Introduction to Tax Law in India (Income Tax Act, 1961)

September 12, 2019

Tax is the compulsory financial charge levy by the government on income, commodity, services, activities or transaction. The word ‘tax’ derived from the Latin word ‘Taxo’. Taxes are the basic source of revenue for the government, which are utilized for the welfare of the people of the country through government policies, provisions and practices.

In India, Income Tax was first time introduced in the year 1860 by Sir James Wilson in order to meet the loss caused on account of ‘military mutiny’ in 1857.

In the year 1886, a separate Income Tax Act was passed, this act was in force for a long time, subject to the various amendments from time to time. In the year 1918, a new Income Tax Act was passed, but again, it was replaced by another new act of 1992. The Act of 1922 became very complicated due to various amendments. This act remains in force to the assessment year 1961-62. In the year 1956, the Government of India referred to the Law Commission in order to simplify the law and also to prevent the evasion of Tax.

The Law Commission submitted its report in September 1958 in consultation with the Ministry of Law. At present, this law is governed by the Act of 1961 which is commonly known as Income Tax Act, 1961 which came into force on and from 1st April 1962. It applies to the whole of India, including the state of Jammu & Kashmir.

Any law is in itself is not complete unless the gaps are being filled. The law of Income Tax in India governed by the Income Tax Act of 1961 and the gaps are being filled by the Income Tax Rules, Notifications, Circulars and judicial pronouncement including rulings by the Tribunal.

The Income Tax law in India consists of the following components;

  1. Income Tax Act, 1961: The Act contains the major provisions related to Income Tax in India.
  2. Income Tax Rules, 1962: Central Board of Direct Taxes (CBDT) is the body which looks after the administration of Direct Tax. The CBDT is empowered to make rules for carrying out the purpose of this Act.
  3. Finance Act: Every year Finance Minister of Government of India presents the budget to the parliament. Once the finance bill is approved by the parliament and get the clearance from President of India, it became the Finance Act.
  4. Circulars and Notifications: Sometimes the provisions of an act may need clarification and that clarification usually in a form of circulars and notifications which has been issued by the CBDT from time to time. It includes clarifying the doubts regarding the scope and meaning of the provisions.

    Constitution and Tax Law

    Every statute gains sanction from the law of land, i.e.,the Constitution of India. Similarly, the government is authorised by the Constitution to collect the taxes. According to Article 265 of the Constitution of India, no tax shall be levied or collected except by authority of law. Thus, the tax levied and collected must be within the competency of authority authorised by the legislature.

    Entry 82 of List I of Seventh Schedule of the Constitution of India confer power on Parliament to levy taxes on income other than agricultural income. Thus, Income Tax is under the Union list and henceforth Central Government is authorised and responsible for the collection of income tax.

    The Central Government enjoys the power to collect taxes on income except for the tax on agricultural income, which is being enjoyed by the State Government. Entry 46 of List II of Seventh Schedule of the Constitution of India provides that the State Government has the power to collect taxes on agricultural income.

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