Exploring the Historical Roots and Evolution of Taxation in India

This essay explores the history of taxation in India, tracing its roots from ancient times through the Mauryan Empire, as described in texts like Manu Smriti and Kautilya's Arthashastra, to the modern era. It highlights the evolution of tax systems, administrative changes, and the underlying philosophies that shaped taxation policies. The analysis covers various aspects of tax collection, including direct and indirect taxes, revenue sources, and the role of taxation in governance and public finance. The essay also touches upon the post-1922 developments and structural changes in the Income-tax Department, reflecting the socio-economic thinking in India. Desklib offers further resources and solved assignments for students studying this topic.

Follow
us on @IncomeTaxIndiaASK 1800 180 1961/ 1961
Employees Login िहंदी
x (https://incometaxindia.gov.in/Pages/atoz-index.aspx)
(https://incometaxindia.gov.in/Pages/search-tips.aspx) /
Advance Search
Home About Us Taxpayers'
Charter
Grievance Redressal Forms/Downloads
Taxpayer
Services
Publicity
Campaign
Contact
us
Feedback
History of Direct Taxation
History of Taxation Pre – 1922

"It was only for the good of his subjects that he collected
taxes from them, just as the Sun draws moisture from the
Earth to give it back a thousand fold" –
--Kalidas in Raghuvansh eulogizing KING DALIP.
It is a matter of general belief that taxes on income and
wealth are of recent origin but there is enough evidence to
show that taxes on income in some form or the other were
levied even in primitive and ancient communities. The origin
of the word "Tax" is from "Taxation" which means an
estimate. These were levied either on the sale and purchase
of merchandise or livestock and were collected in a
haphazard manner from time to time. Nearly 2000 years
ago, there went out a decree from Ceaser Augustus that all
the world should be taxed. In Greece, Germany and Roman
Empires, taxes were also levied sometime on the basis of
turnover and sometimes on occupations. For many
centuries, revenue from taxes went to the Monarch. In
Northern England, taxes were levied on land and on
moveable property such as the Saladin title in 1188. Later
on, these were supplemented by introduction of poll taxes,
and indirect taxes known as "Ancient Customs" which were
duties on wool, leather and hides. These levies and taxes in
various forms and on various commodities and professions
were imposed to meet the needs of the Governments to
meet their military and civil expenditure and not only to
ensure safety to the subjects but also to meet the common
needs of the citizens like maintenance of roads,
administration of justice and such other functions of the
State.

In India, the system of direct taxation as it is known today,
has been in force in one form or another even from ancient
times. There are references both in Manu Smriti and
Arthasastra to a variety of tax measures. 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.B.Sarkar commends the system of
taxation in ancient India in his book "Public Finance in
Ancient India", (1978 Edition) 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 composit population".
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 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.
The reason why Kautilya gave so much importance to public
finance and the taxation system in the Arthasastra is not far
to seek. According to him, the power of the government
depended upon the strength of its treasury. He states –
"From the treasury, comes the power of the government,
and the Earth whose ornament is the treasury, is acquired
by means of the Treasury and Army". 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.
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 over all
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, 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 an unique treatise. It lays down in precise
terms the art of state craft including economic and
financialadministration.
History of Taxation Post 1922
1. Preliminary :
The rapid changes in administration of direct taxes, during
the last decades, reflect the history of socio-economic
thinking in India. From 1922 to the present day changes in
direct tax laws have been so rapid that except in the bare
outlines, the traces of the I.T. Act, 1922 can hardly be seen
in the 1961 Act as it stands amended to date. It was but
natural, in these circumstances, that the set up of the
department should not only expand but undergo structural
changes as well.
2. Changes in administrative set up since the
inception of the department:
The organisational history of the Income-tax Department
starts in the year 1922. The Income-tax Act, 1922, gave, for
the first time, a specific nomenclature to various Income-tax
authorities. The foundation of a proper system of
administration was thus laid. In 1924, Central Board of
Revenue Act constituted the Board as a statutory body with
functional responsibilities for the administration of the
Income-tax Act. Commissioners of Income- tax were
appointed separately for each province and Assistant
Commissioners and Income-tax Officers were provided

under their control. The amendments to the Income tax Act,
in 1939, made two vital structural changes: (i) appellate
functions were separated from administrative functions; a
class of officers, known as Appellate Assistant
Commissioners, thus came into existence, and (ii) a central
charge was created in Bombay. In 1940, with a view to
exercising effective control over the progress and inspection
of the work of Income-tax Department throughout India, the
very first attached office of the Board, called Directorate of
Inspection (Income Tax) - was created. As a result of
separation of executive and judicial functions, in 1941, the
Appellate Tribunal came into existence. In the same year, a
central charge was created in Calcutta also.
World War II brought unusual profits to businessmen.
During 1940 to 1947, Excess Profits Tax and Business
Profits Tax were introduced and their administration
handed over to the Department (These were later
repealed in 1946 and 1949 respectively). In 1951, the
1st Voluntary Disclosure Scheme was brought in. It was
during this period, in 1946, that a few Group 'A' officers
were directly recruited. Later on in 1953, the Group 'A'
Service was formally constituted as the 'Indian
Revenue Service'.
This era was characterised by considerable emphasis
on development of investigation techniques. In 1947,
Taxation on Income (Investigation) Commission was
set up which was declared ultra vires by the Supreme
Court in 1956 but the necessity of deep investigation
had by then been realised. In 1952, the Directorate of
Inspection (Investigation) was set up. It was in this year
that a new cadre known as Inspectors of Income Tax
2.1
2.2

was created. The increase in 'large income' cases
necessitated checking of the work done by
departmental officers. Thus in 1954, the Internal Audit
Scheme was introduced in the Income-tax Department.
As indicated earlier, in 1946, for the first time a few
Group A officers were recruited in the department.
Training them was important. The new recruits were
sent to Bombay and Calcutta where they were trained,
though not in an organised manner. In 1957, I.R.S.
(Direct Taxes) Staff College started functioning in
Nagpur. Today this attached office of the Board
functions under a Director-General. It is called the
National Academy of Direct Taxes. By 1963, the I.T.
department, burdened with the administration of
several other Acts like W.T., G.T., E.D., etc., had
expanded to such an extent that it was considered
necessary to put it under a separate Board.
Consequently, the Central Board of Revenue Act, 1963
was passed. The Central Board of Direct Taxes was
constituted, under this Act.
The developing nature of the economy of the country
brought with it both steep rates of taxes and black
incomes. In 1965, the Voluntary Disclosure Scheme
was brought in followed by the 1975 Disclosure
Scheme. Finally, the need for a permanent settlement
mechanism resulted in the creation of the Settlement
Commission.
A very important administrative change occurred during
this period. The recovery of arrears of tax which till
1970 was the function of State authorities was passed
on to the departmental officers. A whole new wing of
2.3
2.4
2.5

Officers - Tax Recovery Officers was created and a new
cadre of post of Tax Recovery Commissioners was
introduced w.e.f. 1-1-1972.
In order to improve the quality of work, in 1977, a new
cadre known as IAC (Assessment) and in 1978 another
cadre known as CIT (Appeals) were created. The
Commissioners' cadre was further reorganised and five
posts of Chief Commissioners (Administration) were
created in 1981.
Tax Reforms : Certain important policy and
administrative reforms carried out over the past few
years are as follows :-
(a). The policy reforms include :-
• Lowering of rates;
• Withdrawls/reduction of major incentives;
• introduction of measures for presumptive
taxation;
• simplification of tax laws, particularly relating to
capital gains; and
• widening the tax base.
(b). The administrative reforms include :--
• Computerisation involving allotment of a unique
identification number to tax payers which is
emerging as a unique business identification
number; and
2.6
2.7

• realignment of the available human resources
with the changed business needs of the
organisation.
Computerisation : Computerisation in the Income-tax
Department started with the setting up of the
Directorate of Income tax (Systems) in 1981. Initially
computerisation of processing of challans was taken
up. For this 3 computer centres were first set up in
1984-85 in metropolitan cities using SN-73 systems.
This was later extended to 33 major cities by 1989. The
computerized activities were subsequently extended to
allotment of PAN under the old series, allotment of
TAN, and pay roll accounting. These computer centres
used batch process with dumb terminals for data entry.
In 1993 a Working Group was set up by the
Government to recommend computerisation of the
department. Based on the report of the Working Group
a comprehensive computerisation plan was approved
by the Government in October, 1993. In pursuance of
this, Regional Computer Centres were set up in Delhi,
Mumbai, and Chennai in 1994-95 with RS6000/59H
Servers. PCs were first provided to officers in these
cities in phases. The Plan involved networking of all
users on LAN/WAN. Network with leased data circuits
were accordingly set up in Delhi, Mumbai and Chennai
in Phase-I during 1995-96. A National Computer Centre
was set up at Delhi in 1996-97. Integrated application
software were developed and deployed during 1997-
99. Thereafter, RS6000 type mid range servers were
provided in the other 33 Computer Centres in various
major cities in 1996-97. These were connected to the
National Computer Centre through leased lines. PCs
2.8