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	As income increases, tax also increases; e.g., India's Income Tax slabs (₹4–8 lakh: 5%, ₹8–12 lakh: 10%)
Regressive	Tax burden decreases as income increases; e.g., Sales Tax, GST; prevalent in most developed countries
Proportional	Everyone pays tax at the same rate on total income; reduces disposable income

Angel Tax: Income tax levied on capital raised by unlisted companies issuing shares to investors above the fair market value.

⚠ EXAM TRAP

GST is often mistakenly thought of as "fair for all," but structurally it's a Regressive tax — burden effectively decreases as income rises, since everyone pays the same rate regardless of income.

Direct vs Indirect Tax

Type	Description
Direct Tax	Tax burden borne by the person on whom it is levied; no shifting of burden
Indirect Tax	Imposed on goods and services; burden shifted to another person; taxpayer and tax bearer are different individuals

Tax BurdenTax levied on a person but finally paid by another — e.g., GST

Tax IncidencePerson legally taxed also bears the burden

Service TaxStarted 1994, on recommendation of Raja Chelliah Committee

Related Terms

CESS: Based on tax; for a specific purpose only
Surcharge: Imposed on tax payable — "tax on tax"; no specific purpose required
Pigouvian Tax: Imposed on market transactions (buying/selling); creates negative externalities/additional costs

⚡ 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.

Direct Taxes (Central)

Income Tax
Corporate Tax
Expenditure Tax
Wealth Tax
Capital Gains Tax
Interest Tax
Gift Tax
Distribution of Profit Tax
Estate Duty (Inheritance Tax)
Securities Trading Tax
Fringe Benefit Tax
Banking Transaction Tax

Indirect Taxes (Central)

Service Tax
Custom Duty
Central Excise Duty
Central Sales Tax
Central Trade Tax

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
Tax on Hotel Receipts
Business Tax

Indirect Taxes (State)

Sales Tax / Purchase Tax
State Excise Fees
Stamp Duty and Registration Fees
Tax on Vehicles
Tax on Transportation
Tax on Advertising
Taxes and Duties on Electricity
Tax on Gambling

⚠ 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
A single destination-based tax

GST Rates0%, 5%, 12%, 18%, 28%

Constitutional Provision101st Constitutional Amendment, 2016

Implemented From1st July, 2017

First State to Pass GSTAssam

Commodities Out of GST Scope

Alcohol
Real Estate, Aviation
Crude Oil, Petrol, Turbine Fuel

⚡ QUICK RECALL

Petroleum products and alcohol remain outside GST — a high-frequency BPSC question since these generate major state revenue.

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	Union Territory GST — UT transactions

⚠ 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 (31 voting members)

Chairpersons2 (non-voting): Union Finance Minister, Union State Finance Minister

Voting Right of Chair33.3%

Remaining 31 MembersAll States' Finance Ministers or nominated ministers

Voting Right of States66.6%

Decision Threshold3/4 (75%) Majority

⚡ 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	Tax increases as income increases \| India's Income Tax
Regressive Tax	Tax burden decreases as income increases \| e.g., GST, Sales Tax \| Prevalent in developed countries
Proportional Tax	Same rate on total income at every level \| Reduces disposable income
Direct Tax	Levied and borne by same person \| No shifting of burden
Indirect Tax	Imposed on goods & services \| Burden shifted \| Taxpayer ≠ Tax bearer
Service Tax	Started 1994 \| On recommendation of Raja Chelliah Committee
Angel Tax	Income tax on unlisted companies issuing shares above fair market value
CESS	Based on tax \| For a specific purpose only
Surcharge	Tax on tax \| No specific purpose required
Pigouvian Tax	Imposed on market transactions \| Creates negative externalities
GST — Type	Indirect Tax \| Single destination-based tax
GST Rates	0%, 5%, 12%, 18%, 28%
GST — Constitutional Amendment	101st Constitutional Amendment, 2016
GST — Implemented	1st July, 2017
First State to Pass GST	Assam
Items Out of GST Scope	Alcohol, Real Estate, Aviation, Crude Oil, Petrol, Turbine Fuel
IGST	Integrated GST — Inter-state transactions
SGST	State GST — Intra-state transactions
CGST	Central GST — Intra-state transactions
UTGST	Union Territory GST — UT transactions
GST Council Members	33 total (31 voting) \| Chair: Union FM + Union State FM (non-voting)
GST Council — Chair Voting Right	33.3%
GST Council — States Voting Right	66.6%
GST Council — Decision	3/4 (75%) Majority
Main Revenue Sources — Centre	Income Tax \| GST \| Corporate Tax
Non-Tax Revenue	Fees and Fines \| Profits from Public Enterprises
Tax Burden	Tax levied on one person but paid by another \| e.g., GST
Tax Incidence	Person on whom tax is legally imposed also bears the burden