Taxation: UPSC Previous Year Questions (Indian Economy)
16 previous year UPSC Prelims questions on taxation are listed here, from 1996 to 2025. UPSC asks about GST and its advantages, capital gains, indirect transfers, which taxes are direct, and the role of progressive taxation. The 2025 paper tested whether income from allied agricultural activities is taxed. The explanations separate direct from indirect taxes and Centre from State powers.
Explanations state facts as of the year each question was asked; words like “recently” refer to that year.
Showing 11–16 of 16 questions
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UPSC 2003Indian Economy · Taxation
Q11. Consider the following statements: In India, stamp duties on financial transactions are: 1. Levied and collected by the State Government 2. Appropriated by the Union Government Which of these statements is/are correct?
Explanation
Stamp duty is a tax levied by the state government on the transfer of property/property ownership. It is governed by Section 3 of the Indian Stamp Act, 1899. The amount of stamp duty at the time of registration depends on the value of the property. It also varies based on the location of the property, as well as whether the property is newly constructed or pre-owned.
Statement 1 is correct: Stamp duties on financial transactions are levied and collected by State Governments under the Seventh Schedule of the Indian Constitution (State List).
Statement 2 is incorrect: The revenue from stamp duties is not appropriated by the Union Government but remains a vital source of income for state governments. Stamp duties play a significant role in generating non-tax revenue for states. They are imposed on documents such as property deeds, share certificates, and other financial instruments.
UPSC 2001Indian Economy · Taxation
Q12. Consider the following taxes: 1. Corporation tax 2. Customs duty 3. Wealth tax 4.Excise duty Which of these is/are indirect taxes?
Explanation
An indirect tax is a tax imposed on the consumption of goods and services, rather than directly on an individual’s income. The tax is paid by the consumer as part of the price of the goods or services purchased from the seller. In case of Indirect taxes, the individual who pays the tax to the government is different from the person who ultimately bears the burden of the tax. Customs duty and excise duty are classified as indirect taxes because their burden is ultimately passed on to consumers through the pricing of goods and services. Customs duty is levied on the import and export of goods and indirectly borne by the consumers. Excise duty is a tax on the manufacture of goods, indirectly passed on to consumers. According to the Economic Survey 2000-01, indirect taxes like excise and customs duties formed a significant part of India’s revenue during this period. Corporation tax is a direct tax imposed on a company’s profits. Wealth tax is a direct tax on an individual’s or entity’s net wealth, it was abolished in 2015.
UPSC 1999Indian Economy · Taxation
Q13. Which one of the following statements regarding the levying, collecting and distribution of Income Tax is correct?
Explanation
The Union Government levies and collects income tax and shares its proceeds with the states based on the recommendations of the Finance Commission. This ensures a balanced revenue-sharing mechanism between the Union and State Governments to promote equitable development. The Constitution of India, under Article 270, mandates the sharing of income tax between the Union and States, excluding specific surcharges which are retained by the Union. As per Finance Commission recommendations, the distribution formula considers parameters such as population, area, and fiscal discipline to ensure fair allocation. This practice is pivotal for fostering fiscal federalism in India.
UPSC 1997Indian Economy · Taxation
Q14. The Minimum Alternative Tax (MAT) was introduced in the Budget of the Government of India for the year:
Explanation
The Minimum Alternative Tax (MAT) was introduced in the Union Budget for 1996-97 to ensure that companies with substantial book profits pay a minimum amount of tax, even if their taxable income is reduced due to exemptions and deductions. MAT was introduced under Section 115JB of the Income Tax Act to prevent large corporations from exploiting tax loopholes and paying little to no taxes. This initiative was crucial for ensuring tax equity and broadening the corporate tax base. The MAT rate was initially set at 7.5% of book profits and has undergone periodic revisions over the years.
UPSC 1996Indian Economy · Taxation
Q15. Given below are two statements, one labelled as Assertion (A) and the other labelled as Reason (R). Assertion (A): An important policy instrument of economic liberalization is reduction in import duties on capital goods. Reason (R): Reduction in import duties would help the local entrepreneurs to improve technology to face the global markets. In the context of the above two statements, which one of the following is correct?
Explanation
Assertion A is true: Economic liberalization in India, initiated in 1991, focused on reducing import duties on capital goods as a key policy instrument to make the economy globally competitive. Reason R is true: This reduction in import duties facilitated access to advanced technology, machinery, and equipment at lower costs, enabling Indian entrepreneurs to modernize industries and compete in global markets. The Reason (R)explains the Assertion (A) correctly, as lower import duties encouraged the adoption of cutting-edge technologies and fostered export competitiveness in sectors like manufacturing and IT.
UPSC 1996Indian Economy · Taxation
Q16. A redistribution of income in a country can be best brought about through:
Explanation
Redistribution of income is best achieved through progressive taxation, where higher-income groups are taxed at a higher rate, and progressive expenditure, where government spending is directed toward social welfare programs, such as education, healthcare, and poverty alleviation. This ensures equitable resource distribution and addresses income inequality. Examples include India’s National Food Security Act and subsidies for essential services like health and education funded by a progressive tax structure. This combination promotes social equity and economic stability. Options (b), (c), and (d) are incorrect:
Regressive expenditure would widen income inequality by favoring higher-income groups. Regressive systems, in both taxation and expenditure, would exacerbate inequality. Regressive taxation would disproportionately burden the poor, even if expenditures are progressive.
Answer key for these questions
Q
UPSC year
Correct answer
11
2003
(a) Only 1
12
2001
(b) 2 and 4
13
1999
(a) The Union levies, collects and distributes the proceeds of income tax between itself and the states
14
1997
(d) 1996-97
15
1996
(a) Both A and R are true and R is the correct explanation
16
1996
(a) progressive taxation combined with progressive expenditure
What UPSC has tested in Taxation
A redistribution of income in a country is best brought about through progressive taxation combined with progressive expenditure.
The Goods and Services Tax subsumes many Central and State indirect taxes into a single tax on supply.
Capital gains arise when an asset is sold at a price higher than its purchase price.
Value Added Tax is a tax on value added at each stage, and is not basically a subject of the Central Government alone.
Corporation tax and wealth tax are direct taxes; customs duty and excise duty are indirect taxes.
Frequently asked questions
How many previous year UPSC questions are there on Taxation?
This page covers 16 previous year UPSC Prelims GS Paper-I questions on Taxation (Indian Economy), asked from 1996 to 2025. Each has the correct answer and an explanation.
Which taxes are direct and which are indirect?
Direct taxes, such as income tax and corporation tax, are paid by the person on whom they are levied. Indirect taxes, such as customs duty, excise duty and GST, are paid by consumers through the price of goods and services.
What are the advantages of GST?
It replaces a number of Central and State indirect taxes, removes the cascading of tax on tax, creates a single national market and makes compliance simpler. It is levied on the supply of goods and services at each stage.
What is a capital gain?
The profit made when a capital asset, such as land, shares or a house, is sold for more than its cost. It is taxed as short-term or long-term gain depending on how long the asset was held.
