When Was Income Tax First Introduced And More.
History of Income Tax in India
- Income tax is mandatory liability for the citizens of the country.
- Also, there are two major types of income tax in India, which are direct and indirect.
- The taxation system in India is derived from the Manusmriti and Arthashastra period.
- The current taxation system is based on ancient systems that were rooted in the theory of 'Maximum Social Welfare'.
- In India, the income tax system was first introduced in the year 1860 by Sir James Wilson.
- This system was formulated to meet the financial gaps sustained by the Government on account of the military mutiny of 1857.
- James Wilson arrived in India in 1859 right after the British sepoy mutiny.
- It is when the Indians were in the first war of independence.
- Wilson had a deep knowledge of economics and how to deal with the financial situation.
- Wilson was a strong and liberal proponent of financial policies.
- In the year 1918 another income tax system was passed, and it was replaced by the new act passed in 1922.
- The Income Tax Act of 1922 has also remained in force from the assessment year 1961 to 1962.
- In discussion with the Law Ministry, in 1961 the Income Tax Act was passed.
- This act was brought into force from April 1962, and it was immediately applied to entire India.
- From the year 1960, various amendments were made to this act by the Union Budget every year.
- Manusmriti is the predominant and earliest source of income tax provisions in India that emphasise strategic impression and regulation of tax and its subjects.
- The income tax provisions were given by Manusmriti script which includes -
- Traders would pay 20% of the income.
- Artisans would pay 20% of the income.
- Agriculturists would pay ⅙, ⅛, 1/10 of their total production.
- Arthshastra is another prominent taxation law and provision system in India.
- Earlier, it was considered as a fundamental Indian tax mentioning the financial administration and financial laws structurally.
- It also highlighted the taxation for import and export of merchandise, toll taxes, etc.
- The income tax provisions stated by arthshastra include -
- Affluent to pay high tax returns and less privileged individuals were levied with minimal taxes.
- Rule book with limited text flexibility towards the tax collectors.
- Agriculturists would pay ⅙ or ⅛ of their total land taxation.
The Income Tax Act of 1860
- The tax policies in 1860 were passed by the British Government of India, and it made the most influencing changes in the contemporary tax system.
- The income tax policies and laws were structured under British India rule, and the amount was also credited to the event of mutiny.
- This act was applied for 5 years and the latest quashed. Its main features were -
- The premium payable for life insurance was exempted from taxation.
- Hindu undivided families were addressed as an individual taxable unit.
Income Tax Act of 1961
- Income Tax Act, 1961 was enacted by the Indian Government in 1961.
- The history of this act arrived in a new Indian period right after the enactment of the former law.
- The features of this act are -
- Income from other sources.
- Income from house property.
- Income from business and profession.
- Income from earnings.
- Income from capital gains.
An Introduction to Income Tax and Small Businesses
- One of the most fundamental questions every business owner asks is: if they are required to pay for the business tax and the answer is 'Yes'.
- Paying income tax is mandatory for the business owners, whether it is a small or large company.
- If the business revenue is above the threshold limit, then the businesses have to pay for the applicable tax.
- A company is dubbed as a small enterprise, if the paid-up capital of the company is less than ₹ 50 lakhs, and the higher amount is not more than ₹ 5 crore.
- Small businesses are also bank-dependent borrowers, and they can influence the capital requirement in terms of loan or bank lending terms.
Here are some tips for small business owners to limit their taxable income-
- You can reduce travel expenses for personal on business reasons to limit your taxable income.
- You can highlight the expenses like home office expenses, vehicle expenses, and many more to reduce taxable income.
- The reimbursements that you are referring to the employees for their equipment, entertainment, or travel also comes under the accountable plan.
- As a small business owner, you can deduct all these expenses.
Which Income Tax Benefits are Available to Small Business Owners?
- Any eligible assessee having gross receipt of a minimum of Rs. 2 crores (annually) can avail of the benefits of presumptive taxation in India.
- Under the presumptive taxation scheme, the eligible small business owners do not have to organise account books, and they can declare 8% for 6% of the gross receipt as their taxable income.
- This scheme intends to free small business owners from auditing and bookkeeping requisites.
- Resident individuals, i.e., proprietorship concerns, partnership firms, and resident HUFs, can avail the advantages of this scheme.
- The average corporate income tax for small businesses is less than 25%.
- In contrast, the corporate income tax for companies with above-average turnover is around 30%.
- As a small business owner, it is important to know a variety of tax-related concepts.
- It is because the diversity of business taxes are based on your business processes where you might wonder which one is required to pay earlier.
- Here is a list of the most prominent small business taxes that you can refer to -
- Personal income tax
- Payroll tax
- Fringe benefits tax
- Goods and service tax
- Excise tax
- Custom tax or duty
- Corporate income tax
- If the business owner runs the business under the sole proprietorship, they generally have to pay personal income tax on their earnings.
- As the business expands, it gets essential to hire more employees to withhold personal income tax.
- Once the business’ aggregated turnover processes a certain mark, the business owners have to pay for GST returns on the goods and services that they sell.
- The history of income tax in India is directed to assist the understanding of income tax practices.
- The intuitive legacy of the taxation rules in India functions as a directing light for existing Indian tax administration.
- The current income tax system undertakes the requirements for contemporary taxpayers in India.
- Business owners can leverage the existing tax reforms to formulate a marketing plan that can align with their financial activities.
- You can use comprehensive accounting software to file your taxes and make the business conduct efficient.
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Q- Which illegal structures business owners can use to run their business in India?
- Small business owners in India usually run the business as either a partnership firm, proprietorship concerns, or as small companies.
- Proprietorship concern businesses are administered by individuals, partnership firms are administered under the Indian Partnership Act (1932).
- There is another special partnership named Limited Liability Partnership (LLP) that can be incorporated into the business through the ministry of corporate affairs.
- Small business owners can also take advantage of special income tax provisions.
Q- Are LLPs essential to file the income tax return?
- LLP is treated as a separate legal document formulated under the Limited Liability Partnership Act.
- They are essential to file an income tax return by 31st July every year.
Q- How can business owners pay the income tax physically?
- The income tax can be submitted physically if the business account is expected to be audited, then the payment can be made directly through e-mode.
Q- What is the concept of short term and long term capital gains?
- Any business capital asset occupied for more than three years is categorised as a long term capital asset.
- Any asset that is sold within a period of three years is categorised as a short term asset.
- Short term assets are taxed at a flat rate of 50%.