The present tax system in India virtually owes its’ origin to the British legacy. The prevailing economic scenario that existed in the post Sepoy Mutiny period forced the British rulers to impose a tax on income to augment government funding. Accordingly, in the year 1860, an Act to tax income was passed. Income arising out of profits from trade profession and property was taxed fixing the basic exemption limit of income for taxation at Rs.500. The Act was in operation till 1865 when it ceased to exist.
However in the year 1867, again due to the demanding situation of the economy a Licence Tax was imposed for identical purposes for one year and thereafter, with effect from 1st April 1869 an Act to impose Income Tax was reintroduced with variable rates for different ranges of income slab starting from Rs.500 to Rs.1,00,000 and above. Finally, as an outcome of the recommendations of All India Income tax Committee formed in 1921, by Act XI of 1922 Income Tax Act 1922 was enacted merging two existing Acts on Income Tax and Super Tax. In this Act apart from laying a foundation and making a proper tuning of the administrative machineries and functionaries, the operative portion of the statute was also given a more meaningful rationale. Concept of ‘previous year’, ‘income’, ‘taxable income’, ‘total income’, obligation of an ‘employer’ were all introduced .
Due to the impact of flow of money in few hands in the post second world war period and after the independence of the country in 1947, it was felt necessary both to augment government funding and to have a control on the economy with certain checks and balances. The 1922 Act was found to be inadequate. In 1954 John Mathai Commission or Taxation Enquiry Commission was set up to carry out an in depth study of the tax laws and their administration. Thereafter in 1956 at the request of the Government of India, famous economist Prof Nicholas Kaldor made an examination of the tax policies of the country and made quite a number of proposals for broadening the tax base and removing the prevalent inequalities. The primary structure of the present day tax system mostly depended on these studies and recommendations. Resultantly, Income Tax Act 1961 was enacted in the Parliament which came into operation with effect from 1st April 1962.