Taxation: Tax reforms and tax policy

Both boards were constituted under the Central Boards of Revenue Act, 1963, which split the earlier Central Board of Revenue into two. They function in the Department of Revenue, Ministry of Finance: the CBDT deals with income tax and other direct taxes, while the CBIC (renamed from the Central Board of Excise and Customs in 2018, after GST) deals with customs, central excise, CGST and IGST. The income tax and customs laws give powers to these boards, but they do not create them; Article 279A creates the GST Council, not the CBIC.

Traditional tax rules tax a non-resident's business profits only if it has a business connection or permanent establishment, usually a physical presence, in the source country. Digital firms can earn large revenues from Indian users without any office here. The Finance Act, 2018 therefore said that a Significant Economic Presence in India, measured by thresholds of transactions or users (as later notified), will itself constitute a business connection. Its practical reach depends on tax treaties, which generally still require a permanent establishment; that is why India also used the equalisation levy and supported the Pillar One talks.

Pairs 1, 2 and 3 are correct. The Chelliah Committee (1991) laid the base of post- reform tax policy: lower and fewer rates, a wider base and a move towards VAT. The Kelkar Task Forces (2002) recommended simplifying direct taxes and a comprehensive tax on goods and services. The Tax Administration Reform Commission under Parthasarathi Shome (2013- 14) focused on taxpayer services and administrative structure. Pair 4 is wrong: the task force on a new direct tax law (2017-19) was convened first by Arbind Modi and then by Akhilesh Ranjan; N.K. Singh chaired the FRBM Review Committee and the Fifteenth Finance Commission.

All three are correct. The Equalisation Levy was created by Chapter VIII of the Finance Act, 2016 as a standalone levy, deliberately outside the Income-tax Act so that it would not be treated as an income tax under tax treaties. It began at 6% on online advertisement payments to non-residents; the Finance Act, 2020 added a 2% levy on e-commerce operators. Following the OECD two-pillar talks and trade concerns, the 2% levy was ended from 1 August 2024 and the 6% levy from 1 April 2025 by the Finance Act, 2025.

All three are correct. The Finance Act, 2023 made the concessional regime the default from FY 2023-24; taxpayers who want the old regime with its deductions must opt out. The Finance Act, 2025 revised the slabs and raised the rebate so that a resident individual with taxable income up to ₹12 lakh pays nil tax under the new regime (₹12.75 lakh for a salaried person after the ₹75,000 standard deduction); Budget 2026-27 left these slabs unchanged. The trade-off for lower rates is that most savings-linked deductions of the old regime are not allowed.

Statements 1 and 2 are correct. Under the original treaty, capital gains on Indian shares held by Mauritian residents were taxable only in Mauritius, which had no capital gains tax; this made Mauritius the largest route for foreign investment and raised concerns about round-tripping and treaty shopping. The 2016 Protocol shifted to source-based taxation of such gains for shares acquired from 1 April 2017, with grandfathering of earlier investments and a concessional 50% rate during a transition period up to March 2019. Statement 3 is wrong: the Agreement continues in force; only some articles were amended.

Both statements are correct, but Statement-II does not explain Statement-I. In January 2012 the Supreme Court held that Vodafone's purchase of a Cayman Islands company that indirectly owned Hutchison's Indian business was not taxable in India. The Finance Act, 2012 then amended the law retrospectively (from 1961) to tax such indirect transfers, leading to demands on Vodafone and Cairn and to international arbitration that India lost. The 2021 Act withdrew demands for transfers before 28 May 2012 and offered refunds without interest to restore tax certainty and investor confidence. Statement-II gives the origin of the 2012 amendment, not the reason for its withdrawal in 2021.

Statements 1 and 3 are correct. The 2017 Compensation Act guaranteed States a notional 14% annual growth over 2015-16 revenue for five years (July 2017 to June 2022). The cess was then continued to repay loans taken to pay compensation during the pandemic; after the GST rate rationalisation of September 2025 it survived only on tobacco items, and ended on 1 February 2026, when the Central Excise (Amendment) Act, 2025 and the Health Security se National Security Cess Act, 2025 came into force. Statement 2 is wrong: the cess was levied only on specified luxury and demerit goods such as tobacco, pan masala, aerated drinks, coal and motor vehicles, at different rates.

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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