In the recent years, India has been viewed as an attractive and 

dynamic investment destination, and has witnessed an increased presence 

of multinational enterprises (MNEs) and a consequential increase in cross-

border trade. This has created an opportunity to the Government for 

improving tax system of the country to treat the globalization benefits 

effectively. In India, since the inception of globalization and liberalization 

policies, a host of significant developments have taken place in the tax 

system. On the other hand, the present status of tax reforms have their roots 

in the past developments and history of taxes in ancient, medial and 

modern India. The understanding of this sequential development gives us 

an idea about where we stand and whatever should be our next course. 


 In the present chapter history, developments and reforms concerning 

Indian tax structure along with the tax performance is studied. This will 

also help in understanding the progress made and acceleration in the rate of 

progress achieved.


Taxes are as old as civilizations. Taxes are imposed so that a 
government may perform its traditional functions (i.e. defense and 
maintenance of law and order), undertaking welfare and developmental 
activities and to make provision for public goods and services to satisfy

collective needs of public. “It has also to pay its own administration”1
. The 
government needs financial resources for these purposes and taxation is a 
tool or method of transferring money from private to public hands. 
“Taxation is necessary because what the government gives it must first take 


References to taxes in ancient India are found in Arthashastra the 
famous work of Kautilya (also known as Chanakya and Vishnugupta). 
Arthashasrta embodies values, norms, and beliefs pertaining to public 
administration, economics, ethics and diplomacy. Taxes in ancient India 
were levied both in cash and in kind and were collected by local officers. 
Major sources of revenue for the king included land tax, octroi, taxes on 
liquor shops, gambling houses and on professionals like dancing girls. In 
his work Raghuvansa, Kalidasa, the greatest Sanskrit scholar of ancient 
India, observed, “Just as the sun extracts water from the reservoirs and 
gives it back in the form of showers, so does the ruler extract tax from his 
subjects and give it back to them in the form of prosperity”3
 Kautilya’s reference to commodity tax in the book Arthashastra is of 
significance and can be quoted as follows4
 Taxes in cash and kind included are: 
1. Customs duty (Sulka) which consists of import duty (Pravesya), 
Export duty (Nishramya) and Octroi and other gate tolls 
(Dwarabahiri Kadeya). 
 Sury, M.M (2006), Taxation in India 1925 to 2007, New Delhi, New Century Publications, p.3. 

2. Transaction tax (Vyaji) including manavyaji (transaction tax for 
crown goods). 
3. Share of production (Bhaga) including 1/6th share (Shadbhaga). 
4. Tax (Kara) in cash. 
5. Taxes in Kind (Pratikara) including labour (Vishti) supply of 
soldiers (Ayudhiya). 
6. Countervailing duties or taxes (Vaidharana). 
7. Road cess (Vartani). 
8. Monopoly tax (Parigha). 
9. Royalty (Prakriya). 
10. Taxes paid in kind by villages (Pindakara). 
11. Army maintenance tax (Senabhaktham). 
12. Surcharges (Parsvam). 
 While Kara is assumed to be a tax paid in cash and Pratikara that is 
paid in kind, no distinction is made between the two. In the case of customs 
duty expressed as a fraction, could be paid either way, only in case of 
manufactured jewellery, a cash payment of 20 per cent of the value added 
was to be paid as export duty. The taxes paid by batchers, or the production 
share paid by farmers, lessees or of mines or fishermen must always have 
been paid in kind.

 Sury, M.M (2006), Taxation in India 1925 to 2007, New Delhi, New Century Publications, p.3. 
 Rangarajan, L.N (1992), Kautilya”The Arthasastra” Penguin Books India Pvt. Ltd., New Delhi, 
p. 262-265.


Prior to 1947, India was a dependency of the United Kingdom and 
encompassed the entire area which now forms the three countries of India, 
Pakistan and Bangladesh. It consisted of the British Indian Provinces, and 
the Indian Princely States. The political and economic scene changed 
greatly after 1947 when India emerged as an independent country merging 
with itself the former Princely States (called Part B States), but excluding 
areas of the other two countries mentioned above. Although it is desirable

to trace historical developments of a subject to understand its present 
features and trends, the changed circumstances noted above fail to provide 
comparable data for the purpose. Therefore, only a brief account of the tax 
system prevailing prior to Independence is presented here.5

The tax system of British India reflected characteristics of a 
traditional agricultural economy. Revenues of the Central Government 
were dominated by customs duties as domestic requirement for 
manufactured goods were met mostly by imports, chiefly from Britain and 
other Commonwealth countries. Import duties were levied on almost all 
items of imports whereas major items subject to export duties were jute and 
tea in which India enjoyed near-monopoly in the world market. Various 
customs and tariff enactments were passed from time to time but the 
following two were the main; (i) The Sea Customs Act, 1878, and (ii) The 
Tariff Act, 1934. After Independence, the Sea Customs Act and other allied 
enactments were repealed by a consolidating and amending legislation 
entitled the Customs Act, 1962. Similarly, the Tariff Act of 1934 was 
repealed by the Customs Tariff Act, 1975.

Another important source of tax revenue for the Central 
Government was excise duty levied on a few commodities. Excise taxation 
in its modern form dates back to 1894 when for the first time a duty at the 
rate of 5 per cent ad valorem was imposed on cotton yarn of more than 
twenty counts. Excise at the rate of 6 annas
 per Imperial Gallon was 
imposed on motor spirit in 1917 and on kerosene at the rate of one anna
per Imperial Gallon in 1922. Another landmark in the history of excise 
taxation was the year 1934 when excise duties were imposed on sugar, 
matches, and steel ingots. Duties were imposed on tyres in 1941 and on 
 Sury, M.M (2006), Taxation in India 1925 to 2007, New Delhi, New Century Publications, p.5-
 One anna was equal to 1/16th of a rupee before the introduction of the metric system of currency 
from April 1, 1957.

vegetable products, and tobacco in 1943, mainly to meet the exigencies of 
war finances. The year 1944 saw excise duties being imposed on coffee, 
tea and betel nut. Cigarettes came within the excise net in 1948 and mill-
made cotton cloth in 1949. Before 1944, excise duties were levied under 
separate enactment for different goods, e.g. tobacco levies were imposed 
under the Tobacco (Excise Duty) Act, 1943. About 16 such separate laws 
were consolidated into the Central Excises and Salt Act and the Central 
Excise Rules, 1944. 
 Among the direct taxes, the only important source of revenue was 
the income tax introduced in India by the British in 1860 to overcome the 
financial difficulties created by the events of 1857. Out of a Central tax 
revenue of Rs.73.90 crore in 1938-39, customs accounted for Rs.40.51 
crorre, Central excises Rs.8.66 crore, and income tax Rs. 13.74 crore


"It was only for the good of his subjects that he collected taxes 
from them, just as the Sun draws moisture from the Earth to give it 
back a thousand fold"

4.5.1 Constitutional Provisions Pertaining to Taxation in India

The constitution of India makes elaborate arrangements relating to 
the distribution, between the Centre and the States, of taxes, the power of 
borrowing, and provision for grant-in-aid by the Centre to the States. The 
fundamental philosophy of these arrangements is to place at the disposal of 
the two tiers of Government adequate financial resources to enable them to 
discharge their respective responsibilities under the constitution.

Distribution of Taxation Powers: Article 265 of the Constitution 
makes clear that no tax shall be operated without the authority of 
law. Entries 82 to 92B of List I in the Seventh Schedule to the 
Constitution refer to the taxation powers of the Union Government 
(Table 4.2). Entries 45 to 63 of List II in the same Schedule mention 
the fiscal powers of the State Governments (Table 4.3). List III does 
not deal with taxation. So the Center and the States have no 
concurrent powers of taxation. The residual powers of taxation, 
belong to the Center vide entry 97 of List I in the Seventh Schedule. 
For instance, gift tax (abolished in 1998) was imposed by the Union 
Government under these residual powers. Similarly, prior to the 
Constitution (Eighty-eighth Amendment) Act, 2003, service tax was 
imposed under these residual powers. 
 The Constitution does not provide for any taxation powers to local 
governments. However, the implication of Article 276 is that the taxes on 
professions, trades, callings or employment are for the benefit of a State or 
of a municipality, district board, local board or any other local authority. 
The States on their own may assign any of the taxes in the State list to the 
local bodies. The taxes generally assigned to local governments are 
property taxes, octroi, and taxes on vehicles7