Taxation: Tax basics, income and corporate tax

Statements 1 and 2 are correct. Union List entry 82 covers 'taxes on income other than agricultural income', and State List entry 46 covers 'taxes on agricultural income'; hence the Union income tax law exempts agricultural income and only States may tax it (a few, such as Kerala and Assam, tax plantation income). Statement 3 is wrong: the definition of agricultural income requires rent, revenue or income from land situated in India; income from farmland abroad is taxable like any other foreign income of a resident.

The Income-tax Act, 2025 received Presidential assent on 21 August 2025 and came into force on 1 April 2026, repealing the Income-tax Act, 1961 (with transitional provisions for earlier years). It introduces the single term tax year, the twelve-month financial year beginning on 1 April, so that income of 'Tax Year 2026-27' is the income earned from April 2026 to March 2027. Under the old law, income of the 'previous year' was assessed in the following 'assessment year', which confused many taxpayers. The new Act aims at simpler language without changing basic tax policy.

Three statements (1, 2 and 3) are correct. The Finance (No. 2) Act, 2024, effective from 23 July 2024, raised the long-term rate on listed equity to 12.5% with an annual exemption of ₹1.25 lakh, and the short-term rate on STT-paid listed equity to 20%; the holding period for listed securities to be long-term is more than 12 months. Budget 2026-27 kept these rates. Statement 4 is wrong: rural agricultural land is excluded from the definition of 'capital asset', so its sale does not give rise to capital gains tax.

'Angel tax' was the popular name for section 56(2)(viib) of the Income-tax Act, 1961, introduced in 2012 to curb money laundering through bogus share premiums. When an unlisted, closely held company issued shares at a price above fair market value, the excess was taxed as the company's income from other sources. Start-ups argued that valuations of young firms are uncertain and the provision harmed genuine investment; recognised start-ups got exemptions, and the Finance (No. 2) Act, 2024 removed the provision altogether from assessment year 2025-26.

Statements 1 and 2 are correct. STT, introduced by the Finance (No. 2) Act, 2004, is charged on purchases and sales of equity shares, equity-oriented fund units and derivatives on recognised stock exchanges; it is collected by the exchange and is part of direct tax collections under the CBDT. Budget 2026-27 raised STT rates on futures and options to curb excessive speculation. Statement 3 is wrong: CTT, introduced in 2013, applies to non- agricultural commodity derivatives; specified agricultural commodities are kept out of it.

MAT applies to companies: if the tax computed under the normal provisions (after all exemptions, deductions and incentives) is lower than a specified percentage of the book profit shown in the audited profit and loss account, the company pays tax on book profit instead. It was introduced to stop 'zero-tax companies' that showed large profits to shareholders but little taxable income. For non-corporate taxpayers such as LLPs and firms claiming certain deductions, a parallel 'Alternate Minimum Tax' applies. Companies that opt for the 22% concessional regime of 2019 are outside MAT.

Statements 1 and 2 are correct. The Taxation Laws (Amendment) Ordinance of September 2019, later the Taxation Laws (Amendment) Act, 2019, inserted section 115BAA: a domestic company could choose a base rate of 22% (about 25.17% with surcharge and cess) by giving up exemptions and incentives, and such a company is outside the Minimum Alternate Tax. A separate 15% base rate (section 115BAB) was offered to new manufacturing companies set up on or after 1 October 2019 that started production within the deadline. Statement 3 is wrong: the regime is optional; companies with large unused incentives could stay in the old system.

Statement-I is incorrect and Statement-II is correct. Until March 2020, a domestic company paid Dividend Distribution Tax (DDT) and the shareholder received the dividend tax- free (with a separate levy on very large dividends). The Finance Act, 2020 abolished DDT for dividends declared on or after 1 April 2020; dividends are now added to the shareholder's income and taxed at the slab or applicable rate, with tax deducted at source above a threshold. The change made the system fairer to small investors and to foreign investors, who can claim treaty rates and credits in their home countries.

Neither statement is correct (d). Statement 1 is wrong because the 6% equalisation levy (2016) was introduced through a separate chapter of the Finance Act, 2016, not the Income Tax Act. The Indian business paying a foreign firm like Google or Facebook for online ads deducted it. Statement 2 is wrong because the levy is not an income tax, so the foreign firm cannot claim credit for it under a DTAA in its home country. This is exactly why it was designed outside the Income Tax Act.

A 2% levy on e-commerce was added in 2020 and dropped in 2024. The 6% levy on ads ended in April 2025. Notice the reason: India is moving towards the OECD Two-Pillar global tax deal and is also under US trade pressure.

Answer as per the official UPSC answer key.

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Statement (d) is not a feature of VAT, so it is the answer. Value Added Tax, introduced in most Indian States from April 2005, was a multi-point, destination-based tax (a). It taxed the value added at each stage of production and distribution, with input tax credit for tax already paid, avoiding the cascading 'tax on tax' (b). Its burden was finally borne by the consumer (c). But VAT was a State subject that replaced State sales tax; the Centre only facilitated it through the Empowered Committee of State Finance Ministers. So (d) reverses the roles.

Notice what came next: VAT was subsumed into the Goods and Services Tax (GST) from 1 July 2017, after the 101st Amendment (2016), with the GST Council under Article 279A. GST 2.0 reforms in September 2025 moved to mainly two slabs, 5% and 18%. Trap: VAT was a State tax, with the Centre as facilitator.

Answer as per the official UPSC answer key.

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