- A direct tax is paid by the person on whom it is levied (income tax, corporate tax); an indirect tax is passed on to the consumer (GST, customs duty).
- Article 265 says no tax can be levied or collected except by the authority of law.
- Two big reforms reshaped the system recently: GST 2.0, with mainly two slabs, from September 22, 2025, and the Income-tax Act, 2025, which replaced the 1961 Act from April 1, 2026.
Types of Taxes
| Direct taxes | Indirect taxes | |
|---|---|---|
| Examples | Personal income tax, corporation tax, capital gains tax, securities transaction tax | GST, customs duty, excise on petroleum and liquor, stamp duty |
| Burden | Cannot be shifted | Shifted to the final consumer |
| Nature | Usually progressive — rate rises with income | Usually regressive — takes a larger share of a poorer person's income |
| Administered by | CBDT | CBIC |
Both boards work under the Department of Revenue, Ministry of Finance, and were set up under the Central Boards of Revenue Act, 1963.
Key Tax Terms
- Tax buoyancy — how tax revenue responds to GDP growth including the effect of rate changes. Tax elasticity excludes rate changes.
- Tax–GDP ratio — total tax revenue as a share of GDP; a measure of a government's ability to raise resources.
- Laffer curve — beyond a point, raising tax rates reduces revenue because people work, invest or comply less.
- Cess and surcharge — levies on top of a tax; unlike the main tax, they are not shared with states through the divisible pool.
- Pigouvian tax — a tax on activities that cause harm, such as pollution or tobacco use.
GST launchedJuly 1, 2017
GST amendment101st (2016)
GST 2.0From Sept 22, 2025
Main GST slabs5% and 18%
Special rate40%
New Income-tax ActFrom April 1, 2026
The GST System
- Introduced by the 101st Amendment (2016) and launched on July 1, 2017; the idea was recommended by the Kelkar Task Force (2004). It is a destination-based tax on consumption.
- CGST (Centre) and SGST (state) are charged on sales within a state; IGST is charged by the Centre on inter-state sales and imports, then shared.
- It subsumed central taxes such as excise duty and service tax, and state taxes such as VAT, entry tax and entertainment tax.
- Outside GST: petroleum crude, diesel, petrol, natural gas and aviation turbine fuel (their inclusion is left to the GST Council), alcohol for human consumption (excluded by the Constitution) and electricity.
- The GST Council (Article 279A) is chaired by the Union Finance Minister. The Centre holds one-third of the voting weight and the states two-thirds; decisions need a three-fourths majority, so neither side can decide alone.
- The GST Network (GSTN) runs the IT backbone; the GST Appellate Tribunal hears disputes.
GST 2.0 (September 2025)
| Before | From September 22, 2025 | |
|---|---|---|
| Main slabs | 5%, 12%, 18%, 28% (plus compensation cess) | 5% ("merit" rate) and 18% ("standard" rate) |
| Special rate | 28% plus cess on luxury and sin goods | 40% for items such as luxury cars, pan masala, tobacco and online gaming |
| Decided at | The 56th GST Council meeting, September 3, 2025 | |
Most items at 12% moved to 5% and most at 28% moved to 18%. Special low rates such as 0%, 0.25% (rough diamonds) and 3% (gold) remain.
Income Tax and Corporate Tax
- The Income-tax Act, 2025, passed in August 2025, replaced the Income-tax Act, 1961 from April 1, 2026. It simplifies the language and cuts the number of sections, and introduces a single "tax year" instead of separate "previous year" and "assessment year". It does not change tax rates by itself.
- Under the new tax regime (the default since 2023–24), the Budget for 2025–26 made income up to ₹12 lakh effectively tax-free through a rebate under section 87A — up to ₹12.75 lakh for salaried people, with the ₹75,000 standard deduction.
- In September 2019, the base corporate tax rate was cut to 22% for companies giving up exemptions, and to 15% for new manufacturing companies.
- Which taxes were subsumed in GST and which items stay outside (petroleum, alcohol, electricity).
- Concept pairs: buoyancy vs elasticity; progressive vs regressive; cess vs tax (sharing with states).
- Recent reforms: GST 2.0 slabs (5%, 18%, 40%) and the Income-tax Act, 2025 ("tax year").
Q1. Which of these is NOT subsumed under GST?
✅ Answer: (d) Alcohol for human consumption
💡 Explanation: Alcohol for human consumption is constitutionally outside GST; states still tax it.
Q2. Under GST 2.0, from September 22, 2025, the two main GST slabs are:
✅ Answer: (a) 5% and 18%
💡 Explanation: The 12% and 28% slabs were removed; a 40% rate applies to luxury and sin goods.
Q3. In the GST Council, the Centre's share of the total voting weight is:
✅ Answer: (c) One-third
💡 Explanation: The Centre has one-third and the states two-thirds; decisions need three-fourths.
Q4. The responsiveness of tax revenue to GDP growth, including the effect of changes in tax rates, is called:
✅ Answer: (b) Tax buoyancy
💡 Explanation: Buoyancy includes discretionary changes; elasticity excludes them.
Q5. Which tax is collected by the Centre on inter-state supplies under GST?
✅ Answer: (c) IGST
💡 Explanation: IGST applies to inter-state supplies and imports and is later shared with the destination state.
🔁 Revise in 60 Seconds
- Direct (CBDT): income, corporate tax. Indirect (CBIC): GST, customs.
- GST: 101st Amendment, July 1, 2017; CGST + SGST intra-state, IGST inter-state; Council: Centre 1/3, states 2/3, decisions 3/4.
- GST 2.0 (Sept 22, 2025): 5% and 18%, plus 40%.
- Income-tax Act 2025 from April 1, 2026 ("tax year"); ₹12 lakh tax-free via rebate under the new regime.
📌 Prelims Traps to Avoid
- ✘ Petrol and diesel are outside GST for now, but they are not constitutionally excluded — alcohol is.
- ✘ Cess and surcharge are not part of the divisible pool shared with states.
- ✘ The ₹12 lakh relief is a rebate, not a raised exemption limit.
What are the new GST slabs after GST 2.0?
From September 22, 2025, most goods and services fall in two slabs — 5% (merit rate) and 18% (standard rate). A special 40% rate applies to luxury and sin goods such as tobacco products and luxury cars.
What is the Income-tax Act, 2025?
A new law, passed in August 2025, that replaced the Income-tax Act, 1961 from April 1, 2026. It simplifies the language, reduces the number of sections and introduces a single "tax year", without changing tax rates by itself.