Q.

‘Monetary Base’, managed by the Reserve Bank of India, consists of

1. Deposits held by the Government of India with RBI
2. Sum total of the capital of all financial institutions regulated by RBI
3. Notes and coins in circulation with the public
How many of the above statements is/are correct?
a) Only one
b) Only two
c) All three
d) None
Q.Which of the following can occur in an economy due to deficit financing by the
government?
1. Increased private investments
2. Inflation
3. Increase in money supply
4. Rise in employment rates
Select the correct answer code:
a) 1, 2
b) 1, 3, 4
c) 2, 4
d) 1, 2, 3, 4
Q.Consider the following statements.
1. In a floating exchange rate system, market forces determine the value of a
currency.
2. The demand for rupees in the forex market depends on foreign demand for
Indian exports.
3. Currency appreciation encourages a country’s export activity as its products
and services become cheaper to buy.
How many of the above statements is/are correct?
a) Only one
b) Only two
c) All three
d) None
Q. Which of the following statements best describes the term Fiscal
profligacy?
a) Removing fiscal barriers and discrepancies between the tax
systems of the various countries
b) Income tax exemption for new industries
c) The act of spending money in a way that is not wise
d) Official estimate of costs or revenues for proposed legislation
Solution: c)
• Fiscal profligacy is
opposite of fiscal
prudence. It is the act
of spending money or
using something in a
way that wastes it and
is not wise.
• The costs of fiscal
profligacy at the State
level can be huge.
Q. For India, a rise in international crude oil prices can lead to which of the
following?
1. Weakens the rupee against the dollar
2. Rise in current account deficit and fiscal deficit
3. It leads to inflation
4. Rise in edible oil prices
Select the correct answer code:
a) 1, 2, 3
b) 1, 3, 4
c) 1, 2, 4
d) 1, 2, 3, 4
Taxation in India : Historical background
The mention of taxes can well be found in Manusmriti.

The Formal Taxation system had come into existence in India during the Mauryan
Dynasty where it was levied to the tune of one-sixth of the produce.
Thereafter, the Jizya system, prominent in India, was brought by the Mughal
Dynasty.
The evolution of the modern taxation system in India can be traced back to the
Colonial period.
when Britishers introduced a taxation system with an aim to compensate for the
losses suffered by them during the revolt of 1857.
Further, the Income tax act was passed in However, it was short-lived as it was
1866 and the taxation in India has since replaced by the Income tax Act, 1922
been evolving with multiple revisions. which remained in operation till 1961.

1866 1922

1918 1961

Post World War I, the Income Tax Act was It was in 1961, that the modern Taxation
passed in 1918 to compensatefor the system was introduced in India based on
effects of the war. the recommendation of Law Commission
& Direct Taxes Enquiry Committee.
TAXATION

Taxation is a term for when an authority, mostly a government, imposes an

involuntary financial obligation on its citizens/ residents/corporations/companies
etc.

It is a way of Income Redistribution.

Swaran Singh Committee recommended Duty to Pay taxes to be added in

the Fundamental Duty–Article 51A. However, this was not included. So, Duty to
Pay taxes is not a Fundamental Duty.
CANONS OF TAXATION BY ADAM SMITH
Canon of Equality - Tax should be equal and proportionate to income. Rich people
should pay more taxes than poor.

Canon of Certainty – Dates, slabs, percentages should be definite and told in

advance. Randomly govt should not demand “any%” tax to build statue, temple or
mosque.
Canon of Convenience - Taxpayer should not be made wait for a mile long queue &
fill-up 50 pages worth tax forms.

Canon of Economy – to collect INR1000 crore tax, govt shouldn’t be spending

INR9900 crores in salaries of tax officials.
Q. Which of the following was not advocated by Adam Smith? (UPSC-
CDS-2019-1)
a) Canon of equality
b) Canon of certainty
c) Canon of convenience
d) Canon of fiscal adequacy
Distribution of Taxation Power
Article 246 (schedule VII) of the Indian Constitution, distributes legislative
powers including taxation, between the Parliament and the State Legislature.
Schedule VII provides for the three lists:

List – I -It provides for areas on which only parliament is competent to make
laws
List – II -It provides for areas on which only parliament is competent to make
laws
List – III -the areas on which both the Parliament and the State Legislature can
make laws upon concurrently
 EVOLUTION OF TAX IN INDEPENDENT INDIA

YEAR COMMITEE IMPACT

The tax reforms began with Chelliah committee
1991-1993 Chelliah Committee
recommendations for reforming India’s tax system
VAT introduced. Recommended the transforming of Union excise
1986 JHA Committee
duties into a modified value added tax (MODVAT)
2002 Vijay Kelkar Committee Abolition of wealth tax. Abolish Minimum Alternative Task,
Fiscal Responsibility and Budget Management
2003 Kelkar Task Force
(FRBM) recommends GST
2006 launch of GST was announced from 2010
2015 Asim Das Committee State Level VAT was introduced
Introduces 122nd Constitutional Amendment Bill 2014 in
2014-16 16th Lok Sabha. Ultimately, it was passed &became 101st
Constitutional Amendment Act, 2016
 1. PROGRESSIVE TAX– As Income increases the tax increases.
E.g.-Income Tax.
2. REGRESSIVE TAX-The tax rate decreases as the amount
subject to taxation increases. It is applied uniformly so it takes
a larger percentage of income from low-income earners than
METHODS from high-income earners and hence considered regressive in
nature. e.g.- Sales Tax

OF 3. PROPORTIONAL TAX– where the same percentage tax is

levied on everyone regardless of income.

TAXATION 4. RETROSPECTIVE TAXATION– It allows a country to pass a rule

on taxing certain products, items or services and deals and
charge companies from time behind the date on which the
law is passed.
• Countries use this route to correct any anomalies in their
taxation policies that have, in the past, allowed companies to
take advantage of such loopholes.
MCQ. Which one of following is a progressive tax structure? [UPSC-
CDS-2015-II]
(a) Tax rate is the same across all incomes
(b) Tax rate increases as income increases
(c) Tax rate decreases as income increases
(d) Each household pays equal amount of tax
Find Correct Statements (UPSC-CDS-2016-1)
1. Ability to pay principle of taxation holds that the amount of taxes people
pay should relate to their income or wealth.
2. The Benefit Principle of taxation states that individuals should be taxed
in proportion to the benefit they receive from Government programmes .
3. A progressive tax takes a larger share of tax from poor families than it
does from rich families.
4. Indirect taxes have the advantage of being cheaper and easier to collect.
Answer Codes:
(a) 1 and 3 only
(b) 2 and 4 only
(c) 1, 2 and 4 ,only
(d) 1, 2, 3 and 4
 TAX TO GDP RATIO
The size of a country’s tax resources in relation to its GDP.

HIGH TAX TO GDP LOW TAX TO GDP

➢ Financial position the country

•Constrains the government to spend
good.
and puts pressure on the government
➢ It reduces a government’s
to meet its fiscal deficit targets.
dependence on borrowings.
➢ Tax buoyancy is strong
 Basis Direct Tax Indirect Tax
The tax that is levied by the
The tax that is levied by the
government on one entity
government directly on the
Meaning (Manufacturer of goods), but is
individuals or corporations are
passed on to the final
called Direct Taxes.
consumer by the manufacturer.
The incidence and impact of the The incidence and impact of
Incidence direct tax fall on the same the tax fall on different
person. persons.
VAT, Service tax, GST, Excise
Income Tax, Corporation Tax
Examples duty, entertainment tax and
and Wealth Tax.
Customs Duty.
Nature They are progressive in nature. They are regressive in nature.
 • Both Social and • Only Economical. When
Economical. an indirect tax is levied
• Social objective of direct on a product, both rich
tax is the distribution of and poor must pay at
income. the same rate.
• A person earning more • A person earning 10
Objective should contribute more lakh a month pays the
in the provision of same tax on the Wheat
public service by paying purchase as the person
more tax. earning 3000 Re a
• This provision is also month. This principle is
known as progressive called regressive
taxation. taxation.
Impact Not at all Inflationary. Is inflationary.
 TYPES OF DIRECT TAX
DIRECT TAXES UNION GOVT. STATE GOVT.
•Corporation Tax ( Rs. 8,58,849 crore )
•Minimum Alternative Tax (MAT) •Agriculture tax,
On Income •Dividend Distribution tax, Capital •Professional tax
Gains tax.
•Land Revenue,
•Securities Transaction Tax,
•Stamp/Registration duty.
On Assets •Commodities Transaction Tax
•Property tax in urban areas.
•Fringe Benefit Tax,
On Expenditure
•Gift Tax

Share of taxes in descending order according to Budget 2022: GST >

Corporation Tax > Income Tax > Union Excise Duty, Customs Duty
 TAX TO GDP RATIO
The size of a country’s tax resources in relation to its GDP.

HIGH TAX TO GDP LOW TAX TO GDP

➢ Financial position the country

•Constrains the government to spend
good.
and puts pressure on the government
➢ It reduces a government’s
to meet its fiscal deficit targets.
dependence on borrowings.
➢ Tax buoyancy is strong
 Basis Direct Tax Indirect Tax
The tax that is levied by the
The tax that is levied by the
government on one entity
government directly on the
Meaning (Manufacturer of goods), but is
individuals or corporations are
passed on to the final
called Direct Taxes.
consumer by the manufacturer.
The incidence and impact of the The incidence and impact of
Incidence direct tax fall on the same the tax fall on different
person. persons.
VAT, Service tax, GST, Excise
Income Tax, Corporation Tax
Examples duty, entertainment tax and
and Wealth Tax.
Customs Duty.
Nature They are progressive in nature. They are regressive in nature.
 • Both Social and • Only Economical. When
Economical. an indirect tax is levied
• Social objective of direct on a product, both rich
tax is the distribution of and poor must pay at
income. the same rate.
• A person earning more • A person earning 10
Objective should contribute more lakh a month pays the
in the provision of same tax on the Wheat
public service by paying purchase as the person
more tax. earning 3000 Re a
• This provision is also month. This principle is
known as progressive called regressive
taxation. taxation.
Impact Not at all Inflationary. Is inflationary.
 TYPES OF DIRECT TAX
DIRECT TAXES UNION GOVT. STATE GOVT.
•Corporation Tax ( Rs. 8,58,849 crore )
•Minimum Alternative Tax (MAT) •Agriculture tax,
On Income •Dividend Distribution tax, Capital •Professional tax
Gains tax.
•Land Revenue,
•Securities Transaction Tax,
•Stamp/Registration duty.
On Assets •Commodities Transaction Tax
•Property tax in urban areas.
•Fringe Benefit Tax,
On Expenditure
•Gift Tax

Share of taxes in descending order according to Budget 2022: GST >

Corporation Tax > Income Tax > Union Excise Duty, Customs Duty
Cess
• Cess is a tax on tax. It is described under article 270 of the Indian Constitution.
Cess is basically levied for specific purpose.
• It is different from the usual taxes and duties because a cess is imposed as an
additional tax apart from the regular tax.
• For example, the Swachh Bharat cess is levied by the government for cleanliness
activities that it is undertaking across India.
• The revenue from the cess can be used only for particular purpose.
• Another difference between central taxes and cess is that proceeds from regular
taxes should be mandatorily shared with state governments while the
proceeds from the cess may or may not be shared with the state governments.
• Various types of cesses levied by the government : Education cess, Health cess,
Road cess or fuel cess, Clean energy cess, Krishi Kalyan cess, Swachh Bharat cess.
Surcharge

Surcharge is also tax on tax. It is basically levied on usually higher income

groups.

Unlike cess, surcharge is not levied for specific purpose but it is levied on
specific peoplee.; mainly higher income groups.

Surcharge is calculated on payable tax, not on total income generated.

Ex : So a surcharge of, say, 10 per cent on an existing tax rate of 30 per cent
effectively raises the total tax rate to 33%.
Corporation Tax
• Corporate tax is the tax which is levied on the income of the domestic and
foreign companies that arose in India.
• It is levied on both the public and private companies registered under the
Companies Act of 2013.
• The rate at which the tax is imposed as per the provisions of the Income Tax Act,
1961 is known as the Corporate Tax Rate.
• The Taxation Laws (Amendment) Bill, 2019 caused a reduction in the base
corporate tax rate, that is, from 30 percent to 22 per cent for the existing
businesses which led to revenue inference of INR 1.45 Lakh Crores.
• While, in case of new manufacturing firms that have been established post 1st
October, 2019 and prior to 31st March, 2023, the base corporate tax was reduced
from 25 per cent to 15 per cent.
Corporation Tax Before After
🌳🌳 Existing Indian companies 22% tax +10% surcharge on
25-30% depending on turnover + (tax) +4% cess (on tax +
0-12% surcharge depending on
profit + 4% health edu cess
surcharge) = 25.17

🏦🏦 New INDIAN MFG 15% +surcharge & cess as

company registered from
1/10/2019. (but they must start given above = 17.01
manufacturing by 31/3/2023 ⇒
💼💼Budget-2020: new INDIAN
electricity cost also eligible in
this

🐼🐼 Foreign Company’s profit 40%+surcharge+cess no change

from India

🏦🏦 Zero profit companies 18.5% MAT 15% MAT

EQUALISATION LEVY / GOOGLE TAX
If an Indian businessman purchases digital advertisement slots in google-adsense / facebook
= those (foreign) digital-ads companies are making profit.

But earlier, google/facebook did not pay tax on that profit, claiming their business activity (of
displaying digital-ads) is done outside India on global servers.

So, Budget-2016 imposed tax on such income/fees of foreign digital advertisement

companies.

Officially called “Equalisation Levy” (EQL), unofficially nicknamed “Google Tax” / “Digital
Service Tax (DST).

It’s not part of “Income Tax” or “Corporation Tax” under the Income Tax Act 1961, but a
separately imposed by the Finance Bill/Act 2016.

Foreign Company can’t escape it saying we’re protected under Double Taxation Avoidance
💼💼Budget2016 : 6% Equalisation Levy on foreign digital advertisement companies
e.g. Google’s adsense, facebook digital ads

💼💼Budget2020 : 2% Equalisation Levy on foreign companies engaged in E-

commerce /selling goods & services to Indian residents e.g. Microsoft/Adobe selling
softwares on their site

Digital subscription to Indian residents e.g. Netflix,

Q. With reference to India’s decision to levy an equalization tax of 6% on
online advertisement services offered by non-resident entities, which of
the following statements is/are correct? (CSE-2018)
1. It is introduced as a part of the Income Tax Act.
2. Non-resident entities that offer advertisement services in India can claim
a tax credit in their home country under the “Double Taxation Avoidance
Agreements”.
Answer Codes:
a) 1 only
b) 2 only
c) Both 1 and 2
d) Neither 1 nor 2
Minimum Alternative Tax
Some industrialists use tax-deduction, exemptions, depreciations and accounting
tricks to become “Zero Profit Companies” & escape paying Corporation Tax.

So, - Budget-1996 (Chidambaram) introduced 18.5% MAT on book profit using a

different type of formula.

The government lowered the MAT tax rate from 18.5 per cent to 15 per cent in
September 2019.

MAT is subjected to + surcharge + cess. In addition, no MAT would be charged on

any new domestic manufacturing firm (incorporated on or after October 1, 2019).
Question: Which of the following statements is correct:
MAT is a type of indirect tax.
The goal of MAT is to bring "zero tax corporations" into the tax net.
Mark the correct option:
(a) 1 only
(b) 2 only
(c) Both 1 and 2
(d) Neither 1 nor 2
DIVIDEND DISTRIBUTION TAX (DDT)

FM Chidambaram in 1997 started to levy DDT on a shareholder’s dividend income.

In reality, company (source) will cut that much income portion from shareholders’
dividend, and directly deposit that particular amount to the govt, as DDT.

Shareholder did not have to pay Income tax on it.

DDT Rate → 15% + cess + surcharge = 20.56% on dividend paid.

Budget-2020: abolished DDT. But, dividend will be taxable in the hands of shareholder
(i.e. he’ll pay income tax on it).
 Buyback Tax
Profit making companies sometimes repurchase their own shares back from shareholders.

Impact - These many shares are eliminated from company’s liability side.

Benefit to company - No need to pay dividend on these shares in future.

Budget-2013: Government ordered UNLISTED companies to pay “20% Buyback tax” they buy
back their own shares from the market.

(Full) Budget-2019: made this applicable on LISTED companies as well.

Capital Gains Tax (CGT)
❑When an owner makes profit by selling his
capital assets such as non-agro-land,
property, jewellery, paintings, vehicles,
machinery, patents, trademarks, shares,
bonds & other securities- then he has to pay
CGT.
❑ Depending on how long did the owner keep
that asset before selling it, he will pay:
1. Either short capital gains tax (LCGT) or
2. Long capital gains tax (SCGT)
❑ In practice, the buyer will deduct that much
amount from the payment to seller, and
deposit to the govt.
MCQ: In which of the following circumstances may ‘capital gains’ arise?
(Pre’12)
1. When there is an increase, in the sales of a product.
2. When there is a natural increase in the value of the property owned.
3. When you purchase a painting and there is a growth in its value due to
increase in its popularity.
Answer Codes:
(a) 1 only
(b) 2 and 3 only
(c) 2 only
(d) 1, 2 and 3
Question :Consider the following statements regarding “crowding out” effect.
1. Crowding out effect refers to how increased government spending, for which
it must borrow more money, tends to reduce private spending.
2. This also impacts interest rates in the economy.
3. A high magnitude of the crowding out effect may even lead to lesser income
in the economy.
Which of the above statements is/are correct?
a) 1, 2
b) 2, 3
c) 1, 3
d) 1, 2, 3
Q. Which of the following statements best describes ‘fiscal
consolidation’?
a) Government agenda to reform loan disbursal mechanism of
scheduled banks.
b) Strategy of the government to disinvest public sector enterprises
to meet deficit.
c) Scheduled banks action plan to recover the loans from non-
performing assets.
d) Policies undertaken by Governments to reduce their deficits and
accumulation of debt stock.
Q. Which of the following factors can lead to Demand-pull inflation?
A.Strong consumer demand
B.Increase in money supply
C.When prices go up
D.Technological innovation
Q. Consider the following statements.
1. The Monetary Policy Committee (MPC) has six members including the RBI Governor,
where each member is nominated by the RBI.
2. The Monetary Policy Committee meets every two months to evaluate the current
status and outlook for inflation and economic growth.
3. When the Monetary Policy Committee wants to contain inflation, it follows “dear
money” policy.
How many of the above statements are correct?
(a) Only one
(b) Only two
c) All three
d) None
Q. Core Inflation does not indicate a price rise in which of these commodities?
1. Consumer goods
2. Hydrocarbon fuel
3. Food products
4. IT products
Select the correct answer code:
a) 1, 2, 3
b) 1, 4
c) 2, 3
d) 1, 3, 4
 What is Income Tax?
James Wilson (financial member of the Council of India, founder of the Economist magazine and Standard Chartered
Bank) introduced income tax in India on 24 July 1860 to compensate the British losses during 1857’s Sepoy mutiny.

It is levied on a Hindu Undivided Family or an individual's net taxable income during a fiscal year that begins on April
1 and ends on March 31 of the following year.

It is calculated using an individual's or a business's net taxable income.

The government of India has set certain slab rates, i.e., higher and lower slab rates, for the convenience of its citizens.

The government announced a new regime of income tax which is optional in Union Budget 2020-2021.
 Nobel recipient American economist James Tobin proposed
(1970s) a small tax every time currency is converted into
another currency (e.g. from Dollar to Rupee and vice versa).

Such tax will discourage short term speculative investment

Tobin Tax and flight of capital from one country to another.

(Robinhood Tobin tax helps stabilizing the global economy and currency

Tax) exchange rates.

In India, foreign currency conversions are subjected to

(previously Service Tax) & now GST .
Securities Transaction Tax (STT)
STT is a direct tax imposed on all purchases and sales of securities
traded on India's registered stock exchanges.
STT does not apply to commodity and money transactions, as
well as transactions that take place outside of the exchange.
Securities such as shares, debentures, bonds, mutual funds,
government equity securities, and derivatives are all included.
It's rate (0.001%-2%) varies as per the nature of the securities.
 Commodity Transaction Tax i.e. CTT is levied
on non-agricultural commodity trading.

Agricultural commodity trading is exempt

Commodity from CTT.

Transaction CTT at 0.01% is levied on the sell value of

Tax trade in the case of futures trading.

CTT at 0.05% is levied on the sell value of

trade in the case of options trading.
Advance taxation

New financial year starts from 1st April 2019 and ends on 31st
March 2020.

Rational → If everyone paid all of their direct taxes at 11:59PM on

31st March 2020, then govt. will face money-shortage for the whole
year till 31st March midnight comes.
Advance Tax mechanism requires people to pay their Income tax and
Corporation tax in advance instalments on quarterly basis
Tax Collection At Source (TCS)

Tax Collected at e.g. Jeweller selling

Tax payee will have to
Source i.e. collected jewellery would
file tax-return to
by receiver or payee collect TCS and pay to
unlock this amount.
or seller. the IT department.
 MERITS OF DIRECT TAX
Progressive Tax: The direct taxes follow the principle of ‘ability to pay’ because they are levied on the basis
of individual’s income and wealth. Since ability to pay can be measured, the direct taxes are imposed at
progressive rate whereby richer persons pay higher taxes in comparison to the poor persons.

Reduction in Inequality:Due to their progressive nature, the direct taxes help in reduction of the
inequalities because the revenues collected from the rich man can be used for the good of poor man.

Economical in collection: In comparison to indirect taxes, the direct taxes are easy to collect because a tax
payer makes his own payments.

Elasticity: Direct taxes can be manipulated / altered as per requirements of the government, change in the
income of the people and economic status of the nation as a whole.
What is Indirect Tax?
An indirect tax is a tax that is collected through a middleman from the person who suffers the
tax's ultimate economic burden.
It is possible for the taxpayer to transfer it to someone else.

The intermediary prepares a tax return and sends the tax proceeds to the government along
with it.
In this sense, an indirect tax differs from a direct tax, which is collected directly by the
government from the individuals (legal or natural) who are subjected to it.
Indirect taxes are based on an individual's expenses rather than their income.

Indirect taxes are levied on suppliers of goods and services, but the tax is passed on to the
consumers, who are indirectly paying the tax.
Customs Duty
When commodities are transferred across international boundaries, customs duty is
applied as a tariff or tax.
Its goal is to safeguard the country's economy.

Various sorts of duties are imposed under customs rules, including Basic Duty,
Countervailing Duty, Protective Duty, Anti-Dumping Duty, and Export Duty.
Import duties are used not just to generate revenue for the government, but also to
regulate commerce.
In India, import duties are calculated on an ad valorem basis.

Ad valorem :It is based on the value of the transaction or the property. E.g. VAT.
❑Sales Tax
• In India, a sales tax is a type of tax levied by the government on the sale or
purchase of a certain commodity within the country.
• Sales tax is levied by both the central and state governments.
• It has now been replaced by IGST.
❑Excise Duty
• Excise duty is a commodities tax in the proper sense because it is collected on the
manufacturing of products in India rather than the sale of the product.
• Except for alcoholic drinks and narcotics, the central government imposes an
explicit excise levy.
• It has now been replaced by CGST.
MCQ-UPSC-Pre-2014. The sales tax you pay while purchasing a
toothpaste is a:
(a) tax imposed by the Central Government
(b) tax imposed by the Central Government but collected by the State
Government
(c) tax imposed by the State Government but collected by the Central
Government
(d) tax imposed and collected by the State Government
 In India, a service tax is levied on all services rendered.

In 1994-95, a service tax was imposed on three services:

telephone services, general insurance, and stockbroking.

Service Tax Every year since then, the service net has widened by adding
more and more services. We now have a 'negative list' exclusion
criterion, where some services are excluded from the tax net.

In India, the current rate of service tax was 15% before it

was replaced by the Goods and Services Tax.
Question: Which among the following is not an indirect tax?
(a) Customs Duty
(b) Sales Tax
(c) GST
(d) Income Tax
 PIGOUVIAN TAX

• An externality is a positive or negative

consequence of an economic activity
experienced by unrelated third parties.
• E.g. Cement company (related parties: labourers
& consumers benefit); whereas unrelated third
parties (local community, flora and fauna) are
harmed by cement company’s air-pollution.
• - English economist Arthur C. Pigou proposed
taxing the companies that create such negative
externalities: e.g. polluting industries, cigarettes
(passive smoking), alcohol (social disharmony).
• - We HAVE high level of indirect taxes on
petroleum, tobacco and alcoholic products.
Question: Which of the following should be considered for ‘Pigovian taxation’?
1. Consumption of cigarettes
2. Research for new technologies
3. Burning of fossil fuels
4. Restoration of lost cultural heritage
Choose the correct answer using the codes given below:
(a) 1 and 3 only
(b) 2, 3 and 4 only
(c) 1, 2 and 3
(d) 2 and 4 only
Cascading Effect Of Indirect Taxes

• If a government levies 10%

indirect tax every time an
item is sold, then buyer will
have to pay tax on tax.
• This ‘cascading effect’ of
indirect taxes raises the
price of final product.
MCQ-UPSC-CDS-2013-I. Which of the following are direct tax in India?
1. Corporation tax
2. Tax on income
3. Wealth tax
4. Customs duty
5. Excise duty
Ans. Codes:
(a) 1, 2 and 3
(b) 1, 2, 4 and 5
(c) 2 and 3
(d) 1, 3, 4 and 5
What is/are the most likely advantages of implementing ‘Goods and Services Tax
(GST)’? [CSE 2017]
1. It will replace multiple taxes collected by multiple authorities and will thus
create a single market in India.
2. It will drastically reduce the ‘Current Account Deficit’ of India and will enable
it to increase its foreign exchange reserves.
3. It will enormously increase the growth and size of economy of India and will
enable it to overtake China in the near future.
Select the correct answer using the code given below:
(a) 1 only
(b) 2 and 3 only
(c) 1 and 3 only
(d) 1, 2 and 3
Evolution of GST in India
Vijay Kelkar Task Force on Fiscal
Responsibility and Budget
Management (FRBM) recommends
GST.
UPA government introduces 115th
Amendment Bill 2011 to implement
GST but it lapsed with the Ultimately, it was passed & became
dissolution of 15th Lok Sabha. 101st Constitutional Amendment Act

2004 2011 2016

2006 2014–2016

In Budget speech, P. Chidambaram Modi govt. introduces 122nd

announces the launch of GST from Constitutional Amendment Bill 2014
2010 in 16th Lok Sabha. Since GST aimed
to change federal financial relations,
so under Art.368, this constitutional
bill required.
Provisions Of 101st Constitutional Amendment Act, 2016
246-A -States given power to tax goods and services. (previously, they couldn’t tax
services.) But only Union will have the power to tax inter-state supply of goods and
services in the form of “IGST”
269-A: IGST (on inter-state trade) will be distributed between Union and states, as per
the formula by the GST Council.

270 :CGST (New indirect tax of the union, which has replaced excise duty and service
tax). CGST will be distributed between union and state govt. as per the formula set by
finance commission.
279A: President of India to appoint a constitutional body, “GST Council” headed by
Finance Minister.

366: Alcoholic liquor for human consumption is kept out of GST. (i.e. State govt continue
to levy State Excise on its production and State VAT on its sale.)
GST
• Established by the 101st Constitutional Amendment Act, on the lines of “One
Nation One Tax”.
• The Parliament and the state legislatures have concurrent powers to implement
GST
• It is a destination-based single tax.
• Tax slabs are 0%, 5%, 12%, 18%, 28%
• 3 taxes are applicable within GST:
1. Centre levies the CENTRAL GST (CGST)
2. State levies STATE GST (SGST)
3. Centre levies INTEGRATED GST (IGST) on transactions
• Parliament will compensate for any loss faced by the state.
• Lottery, Gambling and Betting are also taxable under the Goods and Services Tax
(GST) Act, 2017.
 Alcohol for human consumption,

Petroleum products,

COMMODITIES Electricity, The supply of goods to the SEZ,

OUTSIDE GST Supply of goods that come under zero rate

Fresh vegetables, fresh milk, cereals meat etc.

Raw materials.
 ADVANTAGES OF GST
➢ For the For the State
Government •Expansion of the
➢ Increase tax 1. For the overall tax base.
Compliance economy •Increase
➢ Create a unified 2. Reduce corruption Compliance.
common market 3. Bring about •Enhance
➢ Discourage Tax certainty Investment
evasion 4. Poverty Reduction •Improve the
➢ Taxation 5. Boost secondary Investment
Streamlining sector Scenario.
GST COUNCIL (Art. 279A)
• It is a Constitutional body under Article 279A.
• Decision – majority of 3/4th members.
• Quorum is 1/2 of the total number of members of the council

Chairperson- Union Finance Minister.

Minister of State for Revenue (Central Government) will be
Union Representations
a member
1/3rd voting share
➢ Minister of Finance from each State or Minister
nominated by the States will be its member including
Delhi and Puducherry.
➢ 2/3rd voting share
State Representations
➢ Members of the Council from the states have to choose
1 amongst themselves to be the Vice chairperson of the
council. They can also decide his term
National Anti Profiteering Authority (NAPA)

Under Central Goods and Services Tax Act, 2017.

It is the institutional mechanism to check the unfair profit-making

activities by the trading community and to ensure that the benefits of
the GST are passed on to the consumers.

NAPA is headed by a senior officer of the level of a Secretary to the

Government of India and shall have four technical members from the
Centre and/or the States.
GSTN Network

It is a non-profit, government organization.

It will manage the entire IT system of the GST portal

100% share are owned by the Centre and State government.

It will establish a uniform interface for the taxpayer and also create a common and
shared IT infrastructure between the Centre and States.
The GSTN will handle: Invoices + Various returns + Registrations + Payments &
Refunds.
GST input tax credit

• It is a mechanism to avoid cascading

of taxes.
• Input credit means at the time of
paying tax on output, one can
reduce the tax one has already paid
on inputs and just pay the balance
amount.
• Cross utilisation of input tax credit is
available.
GST COMPENSATION CESS

It was introduced as relief for States for the loss of revenues arising from the
implementation of GST.

As per the GST Act, states are guaranteed compensation for any revenue shortfall
below 14% growth (base year 2015-16) for the first five years ending 2022.

GST compensation is paid using funds specifically collected as compensation

cess- is levied on products considered to be sin or luxury goods.
E WAY BILL SYSTEM

When goods worth ₹50,000/> are moved within a state (intrastate) or from one
state to another (inter-state), then the
truck/transport/cargo/shipping/aeroplane company must generate E-way Bill
from GSTN Portal / App / SMS.

E-way bill’s self-declaration (that our truck is carrying “x” type of goods worth
“y” value) reduces the scope of bribery, delay, red-tape, harassment at the check
post, thereby ensuring a hassle-free rapid movement for transporters
throughout the country. - E-way bill system became effective from 2018. -
Tax Avoidance

When person discloses his

income and transactions It may not be illegal in
to tax authorities but uses every case, but still
legal loopholes to avoid unethical.
paying taxes.
Tax Haven

It is a country that demands

These countries are
little taxes from foreigners and
geographically small, & without
offers legal loopholes for Tax
viable economy. So they offer
Avoidance & opportunities for
such mechanism to attract
Tax Evasion. E.g. Mauritius,
foreign investors and foreign
Marshall Islands, Cayman
tourists.
Islands, Panama etc.
Q. What is meant by Tax haven?
A. A country which gives tax exemptions to the foreign citizens that
there will be no tax on investing the money in their country.
B. Subsidy given by the government in taxes
C. Tax evasion in the domestic country
D. To impose equal taxes on domestic producers and foreign
producers
Money laundering

Money laundering is the

When drug trafficking, ransom,
process of disguising the source
corruption and other criminal
of money, as if it came from a
activity generates substantial
legitimate activity, & then
profits, the criminal tries to
channelize it into banks, share
spend/ invest/ hide the money
market and other financial
without attracting attention.
intermediaries.
Hawala

• Hawala is an illegal money transfer

or remittance system.
• Money is paid to an agent who
instructs an associate in the
relevant country or area to pay the
final recipient.
• Although used by Indian workers
in middle east because lower
commission than post office/bank
transfers.
• Hawalas have better network in
remote areas
Shell firms, Post-
box/ Letter-box
companies
Tax Planning / Tax Mitigation

• When person invests money in

LIC/PPF/Pension funds etc. in
such manner that he can claim
various deductions legally
available in the Income Tax Act.
• It is neither illegal nor
unethical.
 •DTAA is a tax treaty between any two/multiple countries.
Double Taxation •So that taxpayers can avoid paying double taxes in the
Avoidance Agreement source and resident country.
(DTAA) •India has DTAA with countries like Australia, Canada,
Germany, Mauritius, Singapore, UAE, the UK and US.

•Companies shift their profits to other tax jurisdictions

Base Erosion And Profit
having lower tax rates, thereby eroding the tax base in
Shifting
India.

Multilateral Convention •It is an outcome of the OECD / G20 BEPS Project.

To Implement Measures •INDIA has ratified BEPS- MULTILATERAL CONVENTION.
To Prevent BEPS
 •To combat money laundering in India.
Prevention Of Money
•Under this, the Enforcement Directorate is empowered to
Laundering Act,2002
conduct a Money Laundering investigation.
•It is an amnesty scheme offers a complete waiver on interest
Vivaad Se Vishwas
and penalty to the taxpayers who pay their pending taxes by
Scheme,2020
March 31.
•Sabka Vishwas is a legacy dispute resolution scheme to free
Sabka Vishwas
the large number of small taxpayers of their pending disputes
Scheme,2019
with the tax administration.
•Money that leaves the country through various channels and
makes its way
•back into the country often as foreign investment. This
Round Tripping
mostly involves black money and is allegedly often used for
stock price manipulation.
 •A grandfather clause (or grandfather policy or
grandfathering) is a provision in which an old rule continues
Grandfather Clause to apply to some existing situations while a new rule will
apply to all future cases. Those exempt from the new rule
are said to have grandfather rights or acquired rights, or to
have been grandfathered in.

•Fiscal drag is a concept where inflation and earnings growth

Fiscal Drag may push more tax payers into higher tax brackets.
Therefore, fiscal drag has the effect of raising government
tax revenue without explicitly raising tax rates.

•The point at which tax cuts would expire, and spending cuts
Fiscal Cliff
would be triggered.
Organisation for Economic Cooperation and Development(OECD)

• Eatablished-1961.
• Aim- to stimulate economic progress and world trade.
• Most OECD members are high-income economies with a very high Human
Development Index
• Headquarters: Paris, France; Total Members: 36.
• India is not a member, but a key economic partner.
• Reports and Indices by OECD-
• Government at a Glance 2017 report
• International Migration Outlook
• OECD Better Life Index
 •Has task of enforcing– Foreign Exchange Management Act,
1999 (FEMA) and Prevention of Money Laundering Act, 2002
Enforcement
(PMLA).
Directorate
•It also processes cases of fugitive/ fugitives from India under
Fugitive Economic Offenders Act, 2018.
•The central national agency responsible for receiving,
processing, analysing and disseminating information relating to
Financial suspect financial transactions, money laundering and related
Intelligence crimes
Unit •FIU-IND is an independent body reporting directly to the
Economic Intelligence Council (EIC) headed by the Finance
Minister.
 • Both are a part of the Department of Revenue under the Ministry of Finance
created under the Central Boards of Revenue Act, 1963.
• The Central Board of Excise and Customs (CBEC) was renamed as the
Central Board of Indirect Taxes and Customs (CBIC) in 2018 after the roll
out of Goods and Services Tax (GST).
Central Board of
• CBIC deals with the tasks of formulation of policy concerning levy and
Indirect Taxes and
collection of Customs, Central Excise duties, Central Goods & Services Tax
Customs and
and Integrated GST, prevention of smuggling.
Central Board of
• CBDT provides inputs for policy and planning of direct taxes in India and is
Direct Taxes
also responsible for the administration of direct tax laws through the Income
Tax Department.
• Tax Administrative Reforms Commission (TARC)- Parthasarathi Shome-
proposal to merge the Central Board of Direct Taxes (CBDT) and Central
Board of Indirect Taxes and Customs (CBIC).