The history of income tax in India dates back to the British era. The first attempt to introduce income tax was made in 1860 by Sir James Wilson, a British administrator, to manage the financial burden arising after the Revolt of 1857. This tax was meant to be a temporary measure and was repealed in 1865. However, over time, a more structured system was developed, culminating in the Indian Income Tax Act of 1922, which laid down a permanent framework for taxation and granted extensive powers to tax authorities, including provisions for assessment, appeals, and penalties. Post-independence, the Income Tax Act, 1961, replaced the earlier law and forms the foundation of India's current income tax regime. It came into effect under the leadership of Finance Minister Morarji Desai and has been amended several times since to keep pace with the evolving economic landscape. The Central Board of Direct Taxes (CBDT) was also established to administer direct tax laws in the country.
In recent years, India’s income tax system has been undergoing a major transformation. One of the most significant reforms has been the introduction of the faceless assessment and appeal system in 2020. This initiative aims to promote transparency and reduce corruption by eliminating physical interaction between taxpayers and tax officials. Assessments and appeals are now conducted through a centralized electronic system, ensuring uniformity and fairness. The government is also leveraging artificial intelligence and big data analytics to strengthen tax enforcement. By integrating databases such as PAN, Aadhaar, GST, and banking transactions, the Income Tax Department has developed a 360-degree view of taxpayers’ financial activities, enabling it to detect discrepancies and potential cases of evasion more efficiently.
The introduction of the optional new tax regime in 2020 (revamped in 2023) marked another milestone in India’s tax reforms. This regime offers lower tax rates but removes the benefit of exemptions and deductions, aiming to simplify tax compliance and reduce litigation. Additionally, the government has introduced real-time tax reporting mechanisms, such as the Annual Information Statement (AIS), which consolidates an individual’s financial transactions in one place, along with pre-filled ITRs to make filing returns easier and more accurate.
One of the recent and notable changes is the taxation of digital assets. From 2022, income from Virtual Digital Assets (such as cryptocurrencies) is taxed at a flat 30%, and a 1% TDS is applicable on every crypto transaction. This move seeks to bring regulatory clarity to a rapidly growing segment of the economy. Looking ahead, India is poised for a tax revolution driven by technology. Future developments may include the use of blockchain for compliance and transparency, AI-driven personalized tax systems, deeper integration with global tax networks under the OECD’s Common Reporting Standard, and the possible consolidation of direct and indirect tax systems under a unified framework like the proposed Direct Tax Code 2.0.
These changes aim to make the Indian tax system more transparent, efficient, and taxpayer-friendly while ensuring robust compliance and revenue generation for the government