HISTORY OF INCOME TAX LAW

In Undivided India (now consisting of Pakistan, Bangladesh and India) income tax was introduced for the first time in the year 1860. It was introduced by Income Tax Act, 1860, and exactly the same pattern was followed that was prevailing in those days in the United Kingdom. This Act came into force on 31 July 1860 and continued for only 5 years up to 1st August 1865 when it was completely withdrawn. A major characteristic of this Act was that the agricultural income from land, above the rental value of Rs. 600 per annum, was taxable.

Income Tax was not applicable for the next two years. However, it was re-imposed with certain changes in 1867 and was called: “The Licence Tax Act of 1867”. Income earned up to Rs. In this Act, agricultural income was exempted from tax. In 1868, its name was changed to “The Certificate Act, By virtue of this Act, not only that the exemption limit was raised to Rs. In 1869, the Certificate Act was converted again into Income Tax Act II. Under this law, agricultural income was again brought under taxation. Moreover, different rates of tax were proposed on different types of income. This Act remained in force for only one year and during the next four years, tax was levied by annual legislation. By 1872, the exemption limit was gradually raised to Rs. 1,000. Income tax was entirely withdrawn for the second time in 1873.

After a gap of four years, it was re-imposed and termed as “The Licence Act, 1877”. In this law, a tax on trade and a cess on land was proposed. This Act continued up to 1886, although quite a few changes in the working of the Act were made during this period.

A new Income Tax Act which came into force in 1886, is treated as animportant landmark in the taxation history of the country. It is due to the fact that it not only continued for a long period of time, as compared to its predecessors, but great improvements in the legislation were also made. A proper definition of agricultural income was provided for the first time and such income was completely exempted from tax. Concession in payment of tax was provided if a person paid life insurance premium. (This was done in order to encourage the people to save money and invest it properly. This concession still continues.) Schedule explaining the sources of income and rates of tax was for the first time attached to the Act separately. This schedule continued for 30 years.

Another important landmark in the taxation history of the subcontinent came about in the year 1918. “The Income Tax Act, 1886” was replaced by “The Income Tax Act, 1918” The new Act for the first time introduced a distinction between “Total Income” and “Taxable Income”. Drastic changes were effected in the procedure for payment of tax. Under the previous Acts, income of the same year was taxed immediately, but in this Act, tax was imposed in respect of the income earned during the previous income year Unfortunately, it was soon felt that this law had created quite a few difficulties so far as its application was concerned. Day-to-day difficulties made it essential that not only the improvements in the law must be made but the administration of income tax must also be centralized. Due to the above mentioned reasons, the question of amendments (changes) in the law was first considered by the Provincial Committees and then an All India Committee was formed in 1921. The purpose of this committee was to revise the whole law regarding income tax and on the report of this committee, the Act (XI of 1922) was introduced.

Income Tax Act, 1922, prescribed a complete machinery and procedure of assessment. However, it provided that rates of tax will be fixed every year by the Finance Acts Wide powers were given to the assessing officers under this Act. Amendments in the Act continued, meanwhile the Government, in 1935, formed an expert committee. The purpose of this committee was to investigate the law completely from all possible angles. The committee was asked to give a report about:

(a) Whether the tax burden imposed by the government is reasonable and justified,

(b) Is the income tax administration working efficiently?

The Committee made a thorough investigation into all these matters and then submitted its report in 1936. It resulted in drastic changes in respect of taxation and administration of the Act in 1939. The World War II (1939-45) necessitated a better system, so that tax can immediately reach the government and in 1944, “Pay as You Earn” scheme was introduced.The provisions of the Act were extended to the whole of Pakistan except the special areas

A Taxation Inquiry Committee set up in June 1958. On this Committee besides officials, representatives of trade and commerce were also taken as members. The said committee submitted its report to the Central Board of Revenue after long deliberations. Some of the recommendations of the committee were accepted by the government and Income Tax Act, 1922, was amended accordingly In 1960, the financial year was changed to commence on 1 July and end on 30th June. Previously, it used to start on 1 April and end on 31 March. In 1961, an Income Tax Committee was formed by the CBR to make recommendations for simplifying the Income Tax Act and procedures.

The “Income Tax Act, 1922” continued for 57 years till 1979. During this period, a lot of amendments were made in the original Act. Each of these amendment Acts contained several amendments, some of them being of far-reaching importance. The purpose of most of these changes was to check evasion of tax. Some of these changes were brought about in a hurry and the framework of the basic Act was not kept in mind. The result was that the Act became a complicated law and difficulties arose in its day-to-day working

Keeping these difficulties in view, the government introduced a new income tax law namely “Income Tax Ordinance, 1979”, The Ordinance replaced Dfa Ho the Income Tax Act 1922 and was enforced as from 1st July 1979. The Self Assessment Scheme was further broad-based in this Ordinance. However, the job of improving the law continued after the promulgation of this Ordinance also. As a result of all these efforts the Income Tax Ordinance, 2001, is in force in Pakistan now.