Taxation: UPSC Previous Year Questions (Indian Economy)

Explanation

Statement I is incorrect: Under Section 10(1) of the Income Tax Act, only agricultural income is exempt. Allied activities like poultry farming, dairy, or wool rearing do not fall under the definition of agricultural income. Hence, they are taxable under normal income tax provisions even in rural areas.

Statement II is correct: Under Section 2(14) of the Income Tax Act, 1961, rural agricultural land is specifically excluded from the definition of a capital asset. This means that capital gains tax is not applicable on the transfer of rural agricultural land. However, this exclusion applies only to land situated in rural areas and used for agricultural purposes.

Explanation

The term "Indirect Transfers" in the Indian context refers to situations where a foreign entity transfers shares, and those shares derive significant value from assets located in India. This concept gained prominence due to high-profile tax cases such as Vodafone and Cairn Energy. Case Study: In 2007, Vodafone International Holdings BV acquired shares of a Cayman Islands-based company which indirectly owned a majority stake in Indian telecom operator Hutchi-son Essar Limited. Although this transaction took place outside India between two foreign entities, India’s tax authorities argued that it involved the indirect transfer of Indian assets and demanded capital gains tax. Vodafone challenged this tax demand and the Supreme Court of India (2012) ruled in Vodafone’s favor, stating that indirect transfers were not taxable under Indian law at the time. The Indian government later amended tax laws retroactively, reinforcing its authority to tax such transactions. This led to international arbitration, which again ruled in Vodafone’s favor, citing unfair taxation practices.

Explanation

Option (a) is incorrect: An increase in the CRR means banks have to keep a larger portion of their deposits with the Re-serve Bank of India (RBI), reducing the funds available for lending. This leads to a decrease in the money multiplier.

Option (b) is incorrect: An increase in the SLR requires banks to hold a higher percentage of their deposits in the form of liquid assets like government securities, reducing their ability to lend. This also leads to a decrease in the money multiplier.

Option (c) is correct: When more people prefer banking and keep their money in banks instead of holding cash, it increases deposits in the banking system. This boosts banking activities like lending, which leads to a higher money multiplier as the deposits circulate through the system.

Option (d) is incorrect: While an increase in population may lead to more economic activity, it does not directly affect the money multiplier unless it translates into higher banking habits or changes in monetary policy.

Explanation

The Goods and Services Tax (GST) in India classifies goods and services into various tax slabs, with certain essential items exempted to ensure affordability.

Option (c) is correct:

Unprocessed cereal grains including those that are hulled are exempted from GST as they are considered basic food staples. Cooked eggs are exempt from GST aligning with the tax exemption on basic food products. Newspapers irrespective of whether they contain advertising material are exempt from GST to support the dissemination of information. Processed and canned fish are subject to GST as they are considered value-added products

Explanation

Statement 1 is correct: One of the primary objectives of the Goods and Services Tax (GST) is to replace multiple indirect taxes like VAT, service tax, excise duty, etc., that were levied by both the central and state governments. By creating a uniform tax structure, GST promotes the creation of a single national market, eliminating the cascading effect of taxes and simplifying the tax system.

Statement 2 is incorrect: GST is a domestic tax reform aimed at simplifying the indirect tax structure within India. It primarily affects internal trade and taxation and does not have a direct impact on the Current Account Deficit (CAD), which is influenced by factors like imports, exports, remittances, and foreign investments. While improved efficiency might contribute indirectly to exports, the effect on CAD would not be drastic.

Statement 3 is incorrect: While GST is expected to boost economic growth by improving tax compliance, reducing logistics costs, and promoting ease of doing business, claiming that it will enormously grow the economy to the extent that India will over-take China in the near future seems exaggerated and unrealistic. Goods and Services Tax (GST) Definition It is a comprehensive tax levied on the manufacture, sale, and consumption of goods and services. Established By the 101st Constitutional Amendment Act, on the lines of "One Nation One Tax". Powers The Parliament and the state legislatures have concurrent powers to implement GST Features Applicable on supply side Destination based Taxation Dual GST(Centre and the States simultaneously levying tax on a common base.) GST rates to be mutually decided(CGST, SGST & IGST) Multiple Rates Merged Taxes Central Value Added Tax, Additional Customs Duty, Special Additional Duty of Customs, Central Sales Tax, Service Tax, State VAT (Sales tax) Tax Slabs 5%, 12%, 18% and 28%. 3-Tiers of GST Centre levies the CENTRAL GST (CGST) State levies STATE GST (SGST) Centre levies INTEGRATED GST (IGST) on transactions IGST When the commodity is produced in one state and is traded to another state (interstate trade). In this case, the share of SGST should go to the consuming state (as the GST is a destination-based tax). Compensation Parliament will compensate for any loss faced by the state 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. Input Tax Credit It is a mechanism to avoid cascading of taxes. It 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 Reverse Charge Mechanism The receiver becomes liable to pay the tax, i.e., the chargeability gets reversed. Self-invoicing is to be done when you have purchased from an unregistered supplier and such purchase of goods or services falls under reverse charge. E-Way Bill System It is an electronic way bill for movement of goods which can be generated on the e-Way Bill Portal Objective:

Facilitate faster movement of goods.

Improve the turnaround time of vehicles.

It helps track intra-state as well as inter-state movements of goods of value exceeding Rs 50,000, for sales beyond 10 km in the Goods and Services Tax (GST) regime. Commodities Outside GST Alcohol for human consumption, Petroleum products, Electricity, The supply of goods to the SEZ, Supply of goods that come under zero rate Fresh vegetables, fresh milk, cereal, meat etc. Raw materials. NOTE: Lottery, Gambling and Betting are also taxable under the Goods and Services Tax (GST) Act, 2017 Advantages Disadvantages Lesser compliance (returns, maintaining books of record, issuance of invoices). A limited territory of business. Limited tax liability. No Input Tax Credit available to composition dealers High liquidity as taxes are at a lower rate. The taxpayer will not be eligible to supply non-taxable goods under GST such as alcohol and goods through an e-commerce portal.

Explanation

Statement 1 is incorrect: An increase in sales of a product typically results in revenue or business profits, not capital gains. Capital gains arise from the sale of an asset at a price higher than its purchase price, not from the regular sale of products.

Statement 2 is correct: Capital gains can arise when the value of an asset, such as property, appreciates over time. If the property is sold at a higher price than the original purchase price, the difference is considered a capital gain.

Statement 3 is correct: If the value of an asset, such as a painting, increases due to factors like popularity, and you sell it for a higher price than what you paid, the difference is considered a capital gain.

Explanation

In reference to the year in which questions has been asked details of the options are given below Statement (a) is correct: VAT is a multi-point tax system be-cause it is levied at each stage of the production and distribution process. However, it is destination-based, meaning the tax is ultimately collected in the state where the goods or services are consumed. Statement (b) is correct: VAT is applied to the value added at each stage of the production and distribution process, which means businesses pay tax on the difference between the cost of inputs and the selling price of their products. Statement (c) is correct: VAT is ultimately a consumption tax, and it is the consumer who bears the final burden of the tax, even though businesses collect it at each stage. Statement (d) is incorrect: VAT is a joint subject of both the Central Government and State Governments in India. The Central Government implements Central VAT (CENVAT), and State Governments levy the State VAT. The system requires coordination between both levels of government.

Explanation

The share of excise duty in gross tax revenue saw a significant decline in the five years leading up to 2010. This was primarily due to the shift toward service tax and the rationalization of indirect taxes. The reduction in excise duty rates for essential goods, introduction of exemptions, and gradual steps toward the Goods and Services Tax (GST) framework also contributed to this trend. According to the Economic Survey 2009-10, excise duty collections as a percentage of total revenue declined as the government focused on reducing cascading effects in indirect taxation to promote industrial growth and exports. This shift in taxation policy marked the transition of India’s indirect tax structure to a more consumption-based taxation system. Note: If this question were asked today, excise duty has been largely replaced by GST for most goods, further reducing its contribution to tax revenue.

Explanation

All three taxes--Fringe Benefit Tax (FBT), Interest Tax, and Securities Transaction Tax (STT)--are classified as direct taxes, as they are levied directly on entities or individuals and cannot be passed on to others. Fringe Benefit Tax (FBT): Introduced in 2005 and abolished in 2009, it was imposed on employers for providing fringe benefits to employees. Interest Tax: Levied on the interest income of financial institutions, phased out in the early 2000s. Securities Transaction Tax (STT): Imposed on the purchase or sale of securities on recognized stock exchanges since 2004. These taxes were introduced under the Income Tax Act, 1961, with the intent to simplify and broaden the taxation framework.

Explanation

The Kelkar Committee Report (2002) did not recommend raising the personal income tax exemption limit specifically for widows to Rs. 1.20 lakh. Instead, the report focused on simplifying the tax system and broadening the tax base. Key recommendations included:

Abolition of Wealth Tax to streamline the tax structure. Elimination of standard deduction for salaried employees to simplify personal income tax calculations. Exemption from tax on dividends and capital gains from listed equities to encourage market participation. The report emphasized promoting economic grow-th by reducing distortions in the tax system and encouraging compliance.