxation system. Although it was highly in favor of
the British government and its exchequer, it incorporated the modern and scientific method of
taxation tools and systems.

4
Supra, Note 3.

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1860 To 1990
The 1860s to up to 1910s

Income Tax in India was introduced by Sir James Wilson on 24 July 1860. It was a tax
selectively imposed on the rich, royalty and Britishers, and hence was not liked by the powerful.
In its first year, the exchequer collected a princely sum of Rs. 30 lakh. Income Tax Collection for
the year 1918-19 stood at Rs. 11 Crore.

The 1920s and 1930s

The most comprehensive Income Tax law was brought about through the Income Tax Act of
1922. Enacted amidst a highly charged atmosphere of the Non-cooperation Movement, the Act
of 1922, laid the ground for the growth of the Income Tax Department. In the period between the
two world wars, many institutional changes were made to increase the efficacy of the
Department. For the first time, tax administration was effectively centralized in the hands of the
Central Board of Revenue in 1924. Income Tax Collection for the year 1939-40 stood at Rs.
19.82 Crore.

The 1940s

A shortage of manpower in the Department necessitated direct recruitment of the first batch of
Income Tax Officers (Class I) Service in 1945 through the Indian Accounts and Audit
Examinations. This Service later came to be known as the Indian Revenue Service. Income Tax
Collection for the year 1945-46 stood at Rs. 57.12 Crore

The 1950s and 1960s

The Estate Duty Act, 1953 came into existence. Law Commission Report on new Income Tax
Act was submitted in 1958. Direct Taxes Administration Enquiry Committee was set up in 1958.
Income Tax Act, 1961 came into existence with effect from 01.04.1962, based on the
recommendations of the Law Commission and the Enquiry Committee. Direct Taxes Collection
for the year 1960-61 stood at Rs. 287.47 Crore.

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The 1970s

In the year 1970, recovery functions for the collection of Direct Taxes dues performed by State
Government officials were assigned to Tax Recovery Officers. Direct Taxes Collection for the
year 1974-75 stood at Rs. 1632.02 Crore.

The 1980s

L.K Jha Committee was set up for simplification and rationalization of tax laws in 1987. The
Direct Tax Law (Amendment) Act, 1987 introduced uniform previous year and brought about re-
designation of ITO Group A as Assistant Commissioner of Income Tax, etc. Direct Taxes
Collection for the year 1983-84 stood at Rs. 4232.38 Crore.

1990 To 2010

The 1990s to 2010s

The Indian economy moved towards increased globalization in the 1990s. In 1993, Authority for
Advance Rulings was set up to provide the non- residents with the facility of ascertaining in
advance their Income Tax liability.

The Permanent Account Number (PAN), a 10 digit alphanumeric number was launched in 1994.
It acts as a unique identifier and enables the Department to link all transactions like tax payment,
TDS / TCS credits, Income Tax Returns, High-Value Transactions etc. to individual taxpayers.

Sec. 260A was introduced in 1998 enabling direct appeals to High Court. Some other changes
were also made in that year e.g. 1/6 Scheme & penalty for non-filing of return were introduced to
widen the tax base. Gift-tax was abolished. Direct Taxes Collection for the year 1996-97 stood at
Rs. 38895 Crore

The Income Tax Department became the biggest revenue mobilizer for the Government in 2007-
08, with its share increasing from 34.76%in 1997-98 to 52.75%in 2007-08. Direct Taxes
Collection for the year 2004-05 stood at Rs. 132771 Crore.

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 Modernization in the Income Tax department5.
Portal: The Department of Taxes launched a portal www.incometaxindia.gov.in in the year 2003
to provide a host of informational, interactive and transactional services to the Taxpayers.

e-FILLING: In India, e-filing of income tax was introduced in September 2004, initially on a
voluntary usage basis Page 2 380 Mukesh Kumar and Mohammad Anees for all categories of
income tax assessee. But from July 2006, it was made mandatory for all corporate firms to e-file
their income tax returns.

e-PAYMENT: Taxpayers have the facility to pay their taxes online, through ATMs, Debit Cards
or Cheques at agency bank branches across the country.

TRPS: Tax Return Preparer Scheme was launched in 2006 to assist individual and HUF
taxpayers to file their Return of Income. The Department trained nearly 4700 unemployed or
underemployed graduates at 100 centers across the country to enable them to prepare Returns of
taxpayers at marginal cost. The scheme used Online Learning Management System for distance
learning for the first time.

REFUND: The Refund Banker Scheme was launched in January 2007 in Delhi and Patna
charges. Data of Refunds determined by the Assessing Officer gets transferred to the Refund
Banker (State Bank of India) which issues refund through Electronic Clearing System (ECS) in
cases where MICR code is available or through Cheque if MICR is not available. The scheme
has now been extended to the whole country and introduced online refund to the assessee bank
account.

ITDMS: Integrated Taxpayer Data Management System (ITDMS) for drawing of 360° taxpayer
profile was launched in 2007. The system creates 360° profile by using the huge volume of data
available from internal and external databases and builds individual profiles, family relationship
by using sophisticated data mining tools and search engine.

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Genesis Of Taxation System(visited on Aug 27,2019 at 10:59),https://www.taxreturnwala.com

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 CPC: Centralized Processing Centre was set up in Bengaluru in 2009 for bulk processing of e-
filed and paper returns. The Centre operates without any interface with taxpayers in a jurisdiction
– free manner.

 Tax Structure of India with respect to USA6.

India (Tax system prior to GST):- India has a three tier tax structure where taxes are levied by
Central Government, State Government and Local Authorities like Municipal Corporations. In
India, the authority to levy a tax is received from the constitution. In constitution there is clear
demarcation of respective taxes to be collected by centre and the states. Article 265 of the
Indian Constitution states that “No Tax Should be levied without the authority of Law”. Hence
abiding to the constitution, every tax in India is backed by its respective accompanying law
passed by either parliament or state legislative councils. In India , the taxes are classified as
Direct Taxes and Indirect Taxes.

USA:- The United States of America is has its autonomous state and local governments. It is a
federal republic country. Taxes in USA are levied by both autonomous state and the local
governments. The taxes include, taxes on income, property, sales, capital gains, dividends,
estates, gifts and imports. The Taxation System followed in USA is Progressive Tax System.
Taxes are incurred on incomes of the individual. The reliance on direct taxes is more than the
indirect taxes

6
A Comparative Study of Tax Structure of India with respect to other countries (visited on Aug 27,2019 at 11:34
PM) ,www.ijettjournal.org

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 What is the difference in tax slabs between US and India?7
Here are the tax slabs in India and the USA, converted at today's(9/1/2015) exchange rates. For
USA, individuals below 65 years of age.

USA

Standard deduction : $6,200. This amount will be subtracted from your annual taxable income
and won't be taxed, just like Rs.2,50,000 in India. In addition, there are personal exemption that
will be subtracted from your taxable income before tax calculation.

After deductions, the following slabs are applied:

$0-$8,925 : 10%

$8,926 – $36,250 : 15%

$36,251 – $87,850 : 25%

$87,851 – $183,250 : 28%

$183,251 – $398,350 : 33%

$398,351 – $400,000 : 35%

$400,001+ : 39.6%

Lets take an example calculation of $40,000.

$40,000 gross income – $6,100 standard deduction – $3,900 personal exemption = $30,000
taxable income

$8,925 × 10% = $892.50 (taxation of the first income bracket)

$30,000 – $8,925 = $21,075.00 (amount in the second income bracket)

$21,075.00 × 15% = $3,161.25 (taxation of the amount in the second income bracket)

Total income tax is $892.50 + $3,161.75 =$4,053.75 (~10.13% effective tax).

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Difference in tax slabs between US and India?(visited on Aug 27,2019 at11:45PM),https://www.quora.com

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 India

In India, there are similar deductions under 80G(money you give to select charities, etc.)

After that, income tax is straight forward:

0 to 2,50,000($0 - $3955): No tax

2,50,001 to 5,00,000($3955 - $7911): 10%

5,00,001 to 10,00,000($7911 - $15822): 20%

Above 10,00,000(Above $15822): 30%

 The UK tax system8.

Basic UK taxes include income taxes, property taxes, capital gains taxes, UK inheritance taxes
and Value Added Tax (VAT). Many of these taxes are stratified based on the payer’s assumed
ability to pay – higher income persons are assumed to be able to pay at higher rates.

The UK tax system applies throughout the UK – England, Scotland (though there are some
specific differences owing to Scotland’s unique legal system), Wales, Northern Ireland, and
many of the smaller islands around the British coast. It includes oil drilling platforms in British
territorial waters, though, notably, it excludes the Channel Islands, the Isle of Man, and the
Republic of Ireland.

One interesting aspect of UK tax is that it treats spouses as separate entities and taxes them as
individuals, with the exception of a small allowance for the purpose of income taxes.

Before you can pay taxes in the UK, you will need to have a national insurance number. And,
unless you are a national from the European Economic Area (European Union plus Iceland,
Norway, and Liechtenstein), Switzerland, or from an EU member nation (at least until the UK’s
exit is sorted), you may also need to apply for a Tier 2 visa.

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A complete guide to the UK tax system(visited on Aug 27,2019 at 11:58PM), https://www.expatica.com

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 Income taxes in the UK9.
In the UK, many of the various taxes for which an individual will be liable – with the exception
of VAT – will in some way be keyed to income taxes. The basic formula for taxes is to sum your
personal income and benefits, subtract your personal allowance, and then pay the appropriate
rate on the difference.
For the 2018/19 tax year, all individuals are allowed a personal allowance of £11,850 (rising to
£12,500 in the 2019/20 tax year), making income below this level tax exempt. UK income tax
rates are stepped depending on your income. These steps, or bands, are also used to determine
other tax rates, such as capital gains.

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Supra, Note 8.

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