Which one among the following is not a source of tax revenue for the Central Government in India ?

1. Constitutional Basis: The Seventh Schedule (basic)

Hello! It is wonderful to have you here as we begin our journey into how money and power are distributed in the Indian democracy. To understand taxation in India, we must first look at the Seventh Schedule of the Constitution. Think of this schedule as a clear set of "fences" built by the Constitution to prevent the Union and the States from stepping on each other's toes when it comes to making laws and collecting money.

Under Article 246, the Constitution divides legislative authority into three lists. This division is the backbone of Fiscal Federalism—the principle that for a State to be truly autonomous, it must have its own independent sources of revenue. According to D. D. Basu, Introduction to the Constitution of India, Distribution of Legislative and Executive Powers, p.377, List I (Union List) includes subjects of national importance like defence and banking, while List II (State List) focuses on local and regional matters like public health and agriculture. Interestingly, the List III (Concurrent List), where both can make laws, traditionally contained almost no major taxing powers to avoid double taxation and legal disputes.

The distribution of taxing power is very specific. The Union Government has the exclusive right to levy Customs Duties (on imports/exports) and Income Tax (specifically excluding agricultural income). On the other hand, the States are empowered to levy taxes on Agricultural Income, Professions, and notably, Motor Vehicles. As noted in M. Laxmikanth, Indian Polity, Centre-State Relations, p.157, these powers are distinct; for instance, while the Centre taxes the manufacture of goods, the States have historically handled taxes related to the use of vehicles within their borders.

Category	Union List (List I)	State List (List II)
Core Logic	National importance and uniformity.	Regional relevance and local administration.
Key Taxes	Corporation Tax, Customs, Income Tax (Non-Agri).	Motor Vehicle Tax, Profession Tax, Land Revenue.
Constitutional Basis	Entry 82 to 92C.	Entry 45 to 63.

Sources: Introduction to the Constitution of India, D. D. Basu, Distribution of Legislative and Executive Powers, p.377; Indian Polity, M. Laxmikanth, Centre-State Relations, p.157; Indian Economy, Nitin Singhania, Indian Tax Structure and Public Finance, p.92

2. Classification of Government Receipts (basic)

To understand how the government manages its money, we must first look at Government Receipts—which is simply all the money the government receives from various sources. These are broadly classified into two categories: Revenue Receipts and Capital Receipts. The fundamental difference lies in whether the money creates a future obligation or affects the government's assets.

Revenue Receipts are those that are non-redeemable, meaning the government is not required to return this money to the payer. They neither create a liability (debt) for the government nor lead to a reduction in its assets Vivek Singh, Chapter 4, p.151. These are further subdivided into:

• Tax Revenues: These include Direct Taxes (like Personal Income Tax and Corporate Tax) and Indirect Taxes (like Customs Duties and GST). For instance, Customs duties are imposed by the Centre on international trade, while Motor Vehicle taxes are a significant revenue source for State Governments NCERT Class XII Macroeconomics, Chapter 5, p.68.
• Non-Tax Revenues: These are funds collected from sources other than taxes, such as interest receipts on loans given to States, dividends from Public Sector Undertakings (PSUs), and fees/fines like passport or court fees Nitin Singhania, Chapter 5, p.104.

Conversely, Capital Receipts are those that either create a liability (like market borrowings) or reduce an asset (like selling shares in a PSU, known as disinvestment). Understanding this distinction is vital because a healthy economy typically relies more on its own revenue receipts rather than borrowing its way through capital receipts.

Feature	Revenue Receipts	Capital Receipts
Nature	Regular and recurring.	Irregular and non-recurring.	Obligation	Non-redeemable (no need to pay back).	Often create a liability (must be repaid).	Impact on Assets	No impact on government assets.	Reduces assets (e.g., via disinvestment).

Sources: Macroeconomics (NCERT class XII 2025 ed.), Government Budget and the Economy, p.68; Indian Economy, Vivek Singh (7th ed. 2023-24), Government Budgeting, p.151, 167; Indian Economy, Nitin Singhania (2nd ed. 2021-22), Indian Tax Structure and Public Finance, p.104

3. Finance Commission and Fiscal Devolution (intermediate)

In the Indian federal structure, there is a fundamental mismatch: the Central Government has the power to collect the most productive taxes (like Income Tax and Customs), while the State Governments are responsible for the most significant public expenditures (like Health, Education, and Agriculture). To bridge this "Vertical Fiscal Imbalance," the Constitution provides for a unique balancing mechanism: the Finance Commission (FC).

Under Article 280, the President of India constitutes a Finance Commission every five years (or earlier if needed). Its primary job is to act as a quasi-judicial body that recommends how financial resources should be shared between the Union and the States Introduction to the Constitution of India, D. D. Basu, DISTRIBUTION OF FINANCIAL POWERS, p.387. These recommendations are submitted to the President, who then causes them to be laid before each House of Parliament under Article 281 Indian Polity, M. Laxmikanth, Finance Commission, p.433.

The work of the Commission is broadly divided into two types of devolution:

Type of Devolution	Description	Current Status (15th FC)
Vertical Devolution	The percentage of the "Divisible Pool" of central taxes that goes to all States combined.	41% (The remaining 59% stays with the Centre) Indian Economy, Vivek Singh, Government Budgeting, p.182.
Horizontal Devolution	The formula used to divide that 41% share among the 28 States based on criteria like population, area, and income distance.	Calculated using weights like 45% for Income Distance and 15% for Population (2011) Indian Economy, Nitin Singhania, Indian Tax Structure and Public Finance, p.123.

Beyond sharing taxes, the Commission also recommends the principles for Grants-in-aid to States out of the Consolidated Fund of India (Article 275). Since the 73rd and 74th Constitutional Amendments, the Commission has an additional duty: recommending measures to augment the Consolidated Fund of a State to help supplement the resources of Panchayats and Municipalities Introduction to the Constitution of India, D. D. Basu, MUNICIPALITIES AND PLANNING COMMITTEES, p.326. This ensures that even the lowest tier of governance has a constitutional claim to fiscal stability.

Sources: Introduction to the Constitution of India, D. D. Basu, DISTRIBUTION OF FINANCIAL POWERS, p.387; Indian Polity, M. Laxmikanth, Finance Commission, p.433; Indian Economy, Vivek Singh, Government Budgeting, p.182; Indian Economy, Nitin Singhania, Indian Tax Structure and Public Finance, p.123

4. The GST Era: Subsumed vs. Non-Subsumed Taxes (intermediate)

The introduction of the Goods and Services Tax (GST) via the 101st Constitutional Amendment Act, 2016, marked a paradigm shift in India's federal financial relations. Before July 1, 2017, the Indian tax landscape was a complex web of multiple indirect taxes levied separately by the Centre and the States. The core philosophy of GST was to create a unified national market by subsuming (merging) most of these indirect taxes into a single levy on the manufacture, sale, and consumption of goods and services D. D. Basu, Introduction to the Constitution of India, DISTRIBUTION OF FINANCIAL POWERS, p.392.

To understand the current distribution of power, we must distinguish between taxes that lost their individual identity and those that remain independent. The GST Council, a federal body constituted under Article 279A, now oversees the management of this shared tax regime Nitin Singhania, Indian Economy, Indian Tax Structure and Public Finance, p.94. However, for reasons of revenue autonomy and social policy, certain taxes were intentionally kept outside the GST net.

Category	Subsumed into GST	NOT Subsumed (Remain Separate)
Central Levies	Central Excise Duty, Service Tax, Central Sales Tax, Cesses like Swachh Bharat Cess NCERT Class XII, Macroeconomics, Government Budget and the Economy, p.83.	Basic Customs Duty (on imports), Central Excise on Tobacco (Dual levy).
State Levies	State VAT, Entry Tax, Luxury Tax, Octroi, Taxes on Advertisements, Lottery, and Gambling NCERT Class XII, Macroeconomics, Government Budget and the Economy, p.83.	State VAT on Alcoholic Liquor, Motor Vehicle Tax, Toll Tax, and Entertainment Tax levied by local bodies.

A critical nuance in this distribution involves Petroleum products (crude oil, petrol, diesel, natural gas, and ATF). Currently, these are not subsumed in GST; States continue to levy VAT and the Centre continues to levy Excise Duty on them. While the Constitution allows for their eventual inclusion, the GST Council has yet to notify the date for this transition NCERT Class XII, Macroeconomics, Government Budget and the Economy, p.83. Additionally, Tobacco is unique—it attracts both GST (for the unified market) and Central Excise Duty (as a 'sin tax' to generate extra revenue) Nitin Singhania, Indian Economy, Indian Tax Structure and Public Finance, p.96.

Sources: Introduction to the Constitution of India, D. D. Basu (26th ed.), DISTRIBUTION OF FINANCIAL POWERS, p.392; Indian Economy, Nitin Singhania .(ed 2nd 2021-22), Indian Tax Structure and Public Finance, p.94, 96; Macroeconomics (NCERT class XII 2025 ed.), Government Budget and the Economy, p.83

5. State Government Revenue Sources (exam-level)

In the Indian federal architecture, the Seventh Schedule of the Constitution clearly demarcates the taxation powers of the States under List II (State List). Unlike the Union’s taxes, which often focus on broad economic activities like international trade (Customs) or non-agricultural income, State revenue sources are typically tied to land, local consumption, and specific services within their borders Introduction to the Constitution of India, D. D. Basu, DISTRIBUTION OF FINANCIAL POWERS, p.386. Major exclusive sources include Land Revenue, taxes on agricultural income, and taxes on lands and buildings. Additionally, States have the power to levy Taxes on Mineral Rights and Taxes on the consumption or sale of electricity. One of the most significant and growing sources of revenue for State Governments is the Tax on Road Vehicles (under Entry 57 of the State List). While the Central Government regulates the standards for vehicles, the actual levy for using roads falls to the States. Interestingly, this power has recently expanded into environmental regulation; for instance, many states are adopting a 'Green Tax' on older, polluting vehicles during fitness or registration renewals to discourage environmental degradation Indian Economy, Nitin Singhania, Sustainable Development and Climate Change, p.606. Another unique fiscal power is the Profession Tax (Article 276). While the Union generally handles income tax, the Constitution permits States to tax individuals based on their profession, trade, or employment. however, to prevent a double-taxation burden, the Constitution imposes a ceiling of ₹2,500 per annum on the total amount payable by any one person to a State Introduction to the Constitution of India, D. D. Basu, DISTRIBUTION OF FINANCIAL POWERS, p.384. Finally, we must distinguish between taxes the State levies itself and Article 268 duties (like Stamp Duties on bills of exchange), which are technically levied by the Union but collected and kept by the States Introduction to the Constitution of India, D. D. Basu, DISTRIBUTION OF FINANCIAL POWERS, p.386.

Sources: Introduction to the Constitution of India, D. D. Basu (26th ed.), DISTRIBUTION OF FINANCIAL POWERS, p.386; Introduction to the Constitution of India, D. D. Basu (26th ed.), DISTRIBUTION OF FINANCIAL POWERS, p.384; Indian Economy, Nitin Singhania (2nd ed. 2021-22), Sustainable Development and Climate Change, p.606

6. Union Government Revenue Sources (exam-level)

In our federal setup, the power to tax is not a free-for-all; it is strictly partitioned by the Seventh Schedule of the Constitution to prevent overlapping jurisdictions. The Union Government is generally handed taxes that have an inter-state or international character to ensure economic unity. For instance, Personal Income Tax (on all income except agricultural) and Corporation Tax are pillars of central revenue, governed by the Income Tax Act, 1961 Indian Economy, Nitin Singhania, Chapter 5, p.86. While the Union collects these, they are typically shared with the States based on Finance Commission recommendations, except for Surcharges and Cesses, which the Union can keep entirely for itself under Article 271 Introduction to the Constitution of India, D. D. Basu, Chapter: DISTRIBUTION OF FINANCIAL POWERS, p.390. Moving to indirect taxes, the Union holds exclusive command over Customs Duties—taxes levied on goods crossing India's international borders. This includes Basic Customs Duty, Social Welfare Surcharges, and various cesses Indian Economy, Nitin Singhania, Chapter 5, p.95. However, the landscape of indirect taxation changed dramatically with the 101st Amendment Act, which introduced the Goods and Services Tax (GST). This created a 'concurrent' power, allowing both Parliament and State Legislatures to tax the supply of goods and services simultaneously Indian Polity, M. Laxmikanth, Chapter 15, p.153. It is equally important to recognize what the Union cannot tax to understand its boundaries. For example, Taxes on Motor Vehicles fall squarely within the State List (Entry 57). While the Union regulates the manufacture of vehicles through central excise or GST, the actual tax on the use of the vehicle on roads is a vital revenue stream for State Governments. Similarly, while the Union is immune from State taxation on its property, the Union can tax the commercial income of a State if the Parliament passes a law to that effect Introduction to the Constitution of India, D. D. Basu, Chapter: ADMINISTRATIVE RELATIONS BETWEEN THE UNION AND THE STATES, p.403.

Tax Category	Levied By	Key Feature
Income Tax	Union	Excludes agricultural income; governed by IT Act 1961.
Customs Duty	Union	Applied to imports/exports; exclusive Union power.
GST	Union & State	Concurrent power on supply of goods/services.
Motor Vehicle Tax	State	Levied on the use of vehicles under State List.

Sources: Indian Economy, Nitin Singhania, Indian Tax Structure and Public Finance, p.86, 95; Indian Polity, M. Laxmikanth, Centre-State Relations, p.153; Introduction to the Constitution of India, D. D. Basu, DISTRIBUTION OF FINANCIAL POWERS, p.390; Introduction to the Constitution of India, D. D. Basu, ADMINISTRATIVE RELATIONS BETWEEN THE UNION AND THE STATES, p.403

7. Solving the Original PYQ (exam-level)

Now that you have mastered the Constitutional division of fiscal powers, this question tests your ability to apply the Seventh Schedule of the Indian Constitution to real-world revenue streams. You’ve learned that the power to levy taxes is not arbitrary but strictly partitioned between the Union and the States. This specific question requires you to identify which entry does not belong to the Union List. As noted in Indian Polity, M. Laxmikanth, fiscal federalism ensures that while the Centre handles broad-based economic taxes, the States manage localized levies related to their specific administrative functions and infrastructure.

To arrive at the correct answer, think about the jurisdiction of the activity being taxed. Income Tax (excluding agricultural income) and Customs Duties are clearly national and international in scope, placing them firmly under the Central Government's authority. While Service Tax was a central levy before being subsumed into GST, it historically represents a core central revenue source as highlighted in Macroeconomics (NCERT class XII). In contrast, the Motor Vehicle Tax is tied to the use of vehicles within a specific state's territory and its road network. According to Indian Economy, Vivek Singh, this falls under Entry 57 of the State List, making Motor Vehicle Tax the correct answer as it is a state-level revenue source.

UPSC often uses "transitional" taxes like Service Tax to confuse students who might only be focusing on the current GST landscape. A common trap is assuming that because the Central Government creates the framework for the Motor Vehicles Act, it also collects the associated tax. However, you must distinguish between regulatory power and taxing power. As explained in Indian Economy, Nitin Singhania, even though the Centre sets the rules for vehicle safety and registration standards, the actual Tax Revenue generated from those vehicles remains one of the most significant independent sources of income for State Governments.