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Sansad TV: 75 Years- Laws that Shaped India- Income Tax Act, 1961



Income Tax Act 1961:

  • Income Tax Act, 1961 is an act to levy, administrate, collect & recover Income-tax in India. It came into force from 1st April 1962.
  • The Income-tax Act, 1961 is the charging Statute of Income Tax in India.
  • The Government of India brought a draft statute called the “Direct Taxes Code” intended to replace the Income Tax Act,1961 and the Wealth Tax Act, 1957.
  • Income-tax Act has provided separate provisions with respect to levy of tax on income received in advance as well as the income with respect of which the amount has not yet been received.
  • A person also has to keep track of his TDS deducted while calculating his final tax liability at the end of the year.
  • However, the bill was later scrapped because of wealth tax act being repealed.

Tax reforms in recent times

  • Indirect taxes reforms: The integration of State and Central indirect taxes in the GST led to the abolition of entry tax and the Central Sales Tax (CST). GST is an Indirect tax which introduced to replace a host of other Indirect taxes such as VAT service tax, purchase tax, excise duty, and so on.
  • Reduction in the corporate tax rate for all existing domestic companies: In order to promote growth and investment, the Government has brought in a historic tax reform through the Taxation Laws (Amendment) Ordinance 2019 which provided a concessional tax regime of 22% for all existing domestic companies from FY 2019-20 if they do not avail any specified exemption or incentive.
  • The incentive for new manufacturing domestic companies: In order to attract investment in the manufacturing sector, the Taxation Laws (Amendment) Ordinance 2019 has drastically reduced the tax rate to 15% for new manufacturing domestic companies if such company does not avail any specified exemption or incentive.
  • Reduction in MAT rate: In order to provide relief to the companies which continue to avail exemption/deduction and pay tax under MAT, the rate of MAT has also been reduced from 18.5% to 15%.
  • Exemption from income-tax to individuals earning income up to Rs. 5 lakh and increase in standard deduction: Further, to provide complete relief from payment of income-tax to individuals earning taxable income up to Rs. 5 lakh, the Finance Act, 2019 exempted an individual taxpayer with taxable income up to Rs. 5 lakh by providing 100% tax rebate.

 Rationalization and simplification:

  • The rate structure – slabs of 10%, 20% & 30% in personal income tax – has broadly remained the same in the last 20 years.
  • Further, there is a need for rationalization of exemptions and a rethink of incentives on savings (such as small savings schemes like PPF)
  • Simplify corporate tax rate structure and phase out exemptions: The differential in effective corporate tax rate across sectors is very high. E.g. in 2014-15, effective tax rates for cement manufacturers, consultancy service firms and banking service firms were 9 %, 16 % and 35 % respectively
  • Wide tax base will help deal with the problem of potential revenue loss due to lower tax rates and simplified tax structure.
  • Reducing tax litigation: Tendency of tax officials to initiate an action without the necessary justification or assessment is reflected from low success rate of appeals (~30%).
  • Protracted tax litigation in India has not only put a burden on Indian judiciary but has also cost the government exchequer.
  • Ensure balance between direct and indirect taxes: Contribution of direct taxes has declined from 60% in 2010-11 to 52% in 2017-18. Increasing share of indirect taxes in revenue is alarming as indirect taxes are regressive which hurt poor people more.
  • Clarity in cross border transactions: Till now, source rule of taxation for non-residents was linked to physical presence (permanent establishment) which has led to protracted litigation, base erosion and profit shifting.


  • Taxation is not just a vehicle for raising state revenue. It can also be critically important for economic and political development.
  • The legacy of contentious, adversarial tax issues from the past is being cleaned up.
  • Tax administration is being improved: now around 95% of filings are electronic, tax refunds are now being issued in a record 7-8 days.
  • However, the success has only been limited and sporadic in mobilizing larger tax revenue and still, India remains largely a tax non-compliant society. For this, further reforms as per Direct Tax code is the need of the hour.