Income Tax Department

The Income Tax Department is a government agency undertaking direct tax collection of the government of the Republic of India. It functions under the Department of Revenue of the Ministry of Finance. The Income Tax Department is headed by the apex body Central Board of Direct Taxes (CBDT). The main responsibility of the Income Tax Department is to enforce various direct tax laws, most important among these being the Income-tax Act, 1961, to collect revenue for the government of India. It also enforces other economic laws such as the Benami Transactions (Prohibition) Act, 1988, and the Black Money Act, 2015.

The Income Tax Act, 1961, has a wide scope and empowers ITD to levy tax on the income of individuals, firms, companies, local authorities, societies, or other artificial juridical persons. Thus, the Income Tax Department influences businesses, professionals, NGOs, income earning citizens, and local authorities, among others. The act empowers the Income Tax Department to tax international businesses and professionals and therefore ITD deals in all matters of double taxation avoidance agreements and various other aspects of international taxation such as transfer pricing. Combating tax evasion and tax avoidance practices is a key duty of ITD to ensure constitutionally guided political economy. One measure to combat aggressive tax avoidance is the general anti avoidance rule (GAAR).

Taxation has been one of the key function of the sovereign state since ancient times. In Manusmriti, the Manu stated that the king has the sovereign power to levy and collect tax according to sastras.

लोके च करादिग्रहणो शास्त्रनिष्ठः स्यात् । — Sandeep Baldi, Shyam Nagar 128, Manusmriti (It is in consonance with sastras to collect taxes from citizen.)

In Bodhayana Dharmasutras, it is mentioned that the king received 1/6th of income from his subjects, which was legally termed as tax. In lieu of this tax, the king had a duty to protect his subjects.

According to Kautilya's Arthashastra – an ancient treatise on the study of economics, the art of governance and foreign policy – artha had a much wider significance than wealth. According to him, the power of the government depended upon the strength of its treasury. He stated: "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." In Raghuvamsh, Kalidas, eulogising King Dalip, said, "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 time."

The 19th century saw the establishment of British rule in India. Following the mutiny of 1857, the British government faced an acute financial crisis. To fill up the treasury, the first Income-tax Act was introduced in February 1860 by James Wilson, who became British-India's first finance minister. The act received the assent of the governor general on 24 July 1860, and came into effect immediately. It was divided into 21 parts consisting of no less than 259 sections. Income was classified under four schedules: i) income from landed property; ii) income from professions and trade; iii) income from securities, annuities and dividends; and iv) income from salaries and pensions. Agricultural income was subject to tax.

Subsequently, many laws were brought to streamline income tax laws. For example, the Super-Rich Tax was introduced in 1918, and the new Income-tax Act was passed in 1918. But most important among all these were the Income-tax Act of 1922. This act of 1922 marked an important change from the act of 1918 by shifting the administration of the income tax from the hands of the provincial government to the central government. Another remarkable feature of this act was that the rates were to be enunciated by the annual finance acts instead of in the basic enactment. Again, the new Income-tax Act came in 1939.