By Suhani Trivedi
Taxation is the government’s major source of revenue and is determined by the tax structure of the country. Revenue is needed for public services, infrastructure, and defence. Tax thus occupies the central position in India’s economic management. Any tax system which will eliminate tax evasion is beneficial for the country’s economy. Tax policy in India has undergone a century of transformation, reflecting the country’s transformation.
After Independence in 1947, India has been heavily dependent on taxation as a mechanism for balancing development expenditure with fiscal prudence, and also leveraging it as a tool for economic stabilization during crises such as inflationary surges, balance-of-payments shocks, and most recently, the Covid-19 pandemic.
1960s-1970s: High Tax Rates and Heavy Regulation
India followed the model of a socialist economy with extensive government control. At that time, personal income tax rates were extremely high with the highest marginal rate exceeding 90%. Then the tax structure relied mainly on direct taxes and numerous controls on businesses. The high tax rates instead encouraged tax evasion.
1980s: Initial Tax Reforms
In this period, the government began simplifying tax laws as well as reducing excessive tax rates. During this time, various efforts were taken to make tax broad-based and improve tax administration.
1991 Economic Reforms and After
After the economic crisis which occurred of 1991, India adopted liberalization. There was a reduction in tax rates of individuals and corporations. Various other changes such as customs duties were reduced so that international trade could be promoted.
2000s: Modernisation of tax administration
The introduction of the Permanent Account Number (PAN) took place as a key tax payer identifier and there was expansion of electronic filing and digital tax services, service tax was also broadened so that more services could be covered. Value added tax (VAT) was introduced by states to replace multiple sales taxes.
2020s: Digital and compliance-oriented tax system
We saw a greater use data analytics and artificial intelligence in tax administration. There was a expansion of pre-filled income tax return forms and online grievance mechanism, simplified tax regime business was introduced.
From Complexity to Simplicity: The Story of India’s Tax Transformation
Taxation in India goes back to the the times of the Manusmriti and the Arthashastra which make references to taxes. Through these texts, we can have an insight into the early tax systems which were designed to ensure welfare of the state along with being transparent to citizens. India’s taxation has undergone remarkable transformation over the past few decades. Historically, India’s tax system consisted of numerous direct and indirect taxes imposed by both the Central and State governments. Businesses had to direct taxes such as Excise Duty, Service Tax, Value Added Tax (VAT), Central Sales Tax (CST), Entry Tax, Octroi, and several local levies. Each tax had its own rules, rates, filing requirements, and compliance obligations.
This tax-fragmented structure often leads to tax cascading, where cesses were further levied on taxes, which caused increase in the cost of overall goods and services. Compliance occurred as time consuming as well as expensive especially for small and medium enterprises. Understanding the laws and maintaining multiple records was challenging for taxpayers.
The Goods and Services Tax (GST) streamlined taxation by bringing goods and services under a common framework. It eliminated the cascading effect of taxes through the input tax credit mechanism and simplified interstate trade.
Technology has played an important role in the modernization of taxation in India. Online income tax filing, pre-filled return forms, instant PAN issuance, electronic verification, and faceless assessment systems have transformed taxpayer interactions with the tax department.
Key Reforms, Challenges, and the Road Ahead
India’s taxation system has evolved significantly over the years, highly motivated by the urge to simplify compliance, enhance transparency and economic growth. From the enactment of the Income Tax Act, 1961 to the introduction of the New Tax Regime and digital tax administration, tax reforms have played a crucial role in modernizing the country’s fiscal framework.
Key Reforms
1. Simplification of Tax Structures: The new tax regime brought a shift toward a simpler tax structure with lower tax rates and few exemptions. This aims to reduce complexity associated with tax planning.
2. Digitalization of Tax Administration, technology has changed tax compliance through:
· Online income tax filing.
· Pre-filled tax returns.
· Electronic verification of returns.
· Faceless assessments and appeals.
· Faster processing of refunds.
3. Goods and Services Tax (GST): It has converted multiple indirect taxes into a unified format which eliminates the cascading effect of taxation and create a common national market. It has helped in enacting transparency and indirect tax compliances.
4. Faceless Assessment and Appeals: Due to the introduction of faceless proceedings, direct interaction between the taxpayers and tax officials have been minimised which ultimately promotes transparency , accountability and fairness.
5. Rationalization of Tax Rates and Rebates: Successive budgets have focused on reducing tax burdens for individuals and businesses through revised tax slabs, increased rebates, and simplified compliance procedures.
The Changing Face of Taxation in India
India’s tax system has gone through various different eras, and it’s pertinent to understand them to make sense of where things are today.
Colonial and early independence era (pre-1990s): Taxation started as a blunt instrument customs duties and land revenue under the British, then a complex, high-rate direct tax system after independence, with marginal income tax rates which at one point exceeded 90%. The objective was to control rather than efficiency, and compliance was poor because rates gave people every reason to evade taxes.
Liberalization era (1991 onward): The 1991 economic reforms triggered the first big rethink. Income tax rates were slashed, corporate tax was rationalized, and customs duties came down sharply as India opened up to trade. The philosophy shifted from “tax heavily, evade heavily” to “tax reasonably, comply broadly.”
The GST revolution (2017): This was probably the one of the biggest structural change in the history of tax in India. It replaced a bevy of central and state indirect taxes (excise, service tax, VAT, octroi, and more) with one unified Goods and Services Tax which turned India into a genuine common market for the first time. It wasn’t painless a complex four-tier rate structure and the burden of compliance created real friction for small businesses.
Digitization of compliance (2019–2024): Faceless assessment and appeals, e-invoicing, pre-filled ITRs, and AI-assisted scrutiny reshaped the experience of paying tax even where rates stayed similar. The motive was to minimise direct taxpayer-official contact (and the corruption that came with it) and use data trails bank transactions, GST filings, TDS records to catch evasion without heavy-handed raids.
Where Things Stand Now
• GST 2.0: The GST Council simplified the earlier four-tier structure of 5%, 12%, 18%, and 28% into a two-tier structure of 5% and 18%, with reforms taking effect from September 22, 2025, aimed at cutting classification disputes and lowering prices on a wide range of goods.
• New Income Tax Act, 2025: This is a replacement of the six-decade-old Income Tax Act with effect from April 1, 2026, which cuts the number of sections from over 800 to around 530 and reorganizing the law in simpler language to reduce litigation. It also formally brings virtual digital assets like cryptocurrencies and NFTs under a dedicated taxation category, and introduces a single unified “Tax Year” concept, replacing the old assessment year/financial year split.
• The government has said no major GST rate changes are planned for 2026, with the focus instead on stabilising collections and reducing classification disputes, and attention is now turning to customs duty rationalization as the next reform frontier.
—Suhani Trivedi is a third-year LLB student of Lloyd Law College, Greater Noida
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