National Income Tax Day 2024: A Journey of Transformation

National Income Tax Day marks a significant milestone in India’s fiscal history. The day is marked on July 24. Income tax is a crucial government levy on the income earned by individuals and businesses during a financial year. The concept of “income” is broadly defined under Section 2(24) of the Income Tax Act, encompassing various sources of earnings. To understand the scope of income tax, it’s essential to break down the different categories of taxable income:

Types of Taxable Income

1. Income from Salary: This category includes all forms of compensation an employee receives from their employer. It’s not limited to just the basic pay but extends to various components such as allowances, commissions, and even retirement benefits. The comprehensive nature of this category ensures that all monetary benefits an employee receives are accounted for in the tax calculation.
2. Income from House Property: Any rental income generated from residential or commercial properties falls under this category. Whether you own a small apartment or a large commercial complex, if you’re earning rent from it, that income is taxable.
3. Income from Business or Profession: This category covers the profits earned from any business or professional activities. It’s important to note that while the gross income is considered, the tax is calculated on the net profit after deducting legitimate business expenses. This approach ensures that the tax burden is proportional to the actual earnings of the business or professional.
4. Income from Capital Gains: When you sell capital assets such as property, stocks, or precious metals like gold or silver, the profit you make is considered a capital gain and is taxable. The tax treatment differs based on whether these gains are classified as long-term or short-term, depending on the duration of asset ownership.
5. Income from Other Sources: This is a catch-all category that includes any income not covered by the above categories. It can include interest earned on savings accounts, family pensions, gifts received above a certain value, lottery winnings, and returns from various investments. The broad nature of this category ensures that all forms of income are captured within the tax net.

Historical Background of Income Tax in India

The story of income tax in India is a tale of fiscal evolution, marking the country’s journey from a colonial economy to a sovereign nation with a robust financial system.

The Genesis: 1860

Income Tax Day, celebrated on July 24th, commemorates a pivotal moment in India’s fiscal history. It was on this day in 1860 that Sir James Wilson introduced the concept of income tax in India. This initial implementation, while rudimentary, laid the crucial groundwork for the country’s future tax structure.

The Formative Years: 1922-1924

The real structuring of India’s income tax system came with the Income-tax Act of 1922. This comprehensive legislation did more than just define tax rates; it established a formal hierarchy of income tax authorities and created a systematic framework for tax administration. The Act was a significant step towards modernizing India’s fiscal policies.

Building on this foundation, the Central Board of Revenue Act of 1924 further strengthened the tax structure. This Act established the Board as a statutory body, giving it the authority and responsibility to administer the Income-tax Act. During this period, the tax administration saw significant expansion, with Commissioners of Income-tax appointed for each province, supported by Assistant Commissioners and Income-tax Officers.

Professional Development: 1946-1957

The year 1946 marked another milestone with the recruitment of Group A officers, initiating a new era of professionalism in tax administration. The initial training for these officers was conducted in Bombay and Calcutta, laying the foundation for a skilled tax workforce.

A decade later, in 1957, the establishment of the I.R.S. (Direct Taxes) Staff College in Nagpur, later renamed the National Academy of Direct Taxes, further enhanced the professional development of tax officials. This institution played a crucial role in shaping the skills and knowledge of India’s tax administrators.

The Technological Revolution: 1981-2009

The income tax department embraced technology in 1981, marking the beginning of the computerization era. The initial phase focused on processing challans (official forms or receipts) electronically, a significant step towards efficiency in tax collection and record-keeping.

The technological advancement reached its pinnacle in 2009 with the establishment of the Centralized Processing Centre (CPC) in Bengaluru. This state-of-the-art facility was designed to handle the bulk processing of e-filed and paper returns. Operating in a jurisdiction-free manner, the CPC represented a major leap in efficiency and modernization of tax processing.

The Importance of Income Tax in Nation Building

Income tax is not merely a financial tool; it’s a cornerstone of nation-building, playing a multifaceted role in shaping the economic and social fabric of a country.

Funding Essential Services

At its core, income tax provides the necessary revenue for the government to ensure national security and fund essential services. These services include:

• Healthcare: Enabling the government to invest in public health infrastructure, hospitals, and medical research.
• Education: Funding schools, universities, and educational programs that shape the future workforce.
• Infrastructure: Supporting the development of roads, bridges, public transportation, and other critical infrastructure that forms the backbone of economic growth.

Economic Development and Job Creation

The revenue generated from income tax is a key driver of economic development. It allows the government to:

• Invest in various sectors of the economy, stimulating growth and innovation.
• Create job opportunities through public works projects and government initiatives.
• Provide subsidies and support to industries, helping them grow and compete globally.

Social Equity and Wealth Redistribution

Income tax plays a crucial role in maintaining social balance by:

• Influencing the distribution of wealth in society.
• Funding social welfare programs that support underprivileged sections of society.
• Creating a progressive tax structure where higher earners contribute more, promoting a sense of social responsibility.

Strengthening State Power and Accountability

The process of taxation helps in:

• Building and sustaining state power by providing the financial means to govern effectively.
• Establishing a social contract between the state and its citizens, where tax compliance is exchanged for government services and representation.
• Fostering greater accountability, as citizens who pay taxes are more likely to demand transparency and efficiency in government operations.

Enhancing Governance and State Capacity

An effective tax system leads to:

• Development of more responsive and accountable governance structures.
• Expansion of state capacity to address complex societal challenges.
• Enhancement of the state’s legitimacy through the provision of efficient public services.

Creating a Virtuous Cycle

Income tax contributes to a positive feedback loop in society:

• Improved public services lead to greater trust in government.
• Increased trust encourages better tax compliance.
• Better compliance results in more resources for public good, further improving services.

In essence, income tax is not just about revenue generation; it’s a fundamental tool for creating effective, self-sustaining states capable of meeting their citizens’ needs and promoting overall societal welfare. It extends beyond mere financial considerations, contributing significantly to the building of a stable, equitable, and prosperous society.

Current Landscape of Personal Income Tax in India

The personal income tax (PIT) landscape in India has witnessed remarkable growth in recent years, reflecting the country’s economic expansion and improved tax compliance measures.

Financial Year 2020-21

Despite the economic challenges posed by the COVID-19 pandemic, the gross personal income tax, including the Securities Transaction Tax (STT), stood at an impressive ₹5.75 lakh crore. This substantial contribution to the national revenue demonstrated the resilience of India’s tax system even in the face of global economic turmoil.

Financial Year 2021-22

As the economy began to recover from the pandemic’s impact, there was a notable increase in gross PIT collections. The figure rose to ₹7.10 lakh crore, marking a significant year-on-year growth. This increase can be attributed to:

• Gradual economic recovery post-pandemic
• Enhanced tax collection mechanisms
• Improved compliance measures

Financial Year 2022-23

The upward trend continued, with PIT collections reaching ₹9.67 lakh crore. This substantial growth reflected:

• The effectiveness of ongoing tax reforms
• A buoyant economic environment
• Increased tax awareness and compliance among citizens

Financial Year 2023-24

By this year, the personal income tax collections, including STT, had surged to an impressive ₹12.01 lakh crore (provisional, as of April 21, 2024). This significant increase underscores:

• The resilience and robustness of the Indian economy
• Improved taxpayer compliance
• The government’s successful efforts to broaden the tax base

The consistent upward trajectory of PIT collections highlights the crucial role of income tax in supporting India’s economic infrastructure and public welfare programs.

Budget 2024-25: Key Income Tax Slab Changes

The Budget for 2024-25 introduced several significant changes to the income tax regime, aimed at benefiting salaried employees and pensioners:

Standard Deduction Increase

For salaried employees opting for the new tax regime, the standard deduction was increased from ₹50,000 to ₹75,000. This change provides immediate relief to a large section of the workforce, effectively increasing their take-home pay.

Enhanced Deduction on Family Pension

Recognizing the needs of pensioners, the deduction on family pension was enhanced from ₹15,000 to ₹25,000. This increase provides additional financial support to pensioners and their families.

Assessment Reopening Time Limit

The time limit for reopening assessments was revised. Now, assessments can be reopened beyond three years, up to five years from the end of the year of assessment, only if the escaped income is more than ₹50 lakh. This change provides greater certainty to taxpayers while still allowing the tax department to address significant cases of undisclosed income.

Benefits Under the Revised Tax Regime

The revised tax regime offers substantial benefits, with salaried employees potentially seeing benefits of up to ₹17,500 in income tax. This reduction in tax liability is expected to boost disposable income and stimulate consumer spending.

Notable Initiatives to Boost Tax Collection and Expand Tax Base

The Central Government has implemented several strategic initiatives to enhance tax collection, expand the tax base, and promote voluntary compliance. These measures leverage technology and aim to simplify the tax filing process:

Simplification of Personal Income Tax

1. Finance Act, 2020: Introduced an option for individual taxpayers to pay income tax at lower slab rates if they forego specified exemptions and incentives. This move aimed to simplify tax calculations and reduce the burden on taxpayers who prefer a straightforward tax structure.
2. Finance Act, 2023: Expanded the scope and reduced the rates applicable to individuals. Effective from the assessment year 2024-25, the rates under section 115BAC(1A) of the Income-tax Act, 1961, became the default rates. This change was designed to benefit a larger number of taxpayers and encourage adoption of the new tax regime.

Introduction of New Form 26AS

The new Form 26AS is a comprehensive tax statement that contains:

• Information on the deduction or collection of tax at source
• Details of specified financial transactions (SFT)
• Payment of taxes
• Demand and refund information

The inclusion of SFT data in Form 26AS makes taxpayers aware of their transactions beforehand, encouraging them to disclose their true income and promoting transparency.

Pre-filling of Income Tax Returns (ITR)

To simplify tax compliance, pre-filled ITRs have been provided to individual taxpayers. This feature auto-populates information such as:

• Salary income
• Bank interest
• Dividends
• Other income sources

By reducing the manual entry of data, this initiative aims to minimize errors and save time for taxpayers.

Introduction of Updated Return

Section 139(8A) of the Act introduced the concept of an updated return, which:

• Allows taxpayers to update their return anytime within two years from the end of the relevant assessment year
• Facilitates the filing of an updated return by voluntarily admitting omissions or mistakes
• Requires payment of an additional tax as applicable

This provision gives taxpayers an opportunity to rectify errors or disclose additional income without facing severe penalties.

E-Verification Scheme

This scheme enables authorities to collect information for accurate and comprehensive determination of a taxpayer’s income. It aims to:

• Reduce tax evasion by cross-referencing financial information from various sources
• Provide taxpayers with relevant financial information collected from different entities

Establishment of Dispute Resolution Committee (DRC)

To reduce litigation and promote dispute resolution for small taxpayers, a Dispute Resolution Committee has been constituted. Key features include:

• Eligibility for taxpayers with taxable income up to ₹50 lakh and disputed income up to ₹10 lakh
• Digital platform for dispute resolution under the e-Dispute Resolution Committee Scheme, 2021

This initiative aims to provide a faster and more accessible dispute resolution mechanism for smaller tax cases.

Expansion of Scope of TDS/TCS

To bring new taxpayers into the income tax net, the scope of Tax Deducted at Source (TDS) and Tax Collected at Source (TCS) was expanded to include:

• Huge cash withdrawals
• Foreign remittance
• Purchase of luxury cars
• E-commerce participants
• Sale of goods

This expansion aims to capture transactions that might indicate taxable income and encourage tax compliance across various sectors.

Income Tax Returns: A Growing Trend

The filing of Income Tax Returns (ITR) is a crucial process where individuals submit information about their income and taxes to the Income Tax Department of India. The ITR contains details pertaining to a particular financial year, which starts on April 1st and ends on March 31st of the following year.

Rising Numbers of ITR Filers

The number of persons filing income tax returns has shown a consistent increase over the last four years:

• 2019-20: 6.48 crore filers
• 2020-21: 6.72 crore filers
• 2021-22: 6.94 crore filers
• 2022-23: 7.40 crore filers

This steady growth in ITR filings reflects several positive trends:

1. Expanding Tax Base: More individuals are coming under the tax net, indicating a broadening of the formal economy.
2. Improved Compliance: The increase suggests better adherence to tax laws and regulations.
3. Economic Growth: As more people earn taxable income, it points to overall economic development.
4. Effectiveness of Government Initiatives: The rise in filings can be attributed to various government measures to simplify the tax process and increase awareness.
5. Digital Adoption: The growth aligns with the increasing digitization of tax filing processes, making it more accessible to a larger population.

The consistent year-on-year increase in ITR filings is a positive indicator of India’s evolving tax landscape, reflecting both economic progress and improved tax administration.