What Is Income Tax Describe The History Of Income Tax In India?

When Was Income Tax First Introduced And More.

History of Income Tax in India

• Income tax is mandatory liability for the citizens of the country.
• Also, there are two major types of income tax in India, which are direct and indirect.
• The taxation system in India is derived from the Manusmriti and Arthashastra period.
• The current taxation system is based on ancient systems that were rooted in the theory of 'Maximum Social Welfare'.
• In India, the income tax system was first introduced in the year 1860 by Sir James Wilson.
• This system was formulated to meet the financial gaps sustained by the Government on account of the military mutiny of 1857.
• James Wilson arrived in India in 1859 right after the British sepoy mutiny.
• It is when the Indians were in the first war of independence.
• Wilson had a deep knowledge of economics and how to deal with the financial situation.
• Wilson was a strong and liberal proponent of financial policies.
• In the year 1918 another income tax system was passed, and it was replaced by the new act passed in 1922.
• The Income Tax Act of 1922 has also remained in force from the assessment year 1961 to 1962.
• In discussion with the Law Ministry, in 1961 the Income Tax Act was passed.
• This act was brought into force from April 1962, and it was immediately applied to entire India.
• From the year 1960, various amendments were made to this act by the Union Budget every year.

Manusmriti

1. Manusmriti is the predominant and earliest source of income tax provisions in India that emphasise strategic impression and regulation of tax and its subjects.
2. The income tax provisions were given by Manusmriti script which includes -

• Traders would pay 20% of the income.
• Artisans would pay 20% of the income.
• Agriculturists would pay ⅙, ⅛, 1/10 of their total production.

Arthashastra

1. Arthshastra is another prominent taxation law and provision system in India.
2. Earlier, it was considered as a fundamental Indian tax mentioning the financial administration and financial laws structurally.
3. It also highlighted the taxation for import and export of merchandise, toll taxes, etc.
4. The income tax provisions stated by arthshastra include -

• Affluent to pay high tax returns and less privileged individuals were levied with minimal taxes.
• Rule book with limited text flexibility towards the tax collectors.
• Agriculturists would pay ⅙ or ⅛ of their total land taxation.

The Income Tax Act of 1860

• The tax policies in 1860 were passed by the British Government of India, and it made the most influencing changes in the contemporary tax system.
• The income tax policies and laws were structured under British India rule, and the amount was also credited to the event of mutiny.
• This act was applied for 5 years and the latest quashed. Its main features were -

1. The premium payable for life insurance was exempted from taxation.
2. Hindu undivided families were addressed as an individual taxable unit.

Income Tax Act of 1961

• Income Tax Act, 1961 was enacted by the Indian Government in 1961.
• The history of this act arrived in a new Indian period right after the enactment of the former law.
• The features of this act are -

1. Income from other sources.
2. Income from house property.
3. Income from business and profession.
4. Income from earnings.
5. Income from capital gains.

An Introduction to Income Tax and Small Businesses

• One of the most fundamental questions every business owner asks is: if they are required to pay for the business tax and the answer is 'Yes'.
• Paying income tax is mandatory for the business owners, whether it is a small or large company.
• If the business revenue is above the threshold limit, then the businesses have to pay for the applicable tax.
• A company is dubbed as a small enterprise, if the paid-up capital of the company is less than ₹ 50 lakhs, and the higher amount is not more than ₹ 5 crore.
• Small businesses are also bank-dependent borrowers, and they can influence the capital requirement in terms of loan or bank lending terms.

Here are some tips for small business owners to limit their taxable income-

1. You can reduce travel expenses for personal on business reasons to limit your taxable income.
2. You can highlight the expenses like home office expenses, vehicle expenses, and many more to reduce taxable income.
3. The reimbursements that you are referring to the employees for their equipment, entertainment, or travel also comes under the accountable plan.
4. As a small business owner, you can deduct all these expenses.

Which Income Tax Benefits are Available to Small Business Owners?

• Any eligible assessee having gross receipt of a minimum of Rs. 2 crores (annually) can avail of the benefits of presumptive taxation in India.
• Under the presumptive taxation scheme, the eligible small business owners do not have to organise account books, and they can declare 8% for 6% of the gross receipt as their taxable income.
• This scheme intends to free small business owners from auditing and bookkeeping requisites.
• Resident individuals, i.e., proprietorship concerns, partnership firms, and resident HUFs, can avail the advantages of this scheme.
• The average corporate income tax for small businesses is less than 25%.
• In contrast, the corporate income tax for companies with above-average turnover is around 30%.
• As a small business owner, it is important to know a variety of tax-related concepts.
• It is because the diversity of business taxes are based on your business processes where you might wonder which one is required to pay earlier.
• Here is a list of the most prominent small business taxes that you can refer to -

1. Personal income tax
2. Payroll tax
3. Fringe benefits tax
4. Goods and service tax
5. Excise tax
6. Custom tax or duty
7. Corporate income tax

• If the business owner runs the business under the sole proprietorship, they generally have to pay personal income tax on their earnings.
• As the business expands, it gets essential to hire more employees to withhold personal income tax.
• Once the business’ aggregated turnover processes a certain mark, the business owners have to pay for GST returns on the goods and services that they sell.

Closing Thoughts

1. The history of income tax in India is directed to assist the understanding of income tax practices.
2. The intuitive legacy of the taxation rules in India functions as a directing light for existing Indian tax administration.
3. The current income tax system undertakes the requirements for contemporary taxpayers in India.
4. Business owners can leverage the existing tax reforms to formulate a marketing plan that can align with their financial activities.
5. You can use comprehensive accounting software to file your taxes and make the business conduct efficient.

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FAQs

Q- Which illegal structures business owners can use to run their business in India?

• Small business owners in India usually run the business as either a partnership firm, proprietorship concerns, or as small companies.
• Proprietorship concern businesses are administered by individuals, partnership firms are administered under the Indian Partnership Act (1932).
• There is another special partnership named Limited Liability Partnership (LLP) that can be incorporated into the business through the ministry of corporate affairs.
• Small business owners can also take advantage of special income tax provisions.

Q- Are LLPs essential to file the income tax return?

1. LLP is treated as a separate legal document formulated under the Limited Liability Partnership Act.
2. They are essential to file an income tax return by 31st July every year.

Q- How can business owners pay the income tax physically?

• The income tax can be submitted physically if the business account is expected to be audited, then the payment can be made directly through e-mode.

Q- What is the concept of short term and long term capital gains?

1. Any business capital asset occupied for more than three years is categorised as a long term capital asset.
2. Any asset that is sold within a period of three years is categorised as a short term asset.
3. Short term assets are taxed at a flat rate of 50%.