Indian Economy
🔒 Log in to trackTaxation and GST
🔒 Log in to trackA direct tax falls on the person who pays it, like income tax. An indirect tax is passed on to buyers, like GST. GST began on 1 July 2017, and GST 2.0 cut it to two main slabs, 5% and 18%, from 22 September 2025. The new Income-tax Act, 2025 replaced the 1961 Act from 1 April 2026.
Direct and indirect taxes
A direct tax is borne by the person who pays it. An indirect tax is paid to the government but passed on to buyers through prices.
| Type | Examples | Can the burden shift? |
|---|---|---|
| Direct | Income tax, corporate tax, capital gains tax, STT | No |
| Indirect | GST, customs duty, excise on petroleum and alcohol, stamp duty | Yes, to the consumer |
STT is the securities transaction tax. It is a direct tax.
Direct taxes are progressive: a higher income pays a higher rate. Indirect taxes are regressive, because rich and poor pay the same rate on a good. But they are easy to collect.
Example: A shop adds GST to your bill. The shop pays it to the government, but you bear it. So GST is an indirect tax.
Corporation tax and personal income tax are the two biggest direct taxes. GST is the biggest indirect tax. Agricultural income is outside income tax, because taxing it is a state power.
GST basics
GST (Goods and Services Tax) is one tax on goods and services. The 101st Constitutional Amendment Act, 2016 created it. It began on 1 July 2017.
It is a destination-based consumption tax. The tax follows the place where the goods are consumed. GST took over excise, service tax, VAT, CST, entry tax and luxury tax.
| Article | What it covers |
|---|---|
| 246A | Power to make GST laws |
| 269A | GST on inter-state trade (IGST) and its sharing |
| 279A | The GST Council |
Which GST applies
- A sale within one state carries CGST (to the Centre) plus SGST (to the state).
- A sale between states, and imports, carry IGST.
- The GSTN is the IT network that runs GST.
Example: A ₹1,000 item taxed at 18% is sold within one state. CGST is ₹90 and SGST is ₹90. Total tax is ₹180.
The GST Council
The Union Finance Minister chairs the Council. The other members are the Union Minister of State for Finance and the state finance ministers. The quorum is half the members.
Decisions need a three-fourths weighted majority. The Centre holds one-third of the votes. All states together hold two-thirds.
Rule: Neither side can pass a decision alone. One-third and two-thirds are both below three-fourths.
GST 2.0, the 2025 slab reform
The 56th Council meeting approved it on 3 September 2025. It took effect on 22 September 2025.
| Slab | Used for |
|---|---|
| 5% | Merit goods |
| 18% | Standard rate |
| 40% | Demerit goods: tobacco, pan masala, some luxury items |
The 12% and 28% slabs were abolished. Small cars, ACs and TVs moved to 18%. Unprocessed food, education and health stay exempt. Compensation cess ended, except on pan masala and tobacco products. Compensation to states under the GST law ran from July 2017 to June 2022.
The new Income-tax Act
The Income-tax Act, 2025 was passed in August 2025. It replaced the 1961 Act from 1 April 2026. It has 536 sections in 23 chapters, in plainer language.
Its key change is one tax year. It replaces the old pair "previous year" and "assessment year". So income of FY 2026-27 is called Tax Year 2026-27.
Filing is still yearly. The default new regime has lower rates but few deductions. The older regime stays as an option. Under the new regime (Budget FY 2025-26), income up to ₹12 lakh pays no tax. For salaried people, the limit is ₹12.75 lakh with the standard deduction.
Other tax facts
- LTCG (long-term capital gains) on equities is taxed at 12.5% above ₹1.25 lakh, since Budget 2024.
- STT was raised in Budget 2026.
- Share buybacks are taxed as capital gains for holders. Promoters also face a buyback tax.
- The Finance Commission (Article 280) decides how central taxes are shared with states.
- Cesses and surcharges are outside the shared pool, so states get no part of them.
Question types you will see
Each type: how to recognise it, the method step by step, and one question to try.
GST Council and constitutional articles
'Article 279A deals with', 'who chairs the GST Council', or 'the Centre has what share of votes'.
Recall the articles: 246A power, 269A inter-state, 279A Council.
The Union Finance Minister chairs the Council.
Members add the Union MoS Finance and state finance ministers.
Decisions need 3/4 of weighted votes: Centre 1/3, states 2/3.
Three articles and one voting rule cover almost every Council question.
Under which article of the Constitution is the GST Council constituted?
Show solutionHide solution
The 101st Amendment added three articles.
246A and 269A deal with taxing power and inter-state trade.
279A sets up the Council.
Article 279A
GST launch and the 2025 slab reform
'GST was introduced from', 'which amendment brought GST', or 'the GST slabs after September 2025 are'.
GST began on 1 July 2017.
The 101st Constitutional Amendment Act, 2016 created it.
GST 2.0 took effect on 22 September 2025.
Slabs are now 5% and 18%, plus 40% for demerit goods.
The launch date and the new slabs are fixed, often-asked facts.
After the GST 2.0 reform of 22 September 2025, what are the two main GST slabs?
Show solutionHide solution
The 12% and 28% slabs were abolished.
5% is for merit goods. 18% is the standard rate.
40% is only for demerit goods.
5% and 18% (with a separate 40% demerit rate)
Direct versus indirect tax
'Which is a direct tax', 'which tax cannot be shifted', or options mixing customs, corporate tax, GST and STT.
Ask: can the payer pass the tax on to a buyer?
If not, it is direct: income, corporate, STT, capital gains.
If yes, it is indirect: GST, customs, excise, stamp duty.
STT is the usual trick option. It is direct.
The burden test sorts every option in one pass.
Which of the following is a direct tax? (a) GST (b) Customs duty (c) Corporate tax (d) Stamp duty
Show solutionHide solution
GST, customs and stamp duty are passed on to buyers.
Corporate tax falls on company profits.
The company cannot shift it.
(c) Corporate tax
Income-tax Act 2025 and the tax year
'The new Income-tax Act is effective from', 'the tax year replaces', or 'how many sections does the new Act have'.
The Act was passed in August 2025.
It works from 1 April 2026 and replaces the 1961 Act.
One 'tax year' replaces previous year and assessment year.
It has 536 sections in 23 chapters.
A new law is a favourite current-affairs question.
From which date did the Income-tax Act, 2025 come into force?
Show solutionHide solution
It replaced the Income-tax Act, 1961.
It starts with a financial year.
That year began on 1 April 2026.
1 April 2026
Tax bases, exemption and devolution
'Agricultural income is taxed by', 'which tax gives the most direct-tax revenue', or 'how are taxes shared with states'.
Agricultural income is outside income tax. It is a state subject.
Corporation tax and personal income tax lead direct taxes. GST leads indirect taxes.
The Finance Commission (Article 280) shares central taxes with states.
Cesses and surcharges are outside the shared pool.
These are fixed statements that show up in true/false options.
Which statement about agricultural income in India is correct?
Show solutionHide solution
Income tax is a central tax.
Taxing agricultural income is a state power.
So the Income-tax Act leaves it out.
It is outside central income tax; only states can tax it
Which GST applies to a sale
'A sale from one state to another attracts', 'GST on imports is', or 'CGST and SGST are levied on'.
Check if buyer and seller are in the same state.
Same state: CGST (Centre) + SGST (state).
Different states, or an import: IGST.
The GSTN only runs the IT system. It is not a tax.
The place of sale alone decides the GST type.
A trader in Gujarat sells goods to a buyer in Rajasthan. Which GST applies?
Show solutionHide solution
Seller and buyer are in different states.
This is an inter-state sale.
Inter-state sales carry IGST.
IGST (Integrated GST)
Taxes merged into GST
'Which tax was not subsumed in GST', 'GST replaced which taxes', or 'which tax is still outside GST'.
GST took over excise, service tax, VAT, CST, entry tax and luxury tax.
Customs duty is still outside GST.
Excise on petroleum and alcohol continues.
Pick the option that is still levied separately.
Learn the merged list once and the odd one out is clear.
Which of these taxes was NOT merged into GST? (a) Service tax (b) VAT (c) Customs duty (d) Entry tax
Show solutionHide solution
Service tax, VAT and entry tax were merged.
Customs is charged on imports at the border.
It is still a separate tax.
(c) Customs duty
Shortcuts that save time
246A is the power to tax. 269A is inter-state GST. 279A is the Council. All came from the 101st Amendment, in force from 1 July 2017.
Which article created the GST Council?
Show solutionHide solution
Recall the trio 246A, 269A, 279A.
The last one is the Council.
The 101st Amendment (2016) inserted it.
Article 279A
Two working slabs: 5 (merit) and 18 (standard). 40 is kept for sin and luxury goods. 12% and 28% ended on 22 September 2025.
What is the GST on a small car now?
Show solutionHide solution
Small cars were at 28% plus cess.
The 28% slab was abolished.
Small cars moved to the standard slab.
18%
Income-tax Act, 2025 works from 1 April 2026. One 'tax year' replaces the previous year and assessment year pair. 536 sections, 23 chapters.
From which income year does the term 'Tax Year' apply?
Show solutionHide solution
The Act started on 1 April 2026.
That is the start of FY 2026-27.
So that year is Tax Year 2026-27.
FY 2026-27 (Tax Year 2026-27)
Mistakes to avoid
Where most students lose marks on this subtopic.
Calling STT an indirect tax.
STT is a direct tax on securities transactions.
Thinking compensation cess still applies to all goods.
It ended on 22 September 2025, except on pan masala and tobacco products.
Saying the GST Council decides by a simple majority.
It needs a three-fourths weighted majority. Centre has 1/3 of votes, states 2/3.
Still listing a 12% or 28% GST slab.
GST 2.0 kept 5% and 18%, plus a 40% demerit rate.
Using IGST for a sale inside one state.
Inside one state it is CGST + SGST. IGST is for inter-state sales and imports.
Saying the Centre taxes agricultural income.
Agricultural income is outside income tax. Taxing it is a state power.
Quick revision
Read this the night before the exam.
Direct: income, corporate, STT, capital gains. Indirect: GST, customs, excise (petroleum, alcohol), stamp duty.
GST: 101st Amendment (2016), from 1 July 2017. Articles 246A, 269A, 279A.
GST Council: Union FM chairs; 3/4 weighted majority; Centre 1/3, states 2/3.
CGST + SGST inside a state. IGST between states and on imports. GSTN is the IT network.
GST 2.0 from 22 September 2025: 5% and 18%, plus 40% demerit. 12% and 28% abolished.
Income-tax Act, 2025 from 1 April 2026: one 'tax year'; 536 sections, 23 chapters.
New regime: no tax up to ₹12 lakh (₹12.75 lakh for salaried).
Agricultural income is not taxed by the Centre. Tax sharing goes through the Finance Commission (Article 280).
Practice: 15 questions
Sets of 10, mixed across the question types above. Every answer has a step-by-step explanation.
Topic test · 10 questions
Suggested time 4 min · wrong answers go to your mistake notebook automatically.