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Indian Economy

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high importance~2 Q in Tier 16 formulas⚡ 19 shortcuts8 subtopics
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All subtopics·Subtopic 6 of 8

Taxation and GST

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⏱ 6 min read🧩 5 question types🎯 15 practice Q
The idea in one minute

Direct vs indirect taxes

DirectIndirect
Income tax, corporate tax, capital gains, STT; burden cannot be shiftedGST, customs duty; burden shifted to consumer

Direct-tax code change: the Income-tax Act, 2025 replaces the 1961 Act from 1 April 2026 — 536 sections in 23 chapters and a single "tax year" replacing assessment/previous year. Under the new regime (FY 2025-26 Budget), income up to ₹12 lakh attracts no tax (₹12.75 lakh for salaried with standard deduction).

GST

  • Introduced 1 July 2017 by the 101st Constitutional Amendment — Articles 246A (power to tax), 269A (inter-state apportionment), 279A (GST Council).
  • GST Council: chaired by the Union Finance Minister; Union MoS Finance + State finance ministers; quorum = half; decisions by 3/4th weighted majority (Centre 1/3, States 2/3).
  • GST 2.0 (56th Council, 3 Sep 2025; effective 22 Sep 2025): slabs collapsed to 5% and 18%, plus a 40% demerit rate for sin/luxury goods (12% and 28% abolished; compensation cess ended except pan masala & tobacco products). Small cars, ACs, TVs moved to 18%.
  • GST compensation to States ran Jul 2017 – Jun 2022 under the Act.

Other revenue markers

LTCG on equities 12.5% (> ₹1.25 lakh) since Budget 2024; STT raised in Budget 2026; buybacks taxed as capital gains for holders with promoter-level buyback tax. Customs is the only major indirect tax outside GST.

01

Direct vs indirect — the master divide

Direct taxes fall on the person who pays them: income tax, corporate tax, securities transaction tax (STT), capital-gains tax — progressivity built in, burden not shiftable. Indirect taxes are paid to the government but shifted to consumers through prices: GST, customs duty, excise duty on petroleum and alcohol, stamp duties — they are regressive (the rich and poor pay the same rate on a good) but easy to collect. Corporation tax and income tax are the top two direct-tax heads; GST the biggest indirect one. Agricultural income stays outside income tax (taxing it is a state power).

02

GST — one nation, one tax

The 101st Constitutional Amendment Act, 2016 created GST, effective from 1 July 2017; it is a destination-based consumption tax subsuming excise, service tax, VAT, CST, entry tax and luxury tax. Constitutional pegs: Article 246A (power to legislate), 269A (inter-state/IGST apportionment), 279A (GST Council). The Council — Union Finance Minister as chair, with the Union Minister of State for Finance and state finance ministers — decides rates and rules by a three-fourths weighted majority: Centre holds one-third of votes, states together two-thirds. Structure: CGST (Centre) + SGST (state) on intra-state sales; IGST on inter-state and imports; the GSTN runs the IT backbone.

Slabs after the GST 2.0 reform (Council decision of 3 September 2025, effective 22 September 2025): two principal slabs — 5% (merit) and 18% (standard) — plus a 40% rate for demerit goods (tobacco, pan masala, some luxury items); the old 12% slab was abolished and the 28% rate phased out into the 40% demerit track. Exemptions survive (unprocessed food, education, health). Compensation cess continues on specified demerit goods, now aligned to the 40% rate.

03

Income tax — the new code

The Income-tax Act, 2025 — passed in August 2025, effective 1 April 2026 — replaces the Income-tax Act of 1961. Its signature reform is the single 'tax year' replacing the twin concepts of previous year and assessment year; the Act has 536 sections in 23 chapters, in plainer language. Filing stays annual; a default new regime with lower slab rates but few deductions coexists with the older optional regime. Tax devolution to states flows through the Finance Commission (Article 280), the constitutional arbiter of the vertical split.

04

Question types you will see

Each type: how to recognise it, the method step by step, and one question to try.

Type 1very common3 practice Q

GST Council and constitutional articles

How to spot it:

'Article 279A deals with', 'who chairs the GST Council', 'the Centre has what share of votes', matching GST articles and Council facts.

Method

  1. Articles in a line: 246A = power to tax, 269A = IGST on inter-state trade, 279A = GST Council.

  2. Council: Union Finance Minister chairs; members include the Union MoS (Finance) and state finance ministers.

  3. Decisions: 3/4 weighted majority — Centre 1/3, all states together 2/3.

Try this

Under the GST framework, the GST Council is constituted under —

Show solution

Article 279A, inserted by the 101st Amendment — chaired by the Union Finance Minister, with decisions by a three-fourths weighted majority (Centre one-third, states two-thirds).

Type 2very common3 practice Q

GST launch, structure and the 2025 slab reform

How to spot it:

'GST was introduced from', 'which article inserted GST', 'the new GST slabs are', questions naming CGST/SGST/IGST and the 22 September 2025 change.

Method

  1. Launch: 1 July 2017, via the 101st Constitutional Amendment Act, 2016; destination-based.

  2. Structure: CGST + SGST intra-state; IGST inter-state and on imports; GSTN = IT backbone.

  3. From 22 September 2025 (Council decision 3 September 2025): slabs 5% and 18%, a 40% demerit rate, 12% abolished — the GST 2.0 reform.

Try this

After the GST 2.0 reform effective 22 September 2025, the principal GST slabs are —

Show solution

5% (merit) and 18% (standard), with a 40% rate for demerit goods; the 12% slab was abolished and the 28% rate retired into the demerit track.

Type 3common2 practice Q

Direct vs indirect classification

How to spot it:

'Which is a direct tax', 'which tax cannot be shifted', options mixing customs, corporate tax, GST, STT.

Method

  1. Direct = burden on the payer: income tax, corporate tax, STT, capital gains.

  2. Indirect = shifted to consumers: GST, customs, excise (petroleum, alcohol), stamp duties.

  3. Remember the constitutional split: GST article 246A; agricultural income outside income tax.

Try this

Which of the following is a direct tax?

Show solution

Corporate tax — levied directly on company profits with no shifting; GST, customs and stamp duty are indirect.

Type 4common2 practice Q

Income-tax Act 2025 and the tax year

How to spot it:

'The new Income-tax Act is effective from', 'the concept of tax year replaces', questions on the 2025 code replacing the 1961 Act.

Method

  1. Income-tax Act, 2025 — passed August 2025, effective 1 April 2026, replacing the 1961 Act.

  2. Single 'tax year' replaces previous year + assessment year; 536 sections, 23 chapters, simpler drafting.

  3. Devolution of taxes to states = Finance Commission (Article 280).

Try this

The Income-tax Act, 2025 became operative from —

Show solution

1 April 2026 — replacing the 1961 Act and introducing the single 'tax year' in place of the previous-year/assessment-year pair.

Type 5occasional2 practice Q

Tax bases, exemption and devolution facts

How to spot it:

'Agricultural income is taxed by', 'corporation tax contributes most to', which head dominates direct-tax collections, devolution mechanics.

Method

  1. Agricultural income — outside income tax; taxing it belongs to states.

  2. Direct-tax collections are led by corporation tax and personal income tax; GST leads the indirect side.

  3. Centre-state sharing runs through the Finance Commission's award; cesses and surcharges sit outside the divisible pool — a standard statement question.

Try this

Regarding agricultural income, the income-tax law —

Show solution

Leaves it untaxed: taxing agricultural income is a state power, so it stays outside the Income-tax Act's net.

05

Shortcuts that save time

⚡ GST article trio

246A power • 269A inter-state • 279A Council. 101st Amendment, 1 July 2017.

Example

Which article created the GST Council?

Show solution

Article 279A (101st Amendment, 2016).

⚡ GST 2.0 slab story

Two working slabs — 5 (merit) and 18 (standard) — with 40 kept aside for sin/luxury; 12% and 28% abolished on 22 Sep 2025.

Example

GST on a small car now?

Show solution

18% (moved from 28% plus cess).

⚡ Tax-year switch

Income-tax Act, 2025 → effective 1 April 2026; one 'tax year' replaces previous/assessment year pair; 536 sections, 23 chapters.

Example

From which income year does 'Tax Year' apply?

Show solution

FY 2026-27, called Tax Year 2026-27.

06

Mistakes to avoid

Where most students lose marks on this subtopic.

Mistake 01

Calling STT an indirect tax — it is a direct tax on transactions.

Mistake 02

Assuming compensation cess continues on all goods — it ended 22 Sep 2025 except pan masala/tobacco lines.

Mistake 03

Mixing the GST Council's 3/4 weighted majority with a 'simple majority of members'.

07

Quick revision

Read this the night before the exam.

  • Direct: income, corporate, STT, capital gains. Indirect: GST, customs, excise (petroleum/alcohol), stamp.

  • GST: 101st Amendment, 1 July 2017; Articles 246A / 269A / 279A; Council chaired by Union FM, 3/4 majority, Centre 1/3 : states 2/3.

  • CGST + SGST intra-state; IGST inter-state; GSTN = IT network.

  • GST 2.0: 22 September 2025 — slabs 5% and 18%, 40% demerit, 12% abolished.

  • Income-tax Act 2025: effective 1 April 2026, 'tax year' replaces previous/assessment year.

  • Agricultural income — no income tax; devolution via Finance Commission.

08

Practice: 15 questions

Sets of 10, mixed across the question types above. Every answer has a step-by-step explanation.

Topic test · 10 questions

Suggested time 4 min · wrong answers go to your mistake notebook automatically.

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