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Unit 1: Income Tax: Basic Framework

preparation for the Napoleonic wars. Pitt’s new graduated income tax began at a levy of 2d in the Notes
pound (0.8333%) on incomes over £60 and increased up to a maximum of 2s (10%) on incomes of
over £200. Pitt hoped that the new income tax would raise £10 million but actual receipts for 1799
totalled just over £6 million (see UK income tax history for more information). The fi rst United
States income tax was imposed in July 1861, 3% of all incomes over 600 dollars (later rescinded
in 1872).

Income tax in India was imposed by Sir James Wilson of British Government in the year 1860, to
recover from losses of 1857’s revolution. Another act was made in the year 1886, which can be
treated as permanent base for Income tax system in India. This was amended several times in
1863, 1867, 1871, 1873 and 1878.
In the year 1922, ‘Central Revenue Board’ was established and Income Tax Act, 1922 was
implemented with the help of this board. Direct Taxes Administration Enquiry Committee was
appointed in the year 1958. In the year 1961, parliament announced new Income Tax Act, which
came into enforcement from April, 1962. This act was based on report submitted by Mahavir
Tyagi in 1959.
Types of Taxes:

1. Direct Taxes: Income Tax, Wealth Tax, Gift Tax etc.
2. Indirect Taxes: Excise, Customs duty, Sales tax etc.
However, Gift- Tax was removed from 30th September, 1998 and Estate Duty was removed from
the assessment year 1986-87.
1.2.1 Importance of Income Tax

The importance of income tax is enumerated as below:
1. Income tax is the prime source of fund to the government.
2. It helps in removing inequalities of income levels among people.
3. It helps in eradication of poverty, as the government spends the amount collected through
Income tax, for welfare of poor people.

1.2.2 Principles of Income Tax

The “tax net” refers to the types of payment that are taxed, which included personal earnings
(wages), capital gains, and business income. The rates for different types of income may vary
and some may not be taxed at all. Capital gains may be taxed when realised (e.g. when shares
are sold) or when incurred (e.g. when shares appreciate in value). Business income may only be

taxed if it is significant or based on the manner in which it is paid. Some types of income, such
as interest on bank savings, may be considered as personal earnings (similar to wages) or as a
realised property gain (similar to selling shares). In some tax systems, personal earnings may be

strictly defined where labour, skill, or investment is required (e.g. wages); in others, they may be
defined broadly to include windfalls (e.g. gambling wins).

Tax rates may be progressive, regressive, or flat. A progressive tax taxes differentially based on
how much has been earned. A tax system may use different taxation methods for different types
of income. However, the idea of a progressive income tax has garnered support from economists
and political scientists of many different ideologies, from Adam Smith in the Wealth of Nations
to Karl Marx in the Communist Manifesto.
Personal income tax is often collected on a pay-as-you-earn basis, with small corrections made
soon after the end of the tax year. These corrections take one of two forms: payments to the
government, for taxpayers who have not paid enough during the tax year; and tax refunds from

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