UPSC GS Paper III: Taxation Direct Taxes IT Act Corporate Tax Wealth Tax Black Money

Must‑Know

• Income Tax Act, 1961 – Governs taxation of income in India; enacted under Article 246 of the Constitution, which assigns taxation powers to Parliament.
• Direct Taxes Code (DTC) – Proposed comprehensive reform to replace IT Act, 1961; first draft by Shome Committee in 2009, later shelved in favour of incremental reforms.
• Corporate tax – Levied on net income of companies; as of 2023, the standard rate is 22% for domestic companies (reduced from 30% in 2019 via Finance Act).
• Surcharge on corporate tax – 7% for domestic companies with turnover up to ₹400 crore; 12% for turnover exceeding ₹10,000 crore (Finance Act, 2023).
• MAT (Minimum Alternate Tax) – Ensures companies with book profits pay minimum tax; rate is 15% under Section 115JB; introduced in 1987, expanded in 2000.
• Dividend Distribution Tax (DDT) – Abolished in 2020; dividends now taxed in the hands of shareholders at applicable slab rates.
• Wealth Tax Act, 1957 – Repealed in 2015; replaced with 2% surcharge on individuals with net wealth over ₹1 crore (Budget 2015).
• Section 139(1) – Mandates filing of income tax return by specified assessees, including individuals with income above basic exemption limit (₹2.5 lakh for FY 2023–24).
• Section 80C – Allows deduction up to ₹1.5 lakh for specified investments (e.g., PPF, ELSS, life insurance); part of Chapter VI-A deductions.
• Black money – Unaccounted income, often stashed abroad or in cash; estimated at 7.6% of GDP in 2013 (Task Force on Black Money, 2012).
• Benami Transactions (Prohibition) Act, 1988 – Amended in 2016 to strengthen enforcement; enables confiscation of benami properties.
• Special Investigation Team (SIT) on Black Money – Constituted by Supreme Court in 2011; headed by M.B. Shah; submitted final report in 2015.
• Black Money (Undisclosed Foreign Income and Assets) Act, 2015 – Imposes tax, penalty, and imprisonment for undisclosed foreign assets; effective from April 1, 2016.
• Double Taxation Avoidance Agreements (DTAAs) – India has 85+ DTAAs; used to prevent tax evasion and facilitate information exchange (e.g., India–USA DTAA amended in 2016).
• General Anti-Avoidance Rule (GAAR) – Introduced in 2017 under Section 96 of IT Act; targets artificial arrangements to avoid tax.
• Permanent Account Number (PAN) – Mandatory for all financial transactions above ₹50,000; issued under Section 139A.
• Aadhaar–PAN linkage – Made mandatory in 2017 (Section 139AA); upheld by Supreme Court in Justice K.S. Puttaswamy v. Union of India (2018) with privacy safeguards.
• Faceless Assessment Scheme – Launched in 2020; centralizes income tax assessments to reduce discretion and corruption.
• Tax-to-GDP ratio – Direct taxes contributed ~6.5% of GDP in 2022–23 (CAG Report 2023); overall tax-to-GDP ratio ~11.7%.
• Section 194A – Mandates TDS on interest other than on securities; rate is 10% for amounts above ₹40,000 (₹50,000 for senior citizens).
• Liberalized Remittance Scheme (LRS) – Allows individuals to remit up to $250,000 annually; misused for black money routing, hence monitored under FEMA.
• General Anti-Avoidance Rule (GAAR) – Deferred multiple times; finally implemented from FY 2022–23 for selected cases.
• Capital Gains Tax – Short-term (STCG) taxed at slab rates if asset held <24 months (for immovable property); long-term (LTCG) at 20% with indexation.
• Section 54 – Exemption on long-term capital gains from sale of residential house if reinvested in another house; conditions on timing and value.
• Tax exemption limits – ₹2.5 lakh for individuals <60 years; ₹3 lakh for 60–79 years (senior citizens); ₹5 lakh for ≥80 years (super senior).

Difficulty Level

Intermediate – Requires understanding of legal provisions, recent amendments, and interlinkages with economic policy and governance.

Common UPSC Traps

• Trap: Wealth Tax is still applicable in India – Fact: Wealth Tax Act was repealed in 2015; replaced with surcharge on high-net-worth individuals (Finance Act, 2015).
• Trap: DDT is applicable on dividends received by shareholders – Fact: DDT was abolished in 2020; dividends now taxed in the hands of recipients at applicable income tax rates (Finance Act, 2020).
• Trap: GAAR was implemented immediately after the 2012 Budget – Fact: GAAR implementation was deferred repeatedly; fully operational from FY 2022–23 after procedural safeguards (CBDT notifications).
• Trap: Black Money Act applies to undisclosed domestic assets – Fact: Black Money (Undisclosed Foreign Income and Assets) Act, 2015 applies only to foreign income/assets; domestic black money covered under IT Act and Benami Act.
• Trap: PAN is issued under the Wealth Tax Act – Fact: PAN is issued under Section 139A of the Income Tax Act, 1961, not Wealth Tax Act.

Practice MCQs

Question: Which of the following statements is correct regarding the Minimum Alternate Tax (MAT) in India?
A) MAT was introduced under the Wealth Tax Act, 1957
B) MAT is applicable only to foreign companies operating in India
C) MAT is levied at 15% under Section 115JB of the Income Tax Act
D) MAT was abolished in the 2020 Union Budget
Answer: C
Explanation: MAT is levied at 15% on book profits of companies under Section 115JB of the Income Tax Act, 1961, to ensure tax payment even if tax liability is zero under normal provisions.
Why others fail: Option D is tempting due to multiple tax reforms in 2020, but MAT remains applicable despite DDT abolition.

Question: The Black Money (Undisclosed Foreign Income and Assets) Act, 2015 came into effect from:
A) August 26, 2015
B) April 1, 2016
C) November 8, 2016
D) January 1, 2017
Answer: B
Explanation: The Act received presidential assent on August 26, 2015, but became effective from April 1, 2016, for undisclosed foreign income and assets held in assessment year 2016–17 onwards.
Why others fail: Option A refers to the assent date, not enforcement, leading to confusion.

Question: Which of the following is NOT a provision under the Income Tax Act, 1961?
A) Section 80C – Deduction for life insurance premiums
B) Section 115JB – Minimum Alternate Tax
C) Section 269T – Prohibition on cash payments above ₹2 lakh
D) Section 139AA – Mandatory PAN–Aadhaar linkage
Answer: C
Explanation: Section 269T is under the Income Tax Act, but it prohibits acceptance of deposits in cash above ₹20,000 (not ₹2 lakh); the ₹2 lakh cash transaction limit is under Section 269ST.
Why others fail: Option C appears correct due to familiarity with cash transaction limits, but the specific section and amount are mismatched.

Question: The Liberalized Remittance Scheme (LRS) is administered by:
A) Ministry of Finance, Department of Revenue
B) Reserve Bank of India under FEMA
C) Securities and Exchange Board of India
D) Central Board of Direct Taxes
Answer: B
Explanation: LRS is a foreign exchange facility under the Foreign Exchange Management Act (FEMA), administered by the RBI, allowing individuals to remit up to $250,000 annually.
Why others fail: Option A is tempting as LRS relates to tax compliance, but it is an RBI/FEMA mechanism, not a tax provision.

Question: Which committee was constituted by the Supreme Court to investigate black money in 2011?
A) Kelkar Committee
B) Shome Committee
C) Naresh Chandra Committee
D) M.B. Shah Committee
Answer: D
Explanation: The Supreme Court constituted the Special Investigation Team (SIT) on Black Money in 2011, chaired by Justice M.B. Shah.
Why others fail: Shome Committee (2012) dealt with tax reform, not black money investigation, causing confusion.

Last‑Minute Revision

• ⚠️ Wealth Tax Act repealed in 2015 (Finance Act).
• ⚠️ Corporate tax rate cut to 22% in 2019 (Finance Act).
• ⚠️ Black Money Act effective from April 1, 2016.
• ⚠️ GAAR implemented from FY 2022–23.
• ⚠️ DDT abolished in 2020 (Finance Act).
• ⚠️ PAN–Aadhaar linkage upheld in Puttaswamy case (2018).
• ⚠️ MAT rate: 15% under Section 115JB.
• ⚠️ Section 80C deduction limit: ₹1.5 lakh.
• ⚠️ LRS limit: $250,000 per individual per year.
• ⚠️ SIT on Black Money: M.B. Shah (2011).
• ⚠️ Benami Act amended in 2016.
• ⚠️ Faceless Assessment started in 2020.
• ⚠️ Tax-to-GDP ratio (direct): ~6.5% (2022–23).
• ⚠️ Exemption limit: ₹2.5 lakh (<60 years).
• ⚠️ Surcharge on corporates: 7% (turnover ≤ ₹400 cr).
• ⚠️ Section 54: LTCG exemption on house reinvestment.
• ⚠️ STCG on property: held <24 months.
• ⚠️ DTAA: India has 85+ agreements.
• ⚠️ TDS on interest: Section 194A (>₹40,000).
• ⚠️ DTC draft: 2009 (Shome Committee).
• ⚠️ Section 139(1): Mandatory ITR filing.
• ⚠️ Section 269ST: Cash receipt limit ₹2 lakh.
• ⚠️ Basic structure case: Kesavananda Bharati (1973).
• ⚠️ 44th Amendment Act: Removed right to property (1978).
• verify from standard source – Exact tax-to-GDP ratio varies annually.