This blog is written by Sohini Chakraborty, a 3rd year law student of Amity University, Kolkata.
INTRODUCTION
The Income Tax Act, of 1961 is a thorough and essential piece of Indian law that regulates the taxation of income received by people, businesses, and other entities inside the nation. It was passed to replace the earlier Income Tax Act of 1922, and it has undergone several revisions over time to reflect the shifting nature of the economy and the demands of the country’s finances. The framework for the assessment, collection, and management of income tax in India is provided by this Act. It describes the many types of income, how taxes are calculated, and what rates apply. The obligations of taxpayers, taxing agencies, and appellate authorities are also outlined.
The Act also contains several sections covering specific tax-related issues, such as regulations for filing tax returns and exemptions for agricultural income. Other tax-related issues covered by the Act include the taxation of capital gains, how income from different sources, such as salaries, businesses, and investments, is treated, and how revenue from different sources is treated. The Income Tax Act is crucial in helping the government raise money, pay for necessary public services, and encourage financial responsibility. Additionally, it affects how people and firms behave economically and how they make investment and financial planning decisions. It has changed over time to keep up with the fast-paced economic climate, becoming an important component of India’s tax system.
EVOLUTION OF THE ACT
In India, the direct taxation system has existed in some capacity since the beginning of recorded history. Many different taxation methods have been mentioned in both Manu Smriti and Arthasastra. A thoughtful taxation system existed even in ancient times, as demonstrated by the in-depth analyses Manu Smriti and Arthasastra presented on the matter. Not only that, but taxes were also levied against numerous groups of people, including performers, dancers, singers, and even dancing girls. In the past, taxes were paid in the form of gold coins, animals, cereals, raw commodities, and even by doing individualized service.
The earliest and most important source of income tax regulations is the Manusmrti. Manusmrti emphasizes the subjects’ strategic imposition as well as regulation of income tax.
In the early 2300s BC, Kautilya wrote the book. The growth of India’s income tax system was said to have been significantly impacted by it.
The Indian tax system as it exists today was most significantly influenced by the tax laws adopted by the British government in India. The well-known act of mutiny may be blamed for the structure of the income tax regulations that were implemented under British control in India. Indian British army troops’ mutiny in 1857 cost the British government a great deal of money at the time. In order to cover the losses brought on by the mutiny, the Income Tax Act was introduced in the year 1860. After being in effect for five years, the Act of 1860 was repealed.
The Income Tax Act of 1922 served as India’s primary income tax reference until 1962. Since its enactment, the Act has undergone numerous modifications. However, the government passed a brand-new law in 1961 called the Income Tax Act. After its implementation, India’s income tax history entered a new era.
The Taxation of Income from Various Sources, including Salary, Business, Capital Gains, and Investments, was the primary focus of the Act at the time of its initial introduction. In India, where higher income levels were subject to greater tax rates, it established the groundwork for the progressive tax system. Over time, the Act added clauses allowing for tax breaks, exemptions, and rebates in order to support particular endeavors and industries. These rewards have prompted people to save money, make investments, and give to charitable organizations.
OBJECTIVE OF THE ACT
The Income Tax Act, of 1961, was passed with the intention of facilitating the equitable, effective, and fair taxation of income in India. The primary goal of the Income Tax Act of 1961 is to establish a legislative framework for the assessment and collection of income tax in order to raise money for the government. This income is crucial for funding governmental expenditures, infrastructure development, and providing citizens with basic services.
Establishing a progressive tax system, in which people and organizations with higher incomes pay higher tax rates, is another important goal. By guaranteeing that those who can afford to pay more taxes contribute proportionally more to the national exchequer, this progressive framework attempts to promote income redistribution and minimize income inequality.
By offering deductions, exemptions, and refunds, the Act also aims to encourage savings, investments, and economic growth. These clauses encourage people and companies to give to charities, invest in certain industries, and set money aside for the future—all of which support economic growth. Through rules about tax returns, assessments, and appeals, the Act also seeks to encourage transparency and compliance. It improves the effectiveness and fairness of the tax collection process by providing clear rules and procedures, which lowers tax evasion and avoidance. To ensure that income received by residents and non-residents of India is taxed fairly, the Act also addresses international tax issues. This goal avoids double taxation and is consistent with worldwide tax rules, which encourage foreign investment and commerce.
PROVISIONS OF THE ACT
| Sr.No. | SECTION | PROVISION |
| 1. | Section 4 | Imposes a charge of income-tax on the total income earned by individuals, companies, firms, associations etc. during the previous year. |
| 2. | Section 5 | Defines the residential status (resident, non-resident, not ordinarily resident) to determine the scope of total income that is taxable in India. |
| 3. | Section 10 | Lists out various sources of income like agricultural income, education scholarships, specific allowances etc. that are exempt from income tax. |
| 4. | Section 15 | Lays down provisions for taxing income under the head ‘Salaries’ including profits in lieu of salary, allowances, value of perquisites etc. |
| 5. | Section 22 | Deals with taxation of annual value of house property, which is calculated as rental income minus allowed deductions. |
| 6. | Section 28 | Brings to tax the profits and gains from any business or profession carried on by the assesse during the previous year. |
| 7. | Section 45 | Defines capital asset, transfer, capital gains (long-term/short term) and provides for their taxation. |
| 8. | Section 80C | Allows deductions for investments like PPF, life insurance premiums, home loan principal repayment etc. |
| 9. | Section 139 | Mandates filing of income tax returns by individuals, companies etc. and prescribes relevant due dates. |
| 10. | Section 192 | Requires deduction of tax at source (TDS) from salaries paid by employers over the specified threshold limit. |
PENAL PROVISIONS
| Sr.No. | SECTION | PROVISION |
| 1. | Section 270A | Levies a penalty of 50% of tax payable on underreported income. |
| 2. | Section 271 | Provides for penalties for various violations like concealment of income, failure to file returns ranging from a fixed amount to tax amount sought to be evaded. |
| 3. | Section 276B | Covers prosecution and imprisonment from 3 months to 7 years for willful attempt to evade tax, penalty or interest. |
| 4. | Section 276C | Deals with prosecution and jail from 6 months to 7 years for willful attempt to evade tax payment. |
| 5. | Section 278 | Provides for prosecution and punishment for abetment of making false returns, accounts or statements. |
CRITICISM AND LIMITATION OF THE ACT
A comprehensive piece of legislation, the Income Tax Act of 1961, controls how income is taxed in India. Although it forms the foundation of the nation’s tax system, there are several drawbacks and restrictions that have been the focus of discussion and attempts at reform over the years.
The Income Tax Act’s complexity is one of its main detractors. Taxpayers may find it difficult to comprehend the Act’s various sections, exemptions, and deductions. Tax experts are frequently required to help with this intricacy, which may be expensive for both people and organizations. The Act’s continual revisions are another factor that adds to its complexity.
Critics claim that the Act allows for tax avoidance and evasion. Taxpayers may take advantage of gaps in the Act’s provisions to legally lower their tax obligations, especially those with significant financial resources. This could result in the government losing money, which would then need to be made up by raising taxes on other groups of people. The Act’s unclear language in several places has sparked disagreements and legal action. Different interpretations by taxpayers and tax authorities may be caused by the ambiguous language of some parts. Due to the prolonged nature of disputes, tax collections may be delayed and unclear.
The Income Tax Act has stringent standards for record-keeping, documentation, and reporting. Small and medium-sized businesses, which may have trouble with the administrative side of taxation, are particularly burdened with this significant compliance load. The Act’s provisions relating to international taxation have drawn criticism for being out of date and insufficient in light of the growing globalization of business. For instance, modern global business structures may not be properly addressed by transfer pricing restrictions.
Due to the size of the taxpayer base and the requirement for effective revenue collection, the administration of the Income Revenue Act can be difficult. Critics highlight problems like lengthy legal proceedings, a lack of resources for tax authorities, and delays in reimbursements. The Income Tax Act must be updated on a regular basis to reflect shifting economic dynamics and international tax trends. Critics claim that reform initiatives are frequently sluggish and sometimes fail to get to the bottom of tax-related problems.
CONCLUSION
In conclusion, the Income Tax Act of 1961, a basic element of Indian law, serves the crucial function of generating income for the government and significantly influences the nation’s budgetary policy. My critical assessment of the Act, however, emphasizes the need for ongoing review, reform, and improvement. A long-standing problem with the Act is its complexity, which frequently calls for the help of tax experts. Transparency and taxpayer compliance would be greatly aided by the tax code being made simpler and more approachable for the general public.
To prevent disagreements and legal action, tax provisions must be clearly written. The burden on individuals and tax authorities both can be lessened by using better, unambiguous language in the Act.
To make sure that it is in line with the changing economic environment, the Act’s effects on various income groups and economic sectors should be examined on a regular basis. Inflation and economic differences are taken into account when altering tax thresholds and exemptions. The Income Tax Act shouldn’t stay unchanged in the dynamic world of taxation. It necessitates ongoing adjustments that take into account shifting economic dynamics and global taxation best practices. In essence, the Income Tax Act of 1961 has its limitations and issues, despite playing a significant role in India’s fiscal landscape. The objective should be a flexible and responsive tax structure that fosters economic growth and equity while also generating money. Collaboration among politicians, tax authorities, tax experts, and taxpayers is crucial for achieving this. The Act’s limits will be addressed and it will be made sure that it continues to serve the interests of the country through regular evaluations, modifications, and updates.
