Question 1

Consider the following statements regarding tax classifications:
1. A specific tax, which is levied based on a commodity's unit or size, is described as being regressive in nature.
2. An indirect tax, such as the Goods and Services Tax (GST), is characterized by its potential to help in reducing inflation.
3. A proportional tax is one where high-income groups pay a higher percentage of their income than low-income groups, with Income Tax being a prime example.

Accepted Answer

Only one. Statement 1 is correct. A specific tax is a fixed amount levied on a unit of a commodity, irrespective of its price. This fixed amount represents a larger percentage of a low-income person's income compared to a high-income person's income, making it regressive in its impact. Statement 2 is incorrect. Indirect taxes, like GST, are levied on goods and services and are generally passed on to the consumer, leading to an increase in the price level. This effect is inflationary. Direct taxes, by reducing disposable income, are the ones that can help in curbing demand and thus reducing inflation. Statement 3 is incorrect. The definition provided—where high-income groups pay a higher percentage of their income—describes a progressive tax. A proportional tax is one where the same percentage of tax is levied on all taxpayers, regardless of their income. Additionally, Income Tax is a primary example of a progressive tax, not a proportional one. Therefore, only one statement is correct.

Question 2

With reference to the National Anti-profiteering Authority (NAA), consider the following statements:
Statement-I: The NAA was established to ensure that the benefits of reduced GST rates or input tax credits are passed on to the final consumers by suppliers.
Statement-II: The orders passed by the NAA are final and binding, and there is no provision for them to be appealed in a higher court.

Accepted Answer

Statement-I is correct but Statement-II is incorrect. Statement-I is correct. The text clearly states that the National Anti-profiteering Authority (NAA) was set up 'to ensure that the benefit of these reduced GST or benefit in the form of input tax credit is passed on to final consumers'. Statement-II is incorrect. The text explicitly mentions that 'Orders of NAA are appealable in High Court.' This contradicts the claim in Statement-II that the orders are final and cannot be appealed. Therefore, Statement-I is correct, but Statement-II is incorrect.

Question 3

Consider the following statements regarding direct taxes in India:
1. Professional Tax is levied and collected by the Central Government, similar to other direct taxes like Income Tax.
2. Securities Transaction Tax (STT) is levied on both the purchaser and the seller for all types of securities listed on a stock exchange.
3. Minimum Alternate Tax (MAT) is applicable to companies showing low taxable income despite high book profits, and a company must pay either corporate tax or MAT, whichever is higher.

How many of the above statements are correct?

Accepted Answer

Only one. Statement 1 is incorrect. Professional Tax is levied and collected by State Governments, as empowered by Article 276 of the Constitution of India, not by the Central Government. Statement 2 is incorrect. The applicability of Securities Transaction Tax (STT) is not uniform for both the purchaser and the seller across all security types. For example, in the case of the sale of a unit of an equity-oriented mutual fund, STT is levied only on the seller. Statement 3 is correct. Minimum Alternate Tax (MAT) is a provision designed to tax companies that report high book profits but have low taxable income due to various exemptions and deductions. The tax liability for such a company is the higher of its normal corporate tax liability or the MAT.

Question 4

Consider the following statements:

Statement-I: Agricultural land situated within 8 kilometers of a municipality with a population of 10,000 or more is considered a 'Capital Asset' for taxation purposes.

Statement-II: The legal definition of a 'Capital Asset' generally excludes agricultural land, but this exclusion is subject to specific conditions related to the land's proximity to urban areas.

Accepted Answer

Both Statement-I and Statement-II are correct and Statement-II is the correct explanation for Statement-I.. Statement-I is correct. The text defines agricultural land that is NOT a capital asset as land that 'cannot be located within 8 kilometers of' a municipality with a minimum population of 10,000. By logical inversion, this means agricultural land that IS located within that specified radius and population limit is indeed considered a Capital Asset. Statement-II is also correct. The text first lists 'Agricultural Land' as an item not considered a Capital Asset, but then provides the specific condition regarding its location relative to a municipality. Therefore, the general exclusion is conditional. Statement-II correctly explains Statement-I because it outlines the general rule (exclusion of agricultural land) and the principle of conditional exclusion (based on proximity to urban areas), which together establish the specific case described in Statement-I.

Question 5

Consider the following statements regarding certain direct taxes in India:
1. Fringe Benefit Tax (FBT) was levied on employees at 30 per cent of the cost of the benefit provided by the employer.
2. Wealth Tax was not applicable to entities such as trusts, partnership firms, and co-operative societies.
3. Dividend Distribution Tax (DDT) has been abolished and is no longer levied on domestic companies declaring dividends.

How many of the above statements are correct?

Accepted Answer

Only two. Statement 1 is incorrect. The text states that the Fringe Benefit Tax (FBT) was a tax that an 'employer had to pay', not the employee. It was levied on employers. Statement 2 is correct. The text explicitly mentions that wealth tax was not applicable to trusts, partnership firms, co-operative societies, political parties, etc. Statement 3 is correct. The text states that Dividend Distribution Tax (DDT) has been abolished with effect from 1 April 2020. Therefore, only two statements are correct.

Question 6

With reference to the Equalisation Levy introduced in India, consider the following statements:
1. It is an indirect tax levied on payments for digital services rendered by non-resident companies.
2. It is directly paid by the non-resident service provider to the Indian tax authorities.
3. Non-resident service providers can claim a tax credit for this levy in their home country under Double Taxation Avoidance Agreements.
How many of the above statements are correct?

Accepted Answer

None. All the statements are incorrect.
Statement 1 is incorrect. The Equalisation Levy is a 'sui generis' tax, meaning it is in a class of its own. It was introduced via the Finance Act and is not part of the conventional income tax or indirect tax (like GST) frameworks. It is levied on the gross revenue from specified digital transactions, not on net income (a feature of direct taxes) or on general consumption (a feature of indirect taxes). Therefore, classifying it as an indirect tax is inaccurate.
Statement 2 is incorrect. The levy operates on a withholding tax principle. The liability to deduct the levy from the payment and deposit it with the government rests with the Indian resident or business entity making the payment, not the non-resident recipient.
Statement 3 is incorrect. The Equalisation Levy is generally not considered an 'income tax' under the terms of most of India's Double Taxation Avoidance Agreements (DTAAs). As DTAAs typically provide for tax credits only for taxes on income, non-resident companies are generally unable to claim a credit for this levy against their tax liability in their home country.

Question 7

Consider the following statements regarding the OECD's Two-Pillar Plan:

Statement-I: The OECD's Two-Pillar Plan is a key part of the project to address the tax challenges arising from the digitalisation and globalisation of the economy.

Statement-II: Under this plan, Pillar One establishes a Global Minimum Corporation Tax Rate of 15%, while Pillar Two reallocates part of the profits of Multinational Corporations to the jurisdictions where their products and services are sold.

Which one of the following is correct in respect of the above statements?

Accepted Answer

Statement-I is correct but Statement-II is incorrect. Statement-I is correct. The OECD's Two-Pillar Plan was agreed upon to reform international taxation rules and address tax challenges from the digitalisation and globalisation of the economy. Statement-II is incorrect because it swaps the functions of the two pillars. Pillar One is concerned with the 'Reallocation of taxing rights', which reallocates part of the profits of MNCs to places where products and services are sold. Pillar Two, the 'Global anti-base erosion mechanism', is responsible for setting a ‘Global Minimum Corporation Tax Rate (GMCTR)' of 15%.

Question 8

With reference to the Carbon Border Adjustment Mechanism (CBAM) proposed by the European Union, consider the following statements:
1. Its primary objective is to incentivize EU-based companies in carbon-intensive sectors to relocate to countries with more relaxed emission limits.
2. The mechanism is designed to prevent 'carbon leakage' by making it more expensive for EU businesses to operate within the region.
3. It is a comprehensive tariff that applies to all goods imported from countries that lack substantial climate policies.
How many of the above statements are correct?

Accepted Answer

None. Statement 1 is incorrect. The primary objective of the CBAM is to prevent 'carbon leakage', which is the relocation of industries to countries with less stringent environmental regulations. Therefore, the mechanism is designed to disincentivize, not incentivize, such relocation.
Statement 2 is incorrect. The CBAM imposes a levy on certain carbon-intensive goods imported into the EU, not on EU businesses operating within it. The goal is to equalize the carbon price between domestic products (which already pay a price under the EU Emissions Trading System) and imported goods, thereby leveling the playing field, not making it more expensive for domestic firms.
Statement 3 is incorrect. The CBAM is not a comprehensive tariff on all goods. It is being introduced in phases and initially targets only a specific set of carbon-intensive goods, such as iron and steel, cement, aluminium, fertilisers, and electricity.

Question 9

With reference to the recent amendments regarding Long-Term Capital Gains (LTCG) tax, consider the following statements:

1. For properties acquired before the specified cutoff date, taxpayers are mandatorily required to pay a 12.5% LTCG tax without indexation benefits.
2. Indexation benefits, where applicable under the grandfather clause, can be applied to both capital gains and capital losses incurred on the asset.
3. For listed equity and equity-oriented mutual funds, while the exemption limit for LTCG has been increased, the applicable tax rate has been decreased to encourage investment.

Accepted Answer

None. Statement 1 is incorrect. The amendment provides taxpayers with a choice for properties acquired before July 23, 2024. They can either pay 20% LTCG tax with indexation (Old Scheme) or 12.5% LTCG tax without indexation (New Scheme). It is not a mandatory requirement to follow the new scheme. Statement 2 is incorrect. The provisions explicitly state that indexation benefits apply only to gains and will not be applicable to any losses incurred. Statement 3 is incorrect. While the exemption limit for LTCG on listed equity and certain other assets was increased from ₹1 lakh to ₹1.25 lakh, the corresponding tax rate was increased from 10% to 12.5%, not decreased.

Question 10

Consider the following statements regarding tax administration bodies in India:

1. The Central Board of Direct Taxes (CBDT) is the apex authority for the administration of Goods and Services Tax (GST) and Customs.
2. Both the CBDT and the Central Board of Indirect Taxes and Customs (CBIC) are statutory bodies established under the Central Boards of Revenue Act, 1963.
3. The original Central Board of Revenue, which was in charge of both direct and indirect taxes, was established in 1964.

Accepted Answer

None. None of the statements are correct.

- **Statement 1 is incorrect.** The Central Board of Direct Taxes (CBDT) is the apex authority for direct taxes (e.g., Income Tax, Corporate Tax). The Central Board of Indirect Taxes and Customs (CBIC) is the authority for indirect taxes like Goods and Services Tax (GST) and Customs.

- **Statement 2 is incorrect.** While the CBDT and CBIC were constituted under the Central Boards of Revenue Act, 1963, they function as a part of the Department of Revenue under the Ministry of Finance, not as independent statutory bodies.

- **Statement 3 is incorrect.** The original, unified Central Board of Revenue was established under the Central Board of Revenue Act, 1924. This single board was bifurcated into the CBDT and CBIC in 1964; it was not established in that year.

Since all three statements are incorrect, the correct option is (d).

Question 11

Consider the following two statements:

Statement-I: The Taxpayers' Charter, introduced in the Union Budget 2020-21, aims to build trust between the taxpayer and the tax administration.

Statement-II: Under the charter, it is an obligation of the taxpayer to provide a fair and impartial appeal procedure and review mechanism.

Accepted Answer

Statement-I is correct but Statement-II is incorrect.. Statement-I is correct. The stated aim of the Taxpayers' Charter is to build trust between a taxpayer and the tax administration and to reduce harassment. Statement-II is incorrect. The provision of a fair and impartial appeal procedure and review mechanism is a right of the taxpayer, which means it is a commitment or duty of the tax department. It is not an obligation placed upon the taxpayer. The taxpayer's obligations include making honest disclosures, maintaining records, responding to notices, and paying taxes on time.

Question 12

With reference to a proposed new Income-Tax Bill, consider the following statements:

1. The bill defines cryptocurrencies and other virtual digital assets as capital assets under the definition of property.
2. The bill introduces the concept of 'tax year' as the 12-month period beginning April 1, replacing the previous 'financial year' concept to ensure continuity.
3. The bill removes Section 54E of the Act, which pertains to exemptions for capital gains on the transfer of any capital asset.

Accepted Answer

Only one. Statement 1 is correct. The proposed bill includes cryptocurrencies and other virtual digital assets within the definition of 'property', thereby classifying them as capital assets for taxation purposes. Statement 2 is incorrect. The introduction of the term 'tax year' is a change in terminology for clarity. It refers to the same 12-month period beginning April 1, which is already known as the 'financial year' in India. It renames the existing concept rather than replacing a different one. Statement 3 is incorrect. While the bill proposes the removal of Section 54E, this section specifically deals with exemptions for capital gains on the transfer of capital assets that occurred prior to April 1, 1992. It does not apply to the transfer of 'any' capital asset in general, making the statement an overgeneralization. Since only statement 1 is correct, the correct option is (a).

Question 13

Consider the following statements regarding the Goods and Services Tax (GST) Council:
1. A resolution in the GST Council requires a majority of at least three-fourths of the members present and voting.
2. The voting weightage assigned to the Central Government is two-thirds of the total votes cast, with the remaining one-third assigned to all the state governments together.
3. The quorum for a meeting of the GST Council is 50 percent of the total members.

How many of the above statements are correct?

Accepted Answer

Only two. Statement 1 is correct. The text specifies that a resolution requires a 75 percent majority of members present and voting, which is equivalent to three-fourths. Statement 2 is incorrect. The voting weightage is swapped; the Central Government has a weightage of 1/3rd of the total votes, and all state governments together have a weightage of 2/3rd. Statement 3 is correct. The text explicitly states that the quorum for a meeting is 50 percent of the total members. Therefore, two statements are correct.

Question 14

Consider the following statements regarding the order of utilization of Input Tax Credit (ITC) under the GST regime:
1. The cross-utilization of ITC between Central GST (CGST) and State GST (SGST) is not permitted.
2. ITC on account of State GST (SGST) must first be utilized for payment of SGST, and any remaining balance can then be utilized for payment of Integrated GST (IGST).
3. ITC on account of Central GST (CGST) is first utilized for payment of CGST, and the remaining amount can then be utilized for payment of State GST (SGST).

How many of the above statements are correct?

Accepted Answer

Only two. Statement 1 is correct. A fundamental principle of the GST framework is that the credit of CGST cannot be used for paying SGST liability, and vice-versa. The credit pools are maintained separately.

Statement 2 is correct. The prescribed order for utilizing SGST credit is to first settle the SGST liability. Any remaining credit can then be used to pay the Integrated GST (IGST) liability, but it cannot be used for CGST liability.

Statement 3 is incorrect. While ITC of CGST is first used to pay CGST liability, the remaining balance can be used to pay IGST liability, not SGST liability. As established in statement 1, CGST credit cannot be utilized for SGST payments.

Since statements 1 and 2 are correct, the correct option is 'Only two'.

Question 15

Consider the following statements:
Statement-I: An 'Inverted Duty Structure' under the GST regime refers to a situation where the GST rate on inputs and raw materials is lower than the GST rate on the finished goods.
Statement-II: This structure leads to an accumulation of Input Tax Credit, creating working capital issues for taxpayers as their financial resources get blocked.

Which one of the following is correct in respect of the above statements?

Accepted Answer

Statement-I is incorrect but Statement-II is correct.. Statement-I is incorrect. It incorrectly defines the Inverted Duty Structure. The text defines it as a situation where the GST rate paid on purchases (inputs) is more than the GST rate payable on sales (finished goods). Statement-I reverses this relationship. Statement-II is correct. It accurately describes a major impact of an Inverted Duty Structure. When the tax paid on inputs is higher than the tax collected on outputs, a surplus of Input Tax Credit (ITC) accumulates. This unutilized credit represents funds that are blocked, which in turn creates working capital problems for the business.

Question 16

With reference to taxes not subsumed under the Goods and Services Tax (GST) in India, consider the following statements:

1. Basic Customs Duty is not subsumed under the Goods and Services Tax.
2. State Excise duties on the production of alcoholic liquor for human consumption are levied by the Central Government.
3. Value Added Tax (VAT) on natural gas and aviation turbine fuel has been subsumed under GST.

How many of the above statements are correct?

Accepted Answer

Only one. Statement 1 is correct. Basic Customs Duty, levied on the import of goods into India, is a power of the Central Government that was not subsumed under GST and continues to be levied separately.

Statement 2 is incorrect. State Excise duties on alcoholic liquor for human consumption are exclusively levied and collected by the State Governments, not the Central Government. This power is kept with the states and is outside the purview of GST.

Statement 3 is incorrect. Five specified petroleum products, namely petroleum crude, high-speed diesel, motor spirit (petrol), natural gas, and aviation turbine fuel, are currently kept outside the GST framework. States continue to levy Value Added Tax (VAT) on them. The statement incorrectly claims VAT on natural gas and aviation turbine fuel has been subsumed.

Since only statement 1 is correct, the correct option is 'a'.

Question 17

Consider the following statements regarding taxation concepts:

Statement-I: The Laffer Curve posits that beyond a certain point, increasing the tax rate leads to a reduction in total tax revenue.
Statement-II: The Laffer Curve is a graphical representation of Tax Buoyancy, which measures the responsiveness of tax revenue growth to changes in GDP.

Which one of the following is correct in respect of the above statements?

Accepted Answer

Statement-I is correct but Statement-II is incorrect. Statement-I is correct. The Laffer Curve is an inverted U-shaped curve illustrating that as tax rates rise from zero, tax revenue increases up to a certain point (the maximum point). After this point, further increases in the tax rate cause tax revenue to decrease because higher rates disincentivize work and encourage tax evasion. Statement-II is incorrect. The Laffer Curve is a graphical representation of Tax Elasticity, which measures the responsiveness of tax collection to changes in the tax rate itself. Tax Buoyancy, on the other hand, measures the responsiveness of tax revenue to changes in GDP. The statement incorrectly swaps the concepts.

Question 18

With reference to the concept of 'Tax Expenditure' in the Indian fiscal system, consider the following statements:

1. Tax expenditures are explicit budgetary outlays by the government to provide subsidies to preferred taxpayers.
2. The practice of presenting a 'Statement of Revenue Foregone' was initiated to enhance transparency in the government's tax policy.
3. Concessional corporate tax rates and tax deductions for individual savings are examples of measures that constitute tax expenditure.

How many of the above statements are correct?

Accepted Answer

Only two. Statement 1 is incorrect. Tax expenditures are not explicit budgetary outlays. They represent the potential revenue foregone by the government due to special tax provisions like exemptions, deductions, and credits. They are considered implicit payments or subsidies, not actual expenditures. Statement 2 is correct. The statement on revenue foregone (now called 'Statement of Revenue Impact of Tax Incentives') was first introduced in the Union Budget 2006-07 to bring greater transparency to fiscal policy by quantifying the impact of tax preferences. Statement 3 is correct. The government provides various tax preferences, such as concessional tax rates for corporations and deductions for individuals who invest in specified savings instruments. These preferences reduce the government's potential tax collection and are therefore key components of tax expenditure.

Question 19

Consider the following statements regarding India's taxation system:
1. The Equalisation Levy, a direct tax, is levied on the net income of specified digital services.
2. Revenue from the Health and Education Cess is part of the divisible pool of taxes shared with states.
3. The proposed Direct Tax Code aims to merge corporate and personal income tax into a single levy.
How many of the above statements are correct?

Accepted Answer

None. Statement 1 is incorrect. While the Equalisation Levy is a direct tax, it is levied on the gross consideration received, not on the net income. Statement 2 is incorrect. Revenue from any cess is levied for a specific purpose, and as per the established fiscal framework, the proceeds are not part of the divisible pool of taxes shared with the states. The central government retains the entire amount for the stated purpose. Statement 3 is incorrect. The Direct Tax Code aims to simplify and replace the existing laws governing direct taxes, not merge distinct taxes like corporate and personal income tax into one.

Question 20

Consider the following statements regarding India's taxation system:
Statement-I: In recent years, India's gross tax revenue has demonstrated high tax buoyancy, with the buoyancy factor consistently exceeding one.
Statement-II: The formalization of the economy due to the Goods and Services Tax (GST) has led to a contraction in the direct tax base.

Accepted Answer

Statement-I is correct but Statement-II is incorrect.. Statement-I is correct. High tax buoyancy (where tax revenue growth outpaces GDP growth) has been a noted trend, reflecting improved compliance and economic recovery. Statement-II is incorrect. This is a directional inversion. The formalization of the economy due to GST has expanded, not contracted, the tax base for both indirect and direct taxes by bringing more businesses into the financial mainstream.

Question 21

With reference to the Goods and Services Tax (GST) Council, consider the following statements:
1. Its recommendations on GST rates are constitutionally binding on the Union and State governments.
2. The Governor of the Reserve Bank of India (RBI) is a member of the Council.
3. Every decision of the Council is taken by a majority of not less than three-fourths of the weighted votes of the members present and voting.
Which of the statements given above is/are correct?

Accepted Answer

3 only. Statement 1 is incorrect. The Supreme Court, in the case of Union of India and Anr vs M/s Mohit Minerals Pvt. Ltd. (2022), ruled that the recommendations of the GST Council are not binding on the Union and the States but have a persuasive value. Statement 2 is incorrect. As per Article 279A of the Constitution, the GST Council consists of the Union Finance Minister (as Chairperson), the Union Minister of State in charge of Revenue or Finance, and the Minister in charge of Finance or Taxation or any other Minister nominated by each State Government. The RBI Governor is not a member. Statement 3 is correct. As per Article 279A(9) of the Constitution, every decision of the GST Council shall be taken at a meeting, by a majority of not less than three-fourths of the weighted votes of the members present and voting.

Question 22

Consider the following statements regarding the 'Most Favoured Nation' (MFN) principle:

Accepted Answer

Only two. Statement 1 is correct. The MFN principle is a cornerstone of the WTO, obligating members to grant the same trade advantages, such as lower tariffs, to all other members. Statement 2 is correct. The MFN concept extends beyond trade in goods and services. It is frequently included in bilateral agreements like Double Taxation Avoidance Agreements (DTAAs) to ensure a country receives tax treatment no less favourable than that given to any third country. Statement 3 is incorrect. The WTO framework explicitly allows for exceptions to the MFN principle. Regional Trade Agreements, such as Free Trade Agreements (FTAs), are a well-established, permissible deviation from the MFN rule, not a violation.

Question 23

Consider the following statements regarding the Most-Favoured-Nation (MFN) clause in Double Tax Avoidance Agreements (DTAAs):
Statement-I: The MFN clause in a DTAA protocol is interpreted by Indian tax authorities as being self-executing, leading to an automatic extension of benefits when India offers a lower tax rate to another country.
Statement-II: In response to India's legal position on the MFN clause, Switzerland has decided to revert to the originally agreed-upon withholding tax rates in its DTAA with India.

Accepted Answer

Statement I is incorrect but Statement II is correct. Statement-I is incorrect. The established legal position in India is that the MFN clause in a tax treaty is not self-executing or automatic. To give effect to a more favourable provision from a treaty with a third country, the Government of India must issue a specific notification under Section 90 of the Income Tax Act, 1961. Without such a notification, the lower rates or beneficial provisions do not apply. Statement-II is correct. Switzerland had been unilaterally applying lower tax rates based on its interpretation of the MFN clause. However, acknowledging India's position that a separate notification is required (which was not issued), Switzerland decided to rescind its unilateral application and revert to the original, higher withholding tax rate stipulated in the DTAA, effective from a future date. This action aligns with the principle of reciprocity.

Question 24

Consider the following statements regarding the Most-Favoured-Nation (MFN) clause in the context of international agreements:

Accepted Answer

1 and 2 only. Statement 1 is correct. The primary function of an MFN clause within a Double Tax Avoidance Agreement (DTAA) is to ensure that a signatory country receives the benefit of any more favourable tax treatment (like lower withholding tax rates on dividends or interest) that the other signatory grants to a third country, typically within a specified group like the OECD. Statement 2 is correct. The context of the India-Switzerland DTAA issue was that India had entered into agreements with other OECD members (e.g., Lithuania, Colombia) offering a lower withholding tax rate, but this benefit was not automatically extended to Switzerland. This perceived lack of reciprocity led Switzerland to revert to a higher, pre-existing tax rate. Statement 3 is incorrect. This statement conflates the role of an MFN clause in a DTAA with the MFN principle under the World Trade Organization (WTO). DTAAs deal with direct taxes (e.g., income tax, withholding tax) to prevent double taxation, whereas customs duties and tariffs on goods are governed by trade agreements and WTO rules.

Question 25

Consider the following statements regarding the Goods and Services Tax (GST) regime in India:
1. Any cess levied by the Centre under the GST framework is constitutionally part of the divisible pool of taxes shared with the states.
2. A primary objective of the ongoing discussions on GST rate rationalization is to simplify the tax structure, potentially by merging slabs like the 12% and 18% rates.
3. The GST Council is mandated to make recommendations on GST rates while balancing the revenue needs of both the Centre and the States and the impact on the economy.
Which of the statements given above is/are correct?

Accepted Answer

2 and 3 only. Statement 1 is incorrect. A 'cess' is a tax on tax, levied for a specific purpose. The proceeds from a cess are not part of the divisible pool of taxes and are not mandatorily shared with the states; they are earmarked for the specific purpose for which the cess is levied. Statement 2 is correct. A key goal of GST rate rationalization is to simplify the complex multi-slab structure to reduce classification disputes and compliance burdens, with merging the 12% and 18% slabs being a frequently discussed proposal. Statement 3 is correct. As per Article 279A of the Constitution, the GST Council is the joint forum of the Centre and States responsible for making recommendations on all key matters, including rates, with the objective of creating a harmonized structure that balances fiscal needs and economic considerations.

Question 26

With reference to the constitutional framework and potential reforms of the Goods and Services Tax (GST) in India, consider the following statements:
1. A key proposed reform involves including electricity and petroleum products within the GST framework.
2. The GST Council is empowered to unilaterally bring 'alcohol for human consumption' under the GST regime.
3. The Goods and Services Tax Network (GSTN) is increasingly using AI-based analytics to track fraudulent Input Tax Credit claims.
How many of the above statements are correct?

Accepted Answer

Only two. Statement 2 is incorrect. 'Alcohol for human consumption' is constitutionally kept outside the purview of GST and remains a subject of State excise duty. Its inclusion would require a constitutional amendment, which is beyond the unilateral power of the GST Council. Statement 1 is correct; the inclusion of items like electricity and the five specified petroleum products is a widely discussed and anticipated reform for the GST structure. The Constitution already provides a mechanism for the inclusion of petroleum products on a future date recommended by the GST Council. Statement 3 is correct; leveraging technology like AI and data analytics by the GSTN is a key and ongoing administrative reform to enhance compliance and curb tax evasion, such as fraudulent ITC claims.

Question 27

With reference to the proposed reforms in the Goods and Services Tax (GST) regime, consider the following statements:
Statement-I: A key proposal for GST reform involves rationalizing the tax slabs into a three-rate structure.
Statement-II: The primary objective of rationalizing tax slabs is to immediately increase the government's net fiscal revenue.

Accepted Answer

Statement-I is correct but Statement-II is incorrect.. Statement-I is correct. Rationalizing the multiple GST slabs into a simpler, three-rate structure is a widely discussed and proposed reform to simplify the tax system. Statement-II is incorrect. The primary economic logic for reducing slabs is to simplify compliance, reduce classification disputes, and boost consumption and growth in the long run. It is not aimed at an immediate increase in fiscal revenue; in fact, depending on the new rates, the move could be revenue-neutral or even cause a short-term revenue dip.

Question 28

In the context of judicial principles applied to the Goods and Services Tax (GST) regime, consider the following statements regarding the 'Functionality and Essentially Test' for Input Tax Credit (ITC):
1. The test expands the scope of ITC by overriding specific restrictions mentioned in Section 17(5) of the CGST Act.
2. It primarily assesses whether an input is indispensable for the core revenue-generating activity of the business.
3. This test makes it easier for businesses to claim ITC on general employee welfare expenses.
How many of the above statements are correct?

Accepted Answer

Only one. Statement 1 is incorrect; judicial tests clarify or interpret law, they cannot override explicit statutory blocks like Section 17(5). While a court may 'read down' a provision, it does not override it. Statement 2 is correct; this is the core principle of the test, focusing on whether the input is essential and functional for the main business activity. Statement 3 is incorrect (Directional Inversion); the test, by emphasizing indispensability for the core business, likely tightens, not eases, the criteria for claiming ITC on expenses not directly linked to output, such as general employee welfare, which are often specifically blocked anyway.

Question 29

With reference to the 'Functionality and Essentially Test' for Input Tax Credit (ITC) in GST, consider the following statements:
1. This test was formally introduced through a binding recommendation by the GST Council.
2. It serves as a guiding principle for interpreting the phrase 'in the course or furtherance of business'.
3. The test allows ITC on goods even if they are explicitly blocked under Section 17(5).
Select the correct answer using the code given below:

Accepted Answer

2 only. Statement 1 is incorrect; such tests are typically laid down by the Judiciary (High Courts/Supreme Court), not the GST Council. Statement 2 is correct as the test provides a framework to determine if an expense truly relates to business. Statement 3 is incorrect; no judicial test can permit what is explicitly prohibited by the statute, such as the blocked credits in Section 17(5).

Question 30

With reference to the 'Functionality and Essentially Test' for Input Tax Credit (ITC), consider the following statements:
Statement-I: The 'Functionality and Essentially Test' may lead to the disallowance of ITC on expenses incurred for Corporate Social Responsibility (CSR).
Statement-II: CSR expenses are often legally interpreted as an appropriation of profit, not an expense functionally essential for a business's core operations.

Accepted Answer

Both statements are correct; Statement-II explains Statement-I.. Statement-I is correct; applying the test, CSR might not be deemed 'functionally essential' to the main business activity. Statement-II is also correct and provides the precise legal and accounting rationale for the conclusion in Statement-I. Since CSR is often seen as a post-profit obligation, it fails the 'essentially test' for being an input cost for business furtherance.

Question 31

Consider the following statements regarding cess and surcharges in the context of Indian fiscal federalism:
1. The share of cess and surcharges in the Centre's Gross Tax Revenue has consistently decreased over the last decade.
2. Revenue from cess and surcharges is not part of the divisible pool of taxes shared with the states.
3. The Finance Commission can recommend the abolition of specific cesses, but its recommendations are not binding on the Union Government.
How many of the above statements are correct?

Accepted Answer

Only two. Statement 1 is incorrect. The trend shows an increasing, not decreasing, share of cess and surcharges in the Centre's Gross Tax Revenue, which has been a primary concern for states and a key issue in fiscal federalism. Statement 2 is correct. Under Article 270 of the Constitution, the proceeds from cesses (levied for specific purposes) and surcharges are explicitly excluded from the divisible pool of taxes that is shared with the states. Statement 3 is correct. The Finance Commission, as an advisory body, often reviews the usage and necessity of cesses and may recommend their discontinuation or rationalization, but these recommendations are not constitutionally binding on the Union Government.

Question 32

Consider the following statements regarding cesses and surcharges in the context of Indian fiscal federalism:
Statement-I: The increasing reliance on cesses and surcharges by the Union Government has been a major point of contention with the states.
Statement-II: Unlike other taxes, both cess and surcharge are constitutionally mandated to be shared with states through the divisible pool.

Accepted Answer

Statement-I is correct but Statement-II is incorrect.. Statement-I is correct. States have consistently raised concerns that the Centre's growing reliance on these levies undermines the principles of fiscal federalism by reducing the size of the divisible pool of taxes. Statement-II is incorrect. The core reason for the contention is precisely the opposite of what is stated; cesses and surcharges are explicitly excluded from the divisible pool of taxes under Article 270 of the Constitution. This means the revenue from these levies is not shared with the states, which is the primary source of the dispute.

Question 33

Consider the following statements regarding the constitutional provisions for cesses and surcharges in India:
1. The Constitution empowers the Union to levy a surcharge on Goods and Services Tax (GST).
2. A cess, once levied for a specific purpose, must be transferred to a dedicated fund.
3. State governments are also empowered by the Constitution to levy cesses on taxes under the State List.
Select the correct answer using the code given below:

Accepted Answer

2 and 3 only. Statement 1 is incorrect. Article 271 of the Constitution grants the Union the power to levy a surcharge on taxes and duties referred to in Articles 269 and 270. However, the Constitution (One Hundred and First Amendment) Act, 2016, explicitly amended Article 271 to state that this power 'shall not apply to the goods and services tax'.
Statement 2 is correct. The defining legal characteristic of a 'cess' is that it is a tax levied for a specific purpose. Judicial pronouncements have affirmed that if the revenue from such a levy is not earmarked for its stated purpose, it loses its character as a cess. Consequently, the enabling legislation for a cess typically mandates that its proceeds be credited to a dedicated, non-lapsable fund to ensure they are used only for the specified objective.
Statement 3 is correct. The power of a legislature to levy a tax includes the ancillary power to levy a cess on that tax. Therefore, State legislatures, which are competent to legislate on subjects in the State List (List II of the Seventh Schedule), can impose cesses on taxes that fall within their legislative domain, such as taxes on land or motor vehicles, for specific state-level purposes.

Tax Structure in India

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