Fiscal Policy & Revenue (Part – IV)

Total Questions: 50

21. Which one of the following group of taxes collected by the Central Government are shared with the States? [U.P.P.C.S. (Mains) 2003, 2004]

Correct Answer: (e) All of the above
Solution:After the Eightieth Amendment to the Constitution of India (2000), net proceeds of all taxes (after deducting cess, surcharge and cost of collection) collected by the Union are shareable with the States. These constitute the divisible pool of taxes.

The pool of taxes that are shared with states is called the divisible pool. Taxes like surcharges and cesses (levied for specific purposes) are not included in the divisible pool and are retained by the central government.

The Finance Commission plays a crucial role in determining the share of taxes that each state receives, based on factors like population, income, and other relevant criteria. Central GST (CGST) is part of the GST collected by the central government is also shared with the states.

The GST collected by the state governments themselves (SGST) is entirely retained by them. A portion of the Integrated GST (IGST) collected on inter-state transactions is also shared between the center and the states. Other taxes like income tax and corporation tax are also part of the divisible pool.

22. Which one of the following statements regarding the levying, collecting and distribution of Income Tax is correct? [I.A.S. (Pre) 1999]

Correct Answer: (a) The Union levies, collects and distributes the proceeds of income tax between itself and the States
Solution:The Union levies and collects the income tax, but its net proceeds with other Central taxes and duties are distributed between the Union and the States as per the recommendations of the Finance Commission.

The New Income Tax Bill 2025 aims to simplify and modernise the Indian Income tax system through proposed legislation. The bill focuses on important reforms that would enhance tax compliance, reduce litigation and give better clarity in tax laws. At the end of the day, the goal is to optimize and simplify the tax process for authorities as well as tax taxpayers. This would help in creating a better and efficient tax system.

New Income Tax Bill 2025 Objectives
The New Income Tax Bill 2025 has been designed to make tax compliance simpler and more user-friendly. Here's how:

  • Simpler Legal Language: The bill replaces complex jargon with clear, straightforward language, making it easier for taxpayers to understand and comply without needing legal expertise.
  • Shorter, More Efficient Laws: The new legislation will be about half the length of the current tax laws, removing redundant sections and reducing legal disputes. This will streamline processing for both taxpayers and officials.
  • No New Taxes: This reform isn't about adding more taxes-it's about simplifying existing laws. By cutting down on complexity, taxpayers can navigate the system with ease and minimal bureaucratic hurdles.
  • Budget Announcements Included: Key tax updates from the national budget, like income tax rate changes and TDS revisions, will be seamlessly integrated, ensuring clarity and smoother implementation.

This reform is all about making taxation simpler, more transparent, and easier to follow for everyone.

23. Which one of the following sets of sources of revenue belongs to the Union Government alone? [U.P.P.C.S. (Mains) 2005]

Correct Answer: (c) Customs duties, Corporation tax
Solution:Custom duties and Corporation tax are subjects of Union List, under the Seventh Schedule of the Constitution of India. Custom duties and Corporation tax are levied and collected by the Union Government but their net proceeds with other Central taxes and duties are distributed between the Union and the States as per the recommendations of the Finance Commission.

Sales tax (now SGST), land revenue and holding tax belongs to the State Governments. Wealth tax was introduced by the Government of India in 1957 but it was abolished in the Union Budget 2015-16. Gift tax belongs to the Union Government.

24. Which of the following is not a direct tax in India? [Uttarakhand P.C.S. (Pre) 2010]

Correct Answer: (d) Sales tax
Solution:Income tax, Wealth tax and Estate duty are direct taxes because both the impact and incidence of these fall on the same individual/entity. While in the Sales tax, the incidence and impact of taxation does not fall on the same individual/ entity. In the case of this tax, the burden of tax can be shifted by the taxpayer to someone else. Hence, it is an indirect tax.

Direct Taxes

A direct tax can be defined as a tax that is paid directly by an individual or organization to the imposing entity (generally government). A direct tax cannot be shifted to another individual or entity. The individual or organization upon which the tax is levied is responsible for the fulfilment of the tax payment.

The Central Board of Direct Taxes deals with matters related to levying and collecting Direct Taxes and formulation of various policies related to direct taxes. A taxpayer pays a direct tax to a government for different purposes, including real property tax, personal property tax, income tax or taxes on assets, FBT, Gift Tax, Capital Gains Tax, etc.

Indirect Taxes

The term indirect tax has more than one meaning. In the colloquial sense, an indirect tax such as sales tax, a specific tax, a value-added tax (VAT), or goods and services tax (GST) is a tax collected by an intermediary (such as a retail store) from the person who bears the ultimate economic burden of the tax (such as the consumer).

The intermediary later files a tax return and forwards the tax proceeds to the government with the return. In this sense, the term indirect tax is contrasted with a direct tax which is collected directly by the government from the persons (legal or natural) on which it is imposed.

25. Which one of the following is correctly matched? [U.P.P.C.S. (Mains) 2004*]

Correct Answer: (c) Excise Duty - Highest source of tax revenue to the Centre
Solution:In the question period (in 2004-05 and 2005-06), Union excise duties was the largest source of tax revenue of the Centre. However, at present Income Tax, Goods and Services Tax (GST) and Corporation Tax are three largest sources of tax revenue respectively. While Income tax is a direct tax, Customs duty is a Indirect tax. Entertainment tax is not the highest source of tax revenue to the States.

26. Match the list-I with the list-II and select the correct answer from the code given below the lists: [U.P. R.O./A.R.O. (Pre) 2016]

List - IList - II
A. Capital Gain Tax1. Income
B. Central Excise Duty2. Import
C. Custom Duty3. Factory Produce
D. Corporate Tax4. Sale of Property

Code:

ABCD
(a)4231
(b)1324
(c)3142
(d)2413
Correct Answer: (a)
Solution:Capital Gain Tax: Capital gains means the profit earned by an individual on the sale of his investment in assets such as stocks, real estate, commodities, bonds etc. Generally it is the 'gain' made on 'capital investment'. Capital gains are taxed if an individual sells an asset after holding it for a certain 'long' period.

Central Excise Duty: Central Excise duty is a form of indirect tax that is levied by the Central Government for the Production, sale, or license of certain goods.

Customs Duty: Customs duty refers to the tax imposed on goods when they are transported across international borders. In simple terms, it is the tax that is levied on import and exports of goods. It is an indirect tax.

Corporation Tax: Corporation tax is a tax imposed on the net income or profit that enterprises (companies) make from their businesses. It is a direct tax like income tax. Companies, both private and public registered in India under the Companies Act 1956, are liable to pay corporation tax.

27. Corporation tax is levied on: [R.A.S./R.T.S. (Pre) 1996]

Correct Answer: (c) Income of Company
Solution:Capital Gain Tax: Capital gains means the profit earned by an individual on the sale of his investment in assets such as stocks, real estate, commodities, bonds etc. Generally it is the 'gain' made on 'capital investment'. Capital gains are taxed if an individual sells an asset after holding it for a certain 'long' period.

Central Excise Duty: Central Excise duty is a form of indirect tax that is levied by the Central Government for the Production, sale, or license of certain goods.

Customs Duty: Customs duty refers to the tax imposed on goods when they are transported across international borders. In simple terms, it is the tax that is levied on import and exports of goods. It is an indirect tax.

Corporation Tax: Corporation tax is a tax imposed on the net income or profit that enterprises (companies) make from their businesses. It is a direct tax like income tax. Companies, both private and public registered in India under the Companies Act 1956, are liable to pay corporation tax.

28. Corporation tax: [I.A.S. (Pre) 1995]

Correct Answer: (c) is levied by the Union and shared by the Union and the States
Solution:With reference to the question period Corporation tax was levied by the Union and belongs to it exclusively. At present, Corporation tax is levied and collected by the Union but shared with the States with other central taxes and duties. as per the recommendations of the Finance Commission.

A corporate tax is a tax on a corporation's profits. Taxes are paid on a company's taxable income, which is revenue less general and administrative (G&A), selling and marketing, R&D, depreciation, and other operating expenditures.

A corporate entity's net income or profit from its operations, whether domestic or international, is subject to the direct tax which is the corporation tax or corporate tax.

The Corporate Tax Rate is the amount of tax levied by the terms of the Income Tax Act of 1961.

Depending on the kind of business entity and the various revenues generated by each corporate entity, the corporate tax rate is based on a slab rate structure.
Corporate tax rates vary greatly amongst nations, with some having meager rates and being labeled as tax havens.

  • The effective corporate tax rate, or the rate a corporation pays, is typically lower than the statutory rate, which is the declared amount before any deductions because corporate taxes can be reduced by a variety of deductions, government subsidies, and tax loopholes.

29. The Minimum Alternate Tax (MAT) was introduced in the Budget of the Government of India for the year: [I.A.S. (Pre) 1997]

Correct Answer: (d) 1996-97
Solution:The Minimum Alternate Tax (MAT) is a tax first introduced in India by the Union Budget 1987-88 (Finance Act, 1987) with effect from assessment year 1988-89. Later on, it was withdrawn by the Finance Act, 1990 and then reintroduced by the Union Budget 1996-97 (Finance Act, 1996) with effect from 1 April, 1997.

The objective of introduction of MAT is to bring into the tax net 'zero tax companies' which in spite of having earned substantial book profits and having paid handsome dividends, do not pay any tax due to various tax concessions and incentives provided under the Income Tax Law.

At present, MAT is computed by 15% (plus surcharge and cess as applicable) on book profit. It is levied at the rate of 9% (plus surcharge and cess as applicable) in case of a company being a unit of an International Financial Services Centre and deriving its income solely in convertible foreign exchange.

30. MODVAT is related to: [U.P.P.C.S (Pre) 2011]

Correct Answer: (a) Excise duty
Solution:MODVAT (Modified Value Added Tax) is basically related to the excise duties. In the mid 1980s, the excise duty reforms focused on relieving tax cascading, rationalization of duty rates, and simplification of rules and procedures. As a first step towards mitigating tax cascading, MODVAT was incorporated in the Indian tax system in the year 1986, covering a few limited commodities initially.

This permitted the manufacturers to avail of tax credit for the excise duty paid on their purchase of specified raw materials (and not capital goods) used in the manufacturing of specified goods.

After being in force for around 15 years, MODVAT was replaced by CENVAT (Central Value Added Tax) from 1 April 2000. MODVAT/CENVAT is different from the VAT as under MODVAT/CENVAT, excise is levied on final value and then rebate is given on inputs while under VAT, tax is levied on value addition at each stage of transaction in the production-distribution chain.