A tribute to Income Tax Department

A nation is built on the taxes its citizens pay. Income tax was first imposed on 24th July 1860; a princely sum of `30 lakh was collected. Tax remained a popular source of revenue for the colonial Government, often to fund imperial wars.

 From a maximum marginal rate of 91.8 per cent in 1957 till it stabilised at around 30 per cent in 1997, Income Tax has grown leaps and bounds. In FY 2025-26, Direct Tax collections reached Rs 23.40 lakh crore, i.e., 69 per cent of total tax revenue of Rs 33.85 lakh crore, excluding borrowings. Income tax is pivotal for constructing stable and equitable societies, funding crucial public services and government investments, thus fostering growth and creating jobs. Taxation balances wealth accumulation and redistribution, promoting fairness and social cohesion. Significantly, the Income Tax Department (ITD) has graduated from a ‘sovereign right to collect’ to a ‘taxpayer first’ approach.

On 24th July this year, on ‘Aaykar Diwas’, ITD celebrates 167 years of service to the nation. Typically, officers and staff will celebrate through outreach programs, tree plantation drives, blood donation camps, etc. It would be in the fitness of things to present a snapshot view of how ITD has evolved. A NIPFP study concludes that the tax reforms in India, unlike others, were not shaped by multilateral agencies but largely by domestic considerations, yet conforming to international best practices. In the last millennium, regional computer centres at 36 stations handled PAN allotment, taxpayer grievances and mapped jurisdiction. These were consolidated into the TAXNET Project in 2007. 

That year, when AI & ML tools were not common, ITD launched the ITDMS project, creating 360° taxpayer profiles using data mining tools. This project won PM’s Award 2010 for excellence in Governance and Administration. PAN linkage with AADHAAR was undertaken in 2017 to eliminate duplication. Delays in manual issue of PAN, processing of tax-paid challans & ITRs led to outsourcing of PAN, TIN and CPC TDS for integration of TDS/TCS with third party information, e-filing and processing of tax returns in CPC-ITR, and e-payment of taxes through TIN 2.0. The number of TDS/TCS statements processed annually by CPC TDS stand at a mind-boggling 1.41 crores. Similarly, CPC ITR 2.0 processed more than 8 crores ITRs filed in FY 2025-26. With growth in digital economy, predictive AI tools and BI platforms (Project Insight) are used to sift through gargantuan high-value financial transaction data shared by third parties, for strategies that enable precise enforcement, effective fraud detection and voluntary compliance.

The Faceless Assessment and Appeal Schemes were introduced in 2019 and 2020 respectively, eliminating human and discretionary contact in the conduct of assessment & appeals. Data analytical models now de-duplicate, cross-reference and pre-populate returns to facilitate ease of filing Income Tax returns. The e-Verification scheme 2021 resolves high-value transaction mismatches by taxpayers. Advance Pricing Agreements between the tax administration and a taxpayer determining, in advance, the Arm’s Length Price are another feather in the cap of ITD, thereby bringing tax certainty for 5 and a maximum 9 years. 815 APAs have been signed till 31.03.2025. An encouraging sign of trust in the system is the keenness of MNEs to renew such APAs.

ITD regards taxpayers as inherently honest but cannot ignore those who game the system. When, for example, tax breaks claimed on electric cars & disabilities far exceeded the number of such cars and disabled population, a NUDGE approach was adopted to encourage such persons to update/revise their returns and pay correct taxes.  This included undisclosed overseas assets and taxes on overseas income. The success of this campaign is self-evident; claims on account of donations to political parties fell by 47 per cent, medical insurance claims by 49 per cent and education loan claims by 76 per cent between FY 2023-24 to FY 2025-26.

Importantly, ITD successfully nudged taxpayers to adopt the new regime. From 21 lakh taxpayers for AY 2022-23, the numbers opting for new regime have exponentially grown in just 3 years to 7.24 crores for AY 2025-26, ensuring seamless compliance and fewer disputes.

In last 2 decades, ITD has transformed through self-analysis and course correction. One area of concern of Parliamentary Committees, C&AG, etc is the huge backlog of appeals pending before the Commissioner (Appeals). Most appeals are generated in the faceless assessment scheme. The mitigation measures include restoration of powers to set aside for AOs to examine afresh, roping in more manpower to dispose these appeals, closer supervision & monitoring of appellate work.

However, these steps have had limited success & the backlog of appeals continues. Although CBDT continuously refines and ensures assessment of highest risk cases, there is potential for being conservative in authorising further appeals and acknowledging mistakes, if they occur.

Another issue is the burgeoning demand standing in the ledgers of ITD. The CAG Report No. 14/2024 recommends several steps to ensure there is no duplication, write-off is pursued, focus on high-risk cases, etc. These are under consideration and implementation. A big step is the establishment of the Demand Facilitation Centre.

The problem needs to be addressed at the source vis-a-vis risk management strategy so that mule accounts, prospective insolvency cases, etc are tackled pragmatically by raising red flags. Review of write-off & functioning of Tax Recovery Officer by seniors, review of the CPC algorithm functioning by independent Committees are some steps that can be considered. 

Given the tech-driven foundational changes, a critical part of the modernisation paradigm is a comprehensive reorganisation of the Department’s human capital. A formal cadre restructuring exercise, last conducted in 2013, is a vital mechanism needed to redeploy officers into highly specialised verticals like predictive data analytics, risk management, enforcement and expedited dispute resolution. Aligning the department’s institutional hierarchy with its digital transformation will fully empower the workforce to deliver the seamless, non-intrusive, and taxpayer-first administration envisioned by the new Income Tax Act 2026.

The writer is a retired Indian Revenue Service officer; Views presented are personal.