Tax System - Ch11 | Exam Fusion Prep

Tax — Introduction

Tax: Compulsory payment made to the government.

Purposes

Economic regulation
Revenue generation
Fair distribution of wealth
Promotion of price stability

Tax System — By Rate Structure

Type	Description
Progressive	Average or marginal tax burden rises as the tax base/income rises; slab-based personal income tax is an example
Regressive	Burden as a share of income tends to fall as income rises; broad consumption taxes can show this tendency
Proportional	Everyone pays tax at the same rate on total income; reduces disposable income

Angel Tax: former section 56(2)(viib) taxed certain excess share premium of closely held companies; abolished from AY 2025–26.

⚠ EXAM TRAP

Regressivity concerns tax burden as a share of income. Broad consumption taxes can be regressive, but incidence depends on consumption patterns, exemptions, rates and how the tax burden is shifted.

Direct vs Indirect Tax

Type	Description
Direct Tax	Imposed directly on a person/entity; statutory liability is generally intended to be borne by that taxpayer
Indirect Tax	Tax on transactions/goods/services whose economic burden can be passed wholly or partly through prices

Tax BurdenEconomic sacrifice/loss of real income ultimately borne because of a tax; may differ from the statutory payer

Tax IncidenceFinal distribution/resting place of the economic burden after shifting through prices, wages or returns

Service TaxStarted 1994, on recommendation of Raja Chelliah Committee

Related Terms

CESS: tax/levy earmarked for a specified purpose; its base depends on the relevant law
Surcharge: Imposed on tax payable — "tax on tax"; no specific purpose required
Pigouvian Tax: corrective levy on activities generating negative externalities, ideally reflecting the external social cost

⚡ QUICK RECALL

CESS is earmarked for a specific purpose (e.g., education cess); Surcharge has no such restriction — it just adds to the tax burden generally.

Current Union Direct Taxes

Income Tax
Corporate Tax
Securities Transaction Tax (STT)
Capital-gains taxation under income tax

Indirect Taxes (Central)

Central/Integrated GST framework
Custom Duty
Central Excise Duty

Main Revenue Sources — Centre

Income Tax, GST, and Corporate Tax are the main sources of revenue for the Central Government.

Direct Taxes (State)

Tax on Agricultural Income
Land Revenue
Professional Tax

Indirect Taxes (State)

SGST and VAT/sales tax on specified petroleum products and alcohol
State excise on alcoholic liquor
Stamp Duty and Registration Fees
Tax on Vehicles
Taxes and Duties on Electricity

⚠ EXAM TRAP

Tax on Agricultural Income is a STATE subject, not Central — a frequently tested Centre-State tax division question.

Goods and Services Tax (GST)

Indirect Tax
Imposed on goods and services
Destination-based indirect tax on supply under a dual Centre-State framework

GST RatesMain rates after September 2025 rationalisation: 5% and 18%; special 40% for specified luxury/sin goods; Nil/exempt and other special rates

Constitutional Provision101st Constitutional Amendment, 2016

Implemented From1st July, 2017

First State to Ratify the GST Constitutional Amendment BillAssam

Commodities Out of GST Scope

Alcoholic liquor for human consumption
Petroleum crude, high-speed diesel and petrol (motor spirit)
Natural gas and aviation turbine fuel

⚡ QUICK RECALL

Alcoholic liquor for human consumption and five named petroleum products remain outside GST. Do not treat all aviation or all real-estate activity as outside GST.

Types of GST

Type	Full Form / Scope
IGST	Integrated GST — Inter-state transactions
SGST	State GST — Intra-state transactions
CGST	Central GST — Intra-state transactions
UTGST	UT component on intra-UT supplies covered by the UTGST Act, levied alongside CGST

⚠ EXAM TRAP

For intra-state sales, BOTH CGST and SGST apply together; for inter-state sales, only IGST applies — a very common numerical/conceptual GST question.

Taxes Subsumed into GST

Central Taxes Subsumed

Central Excise Duty
Excise Duty (Medicinal and Toilet Preparations)
Additional Excise Duty (Goods of Special Importance)
Countervailing Duty
Surcharge
Additional Excise Duty (Goods of Cotton and Fabrics)
Central Surcharge / Cess
Additional Special Customs Duty (SAD)

State Taxes Subsumed

State VAT, Sales Taxes, Luxury Tax
Entry Tax, Purchase Tax, Entertainment, Advertisement
Lottery, Betting, Gambling Tax
State Surcharge and Cess

GST Council

Total Members33 members when all represented jurisdictions are included; Centre has two members and States/eligible UTs have 31 representatives

Chairperson and Other Union MemberChairperson: Union Finance Minister; other Union member: Union Minister of State in charge of Revenue/Finance

Central Government Voting Weight33.3%

31 State/Eligible UT RepresentativesAll States' Finance Ministers or nominated ministers

Voting Right of States66.6%

Decision ThresholdAt least 3/4 of weighted votes of members present and voting; quorum: 1/2 total membership

⚡ QUICK RECALL

GST Council voting: Centre = 1/3 (33.3%) weightage, States collectively = 2/3 (66.6%) weightage — decisions need a 75% majority of votes cast.

Non-Tax Revenue

Fees and Fines
Profits from Public Enterprises

Quick Summary / Reference Table

Topic	Key Fact
Tax — Definition	Compulsory payment made to the government
Progressive Tax	Average/marginal burden rises with income/tax base; slab-based personal income tax
Regressive Tax	Burden as a share of income tends to fall as income rises; broad consumption taxes can show this tendency
Proportional Tax	Same rate on total income at every level \| Reduces disposable income
Direct Tax	Imposed directly on taxpayer; liability generally intended to be borne by that taxpayer
Indirect Tax	Tax on transactions/goods/services; economic burden may be passed wholly or partly through prices
Service Tax	Started 1994 \| On recommendation of Raja Chelliah Committee
Angel Tax	Former excess-share-premium tax under section 56(2)(viib); abolished from AY 2025–26
CESS	Earmarked tax/levy for a specified purpose; base depends on law
Surcharge	Tax on tax \| No specific purpose required
Pigouvian Tax	Corrective tax on activities generating negative externalities; reflects external social cost
GST — Type	Destination-based indirect supply tax; dual Centre-State framework
GST Rates	Main rates after September 2025 rationalisation: 5% and 18%; special 40% for specified luxury/sin goods; Nil/exempt and other special rates
GST — Constitutional Amendment	101st Constitutional Amendment, 2016
GST — Implemented	1st July, 2017
First State to Ratify the GST Constitutional Amendment Bill	Assam
Items Out of GST Scope	Alcoholic liquor for human consumption; crude, diesel, petrol, natural gas, aviation turbine fuel
IGST	Integrated GST — Inter-state transactions
SGST	State GST — Intra-state transactions
CGST	Central GST — Intra-state transactions
UTGST	UT component on intra-UT supplies covered by the UTGST Act, levied alongside CGST
GST Council Members	33 total when all jurisdictions represented; Chair = Union FM, other Union member = Union MoS Revenue/Finance; 31 State/UT representatives
GST Council — Central Government Voting Weight	33.3%
GST Council — States Voting Right	66.6%
GST Council — Decision	At least 3/4 of weighted votes of members present and voting; quorum: 1/2 total membership
Main Revenue Sources — Centre	Income Tax \| GST \| Corporate Tax
Non-Tax Revenue	Fees and Fines \| Profits from Public Enterprises
Tax Burden	Economic sacrifice ultimately borne; may differ from statutory payer
Tax Incidence	Final economic burden after any shifting through prices, wages or returns