Economics · General Awareness

Indian Taxation System

2,325 Questions

The Indian taxation system comprises direct and indirect levies including income tax, goods and services tax, and property tax. Understanding these tax structures is crucial for general awareness sections in banking and government exams. The practice set covers central and state tax collections, exemptions, and capital gains rules.

Goods and Services TaxIncome tax rulesProperty tax assessmentsTax exemptionsCentral versus state taxes

Indian Taxation System Questions

Multiple choice

Taxing power in India is a two-tier structure. Consider the following:

(a) Levies on pre-production stage with centre (b) Levies on post-production stage with the states (c) Levies on international imports with the centre (d) Levies on exports with the states

Which of the above statements is/are incorrect?

  1. Both (a) and (c)

  2. Both (b) and (d)

  3. Only (c)

  4. Only (d)
Reveal answer Fill a bubble to check yourself
D Correct answer
Explanation

Taxing pattern in India is a two-layer structure. Levies of excise duties are with the centre whereas VAT is levied at the state level.

Multiple choice

Which of the following taxes belong to a state of Indian Union exclusively?

  1. Taxes on lands and buildings.

  2. Taxes on mineral rights

  3. Taxes on entry of goods into local areas.

  4. Taxes on income other than agricultural income.

Select the correct answer using the code given below:

  1. Only 1,2 and 3

  2. Only 2 and 3

  3. Only 1 and 4

  4. 1,2,3 and 4

Reveal answer Fill a bubble to check yourself
A Correct answer
Explanation

Taxes on lands and buildings (state list entry 49), taxes on mineral rights (state list entry 50), and taxes on entry of goods into local areas (state list entry 56) are all state subjects. However, taxes on income other than agricultural income (union list entry 82) are exclusively under the Union's taxation powers, not the states. The Constitutional allocation divides taxation powers between the Union and state lists.

Multiple choice

Which one of the following statements about the Central Board of Direct Taxes is not correct?

  1. The Central Board of Taxes provides essential inputs for public and planning of direct taxes in India.

  2. The Central Board of Direct Taxes is not responsible for administration of direct tax laws.

  3. The chairman and members of the Central Board of Direct Taxes are selected from the Indian Revenue Service only.

  4. Various functions and responsibilities of the Central Board of Direct Taxes are distributed amongst the chairman and the members, with only fundamental issues reserved for collective decision by the board.
Reveal answer Fill a bubble to check yourself
B Correct answer
Explanation

The Central Board of Direct Taxes (CBDT) IS responsible for administration of direct tax laws in India - it frames policies and administers income tax, corporate tax, and other direct taxes. Statement B says it is NOT responsible, which is incorrect and thus the right answer to this 'which is not correct' question. The other statements are generally accurate about CBDT's role in policy planning, IRS composition, and functional distribution.

Multiple choice

Levying of the following taxes falls within the state jurisdiction:

(a) Professional tax (b) Stamp duty (Property transfer) (c) Service tax (d) Land revenue

Which of the above is/are incorrect?

  1. Both (a) and (b)

  2. Only (d)

  3. Only (c)

  4. Both (c) and (d)
Reveal answer Fill a bubble to check yourself
C Correct answer
Explanation

Service tax is under Central jurisdiction (now subsumed under GST). Professional tax, stamp duty on property transfer, and land revenue are all under State jurisdiction. The question asks which are INCORRECT (not under state jurisdiction), so only Service tax qualifies.

Multiple choice

Temporary tax levied to obtain additional revenue is called

  1. FBT

  2. Duty

  3. Surcharge

  4. MAT
Reveal answer Fill a bubble to check yourself
C Correct answer
Explanation

A surcharge is an additional tax imposed over and above the base tax rate to generate extra revenue, typically for specific purposes or during emergencies. Unlike regular taxes, it is temporary in nature and can be levied on income tax, corporate tax, or customs duty.

Multiple choice

Which of the following statements is/are correct about earnings of SEZ units?

I. Export earnings receive 100% exemption from income tax for 5 years. II. They are required to pay excise duty on goods purchased from industries outside India. III. Export earnings do not get any tax exemption from income tax after 15 years.

  1. Only I

  2. I and II

  3. II and III

  4. I and III
Reveal answer Fill a bubble to check yourself
D Correct answer
Explanation

Export earnings receive 100% exemption from income tax for 5 years. There is no exemption from income tax after 15 years. The income tax is exempted for a period of 15 years, i.e. 100% of export profit is exempted from income tax for the first 5 years from the date of first exports. For the next 5 year, 50% of export profit is exempted. For the last 5 years, 50% of the ploughed back export profit is exempted from income tax. The above benefits are available subject to attainment of positive Net Foreign Exchange (NFE) earning in a block of 5 years from the date of commencement of operations.

Multiple choice

What is the Value Added Tax (VAT)?

  1. A single tax that replaces State Taxes like surcharge, turnover tax, etc.

  2. A simple, transparent, easy to pay tax imposed on consumers.

  3. A new initiative taken by the government to increase the tax burden of high income groups.

  4. A new tax to be imposed on the producers of capital goods.
Reveal answer Fill a bubble to check yourself
A Correct answer
Explanation

Value Added Tax (VAT) is indeed a single comprehensive tax that replaced multiple state-level indirect taxes like surcharge, turnover tax, and others. It was introduced to create a more uniform and efficient tax system across states, reducing the cascading effect of taxes.

Multiple choice

Fill blank 5.

Directions: Read the following passage with numbered blanks.

“Between the year 1964 and the year 1973, I did not file any income tax returns.” With that _____1_____ statement, Hitesh embarked on an account of his encounter with the famed Income Tax Department. “I originally owed 2,00,000 in unpaid taxes. With ____2_____ and ___3___, the 2,00,000 became 6,00,000. The Income Tax Department then went into action, and I learned first hand just how much power the Tax Department wields. Royalties and trust funds can be ____4____; automobiles may be ____5____, and auctioned off. Nothing belongs to the ___6_____ until the case is settled.”

  1. smashed

  2. seized

  3. dismantled

  4. frozen

  5. accounted
Reveal answer Fill a bubble to check yourself
B Correct answer
Explanation

Seize means to take possession of, which is correct according to the context of the passage. It implies confiscation of property.

Multiple choice

Which of the following is not a part of multiple taxation on machine tools in India?

Directions: Read the following passage carefully and answer the question that follows. Some words/phrases are printed in bold to help you locate them while answering the question.

Today, the import duty on a complete machine is 30% for all practical purposes, whereas the import duty on raw materials and components ranges from 35.85%. The story does not end here. After paying such high import duties on components, once a machine is made, it suffers excise duty from 5% – 10% (including on the customs duty already paid). At the time of sale, the machine tools suffer further taxation, i.e. Central Sales Tax or State Sales Tax which range from 4% – 16%. This much for the tax angle. Another factor, which pushes the cost of manufacture of machine tools, is the very high rate of interest payable to banks ranging up to 22%, as against 4% – 7% prevailing in advanced countries.
The production of machine tools in India being not of the same scale as it is in other countries, the price which India's machine tool builders have to pay for components is more or less based on the pattern of high pricing applicable to the prices of spares.
The machines tool industry in India has an enviable record of very quick technology absorption, assimilation and development. There are a number of success stories about how machine tool builders were of help at the most critical times. It will be a pity, in fact a tragedy, if we allow this industry to die and disappear from the scene.
It is to be noted that India is at least 6500 km away from any dependable source of supply of machine tools. The Government of India has always given a great deal of importance to the development of small scale and medium scale industries. This industry has also performed pretty well. Today, they are in need of help from India's machine tool industry to enable them to produce quality components at reduced costs. Is it anybody's case that the needs of the fragile sector (which needs tender care) will be met from 6500 km away?
Then, what is it that the industry requests from the government? It wants a level playing field. In fact, all of us must have a deep introspection and recognise the fact that the machine tool industry has a very special place in the country from the point of strategic and vital interest of the nation. Most importantly, it requests for the Government's consideration and understanding. It is therefore, high time that the government gives due attention to this industry which has good potential.

  1. Import duty on complete machine

  2. Import duty on components

  3. Excise duty on complete machine

  4. Sales Tax on components

  5. Sales Tax on complete machine
Reveal answer Fill a bubble to check yourself
A Correct answer
Explanation

The gist of the passage is that indigenously built machine tools and machines have to face taxation at various levels, whereas a complete machine being imported has to face taxation only once, i.e. when it is imported it faces only one taxation (i.e. import duty).

Multiple choice

Which of the following statements is correct?

  1. Income tax was abolished in India in 1991.

  2. Gift tax was abolished in India in 1998.

  3. All the states have adopted the VAT.

  4. Estate duty was abolished in 1995.
Reveal answer Fill a bubble to check yourself
B Correct answer
Explanation

Gift tax was abolished in India in 1998 to simplify the tax structure and reduce administrative burden. Income tax was NOT abolished in 1991 (it's a major revenue source). VAT has NOT been adopted by all states (GST replaced VAT later, but even before GST, some states had issues). Estate duty was abolished in 1985, not 1995.

Multiple choice

Which of the following subjects is not included in the Union list?

  1. Defence

  2. Income tax

  3. Railway

  4. Sales tax
Reveal answer Fill a bubble to check yourself
D Correct answer
Explanation

Sales tax has traditionally been a State subject under the State List, while Defence (Entry 1), Income tax (Entry 82), and Railway (Entry 20) are all explicitly mentioned in the Union List under the Seventh Schedule of the Constitution. Though GST has now subsumed sales tax, the question reflects the traditional constitutional arrangement where states had primary taxation powers over sales within their jurisdiction.