Consider the following taxes : I. Corporation tax II. Customs duty III. Wealth tax IV. Excise duty Which of these is/are indirect taxes ?

1. Components of Government Revenue (basic)

To understand how a government manages its finances, we must look at the Union Budget. Under Article 112 of the Indian Constitution, the government is required to distinguish its receipts and expenditures into two main accounts: the Revenue Account and the Capital Account Indian Economy, Vivek Singh (7th ed. 2023-24), Government Budgeting, p.151. Think of 'Revenue Receipts' as the government's regular, day-to-day income that doesn't come with strings attached. These receipts are non-redeemable, meaning the government isn't obligated to return this money to the person it came from, and crucially, they do not create any future liability or reduce the government's assets Macroeconomics (NCERT class XII 2025 ed.), Government Budget and the Economy, p.68.

Revenue Receipts are broadly categorized into two streams: Tax Revenue and Non-Tax Revenue. Tax Revenue is the most significant portion and is further divided into Direct Taxes (levied on income or wealth, like Personal Income Tax or Corporate Tax) and Indirect Taxes (levied on goods and services, like GST, Customs Duty, or Excise Duty). Indirect taxes are unique because the person paying the tax to the government (the shopkeeper or manufacturer) usually shifts the burden to the final consumer Indian Economy, Nitin Singhania (ed 2nd 2021-22), Indian Tax Structure and Public Finance, p.90.

On the other hand, Non-Tax Revenue includes income from sources other than taxation. This includes interest receipts on loans the Union government has provided to states, dividends and profits from Public Sector Undertakings (PSUs) where the government holds a majority stake, and various fees and fines (like passport fees or traffic penalties) Indian Economy, Nitin Singhania (ed 2nd 2021-22), Indian Tax Structure and Public Finance, p.104. While taxes are compulsory payments, non-tax revenues are often payments for specific services or penalties for law-breaking.

Component	Nature	Key Examples
Tax Revenue	Compulsory contribution to state revenue.	Income Tax, GST, Customs Duty, Excise Duty.
Non-Tax Revenue	Income from services, investments, or penalties.	Interest on loans, PSU Dividends, Fines, Fees.

Sources: Indian Economy, Vivek Singh (7th ed. 2023-24), Government Budgeting, p.151; Macroeconomics (NCERT class XII 2025 ed.), Government Budget and the Economy, p.68; Indian Economy, Nitin Singhania (ed 2nd 2021-22), Indian Tax Structure and Public Finance, p.90, 104

2. Direct vs. Indirect Taxes: Key Differences (basic)

In the world of public finance, the fundamental way we distinguish taxes is by looking at who actually pays the money to the government versus who feels the pinch in their pocket. This brings us to the concepts of Incidence (the legal responsibility to pay) and Impact (the actual economic burden). When both the incidence and impact fall on the same person, we call it a Direct Tax. For instance, if you earn a salary, you pay Income Tax directly to the government; you cannot ask your neighbor to pay a portion of it for you Indian Economy, Nitin Singhania (2nd ed.), Indian Tax Structure and Public Finance, p.85.

On the other hand, an Indirect Tax is one where the person paying the tax to the government (like a shopkeeper or manufacturer) shifts the burden to someone else (the final consumer). This is why we say the incidence and impact fall on different persons. When you buy a chocolate bar, the shopkeeper has already included the tax in the MRP. They act as an intermediary, collecting the tax from you and passing it on to the state Indian Economy, Vivek Singh (7th ed.), Government Budgeting, p.167. Common examples include GST and Customs Duty Indian Economy, Nitin Singhania (2nd ed.), Indian Tax Structure and Public Finance, p.90.

To help you visualize these differences for your notes, I’ve summarized the key distinctions in this table:

Feature	Direct Tax	Indirect Tax
Incidence & Impact	Falls on the same person.	Falls on different persons.
Shiftability	Cannot be shifted to others.	Burden is shifted to the final consumer.
Levied on	Income, wealth, or corporate profits.	Goods and services (commodities).
Inflation	Can help reduce inflation by lowering disposable income.	Often promotes inflation as it increases the price of goods.

Sources: Indian Economy, Nitin Singhania (2nd ed. 2021-22), Chapter 5: Indian Tax Structure and Public Finance, p.85, 90; Indian Economy, Vivek Singh (7th ed. 2023-24), Government Budgeting, p.167

3. Major Direct Taxes in India (intermediate)

In our journey to master the Indian tax system, we must first understand the counterparts to indirect taxes: Direct Taxes. A direct tax is one where the incidence (liability to pay) and the impact (economic burden) fall on the same person or entity. Unlike indirect taxes, the burden of a direct tax cannot be shifted to someone else. These taxes are primarily governed by the Income Tax (IT) Act, 1961, and are considered 'progressive' because they are designed to tax higher earners at higher rates, promoting social equity Indian Economy, Nitin Singhania, Chapter 5, p.86.

The two heavyweights of direct taxation in India are Personal Income Tax and Corporate Income Tax (CIT). Personal Income Tax is levied on the individual income of persons, Hindu Undivided Families (HUFs), and partnership firms. It covers various 'heads' of income, including salaries, house property rent, and capital gains Indian Economy, Nitin Singhania, Chapter 5, p.86. On the other hand, Corporate Tax is levied on the net profits earned by companies. For tax purposes, a company is treated as a separate legal entity from its owners; thus, the company pays CIT on its profits, while the owners pay personal income tax on the dividends they receive Indian Economy, Nitin Singhania, Chapter 5, p.87.

While many direct taxes like Wealth Tax (abolished in 2016) and Gift Tax (abolished in 1998) have been phased out to simplify the tax structure, others like the Securities Transaction Tax (STT) remain relevant today Indian Economy, Nitin Singhania, Chapter 5, p.86. Furthermore, in an era of globalization, India is part of international efforts to implement a Global Minimum Corporate Tax to prevent big tech companies from shifting profits to 'tax havens' where rates are significantly lower Indian Economy, Vivek Singh, Government Budgeting, p.171.

Feature	Personal Income Tax (PIT)	Corporate Income Tax (CIT)
Applied to	Individuals, HUFs, Firms	Registered Companies (Public/Private)
Legal Basis	Income Tax Act, 1961	Income Tax Act, 1961 / Companies Act
Nature	Varies by income slabs (0% to 30%)	Flat rates based on turnover (e.g., 25% or 30%)

Sources: Indian Economy, Nitin Singhania, Chapter 5: Indian Tax Structure and Public Finance, p.86-87; Indian Economy, Vivek Singh, Government Budgeting, p.168, 171

4. The GST Era and Indirect Tax Reform (intermediate)

The introduction of the Goods and Services Tax (GST) on July 1, 2017, marked the most significant structural reform in India's indirect tax history. Before GST, the system was fragmented; the Centre levied taxes like Central Excise and Service Tax, while States levied VAT, Entry Tax, and Luxury Tax. This led to a 'cascading effect' (tax on tax), which increased the final price for consumers. GST was designed as a comprehensive, multi-stage, destination-based tax that is levied on every value addition, effectively replacing almost all other indirect taxes D. D. Basu, Introduction to the Constitution of India, DISTRIBUTION OF FINANCIAL POWERS, p.392.

One of the most profound shifts under GST is the change in the taxable event. In the previous regime, taxes were triggered by specific activities like the 'manufacture' of goods (Excise Duty) or the 'sale' of goods (VAT). Under GST, these distinctions have vanished. Now, the single taxable event is the 'supply' of goods or services. Furthermore, GST is destination-based, meaning the tax revenue goes to the State where the goods or services are consumed, rather than the State where they were produced Nitin Singhania, Indian Economy, Indian Tax Structure and Public Finance, p.91.

Feature	Pre-GST Regime	GST Regime
Tax Logic	Origin-based (Production focus)	Destination-based (Consumption focus)
Taxable Event	Manufacture, Sale, or Provision of Service	Supply of Goods or Services
Governance	Independent Central/State decisions	Collaborative (GST Council)

To implement this, the 101st Constitutional Amendment Act, 2016 was enacted. It inserted Article 279A, which empowered the President to constitute the GST Council. This Council, chaired by the Union Finance Minister and comprising representatives from all States, is a unique example of cooperative federalism, making all decisions regarding tax rates, exemptions, and thresholds Nitin Singhania, Indian Economy, Indian Tax Structure and Public Finance, p.94. However, it is important to remember that GST is not yet 'universal.' Certain items like crude petroleum, high-speed diesel, and tobacco are still subject to separate central excise, and alcohol for human consumption remains strictly under State jurisdiction 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 (2nd ed. 2021-22), Indian Tax Structure and Public Finance, p.91; Indian Economy, Nitin Singhania (2nd ed. 2021-22), Indian Tax Structure and Public Finance, p.94; Indian Economy, Nitin Singhania (2nd ed. 2021-22), Indian Tax Structure and Public Finance, p.96

5. Fiscal Policy and Deficit Indicators (intermediate)

Fiscal policy is essentially the government's "checkbook" management. While the government collects taxes, it also spends on infrastructure, welfare, and administration. When the government spends more than it earns, we encounter various deficits. The most comprehensive measure is the Fiscal Deficit, which represents the total borrowing requirements of the government. However, looking at the total borrowing doesn't tell the whole story. A high Revenue Deficit (where consumption expenditure exceeds revenue receipts) is a warning sign that the government is borrowing money just to meet daily expenses like salaries and interest, rather than investing in productive assets Indian Economy, Vivek Singh, Government Budgeting, p.153. To understand how the government is managing its current finances—independent of the baggage of the past—we use the Primary Deficit. This is calculated by subtracting interest payments on previous loans from the current year's fiscal deficit. As highlighted in Macroeconomics (NCERT class XII 2025 ed.), Government Budget and the Economy, p.72, the goal here is to focus on present fiscal imbalances. If the Primary Deficit is zero, it means the government's current spending (excluding interest) is perfectly covered by its receipts. This concept, introduced in the 1993-94 budget, is a crucial metric for "fiscal health" because it isolates current policy performance Indian Economy, Nitin Singhania, Indian Tax Structure and Public Finance, p.111. To bring discipline to this process, India enacted the Fiscal Responsibility and Budget Management (FRBM) Act, 2003. Its core philosophy is inter-generational equity—ensuring that the current generation doesn't overspend and leave a massive debt burden for future citizens Indian Economy, Vivek Singh, Government Budgeting, p.156. The Act set specific targets, such as reducing the Fiscal Deficit to 3% of GDP and eliminating the revenue deficit, to ensure long-term macroeconomic stability through fiscal consolidation Indian Economy, Nitin Singhania, Indian Tax Structure and Public Finance, p.115.

Indicator	Focus Area	Significance
Fiscal Deficit	Total Borrowing	Reflects the total resource gap and overall debt increase.
Revenue Deficit	Consumption vs. Investment	Shows if borrowing is used for daily expenses rather than asset creation.
Primary Deficit	Current Fiscal Health	Shows the borrowing requirement excluding interest on past debt.

Sources: Indian Economy, Vivek Singh (7th ed. 2023-24), Government Budgeting, p.153; Macroeconomics (NCERT class XII 2025 ed.), Government Budget and the Economy, p.72; Indian Economy, Nitin Singhania (ed 2nd 2021-22), Indian Tax Structure and Public Finance, p.111; Indian Economy, Vivek Singh (7th ed. 2023-24), Government Budgeting, p.156; Indian Economy, Nitin Singhania (ed 2nd 2021-22), Indian Tax Structure and Public Finance, p.115

6. Understanding Excise and Customs Duties (exam-level)

To master indirect taxes, we must distinguish between taxes on domestic production and taxes on international trade. Excise Duty is a tax levied on the act of manufacture or production of goods within the country. Historically, the Central Government levied Central Excise (CENVAT) on most goods, while State Governments levied excise on specific items. With the rollout of GST, most excise duties were subsumed; however, a few high-revenue items remain under the old regime to provide states and the center with fiscal flexibility. For instance, alcoholic liquor for human consumption remains a subject of State Excise, while petroleum products (like crude oil, petrol, and diesel) continue to attract Central Excise for the time being Indian Economy, Nitin Singhania (ed 2nd 2021-22), Indian Tax Structure and Public Finance, p.96. Interestingly, tobacco is unique because it attracts both GST and Central Excise Duty Macroeconomics (NCERT class XII 2025 ed.), Government Budget and the Economy, p.83.

On the other hand, Customs Duty is a tax imposed on goods when they cross international borders—either entering (imports) or leaving (exports) the country. Unlike excise, Customs Duty was not subsumed into GST because it serves as a tool for trade policy and protecting domestic industries. The primary component is the Basic Customs Duty (BCD), regulated by the Customs Act of 1962 Indian Economy, Nitin Singhania (ed 2nd 2021-22), Indian Tax Structure and Public Finance, p.95. Beyond revenue, the government uses specific types of customs duties for protection: Anti-Dumping Duty is used when foreign exporters sell goods in India at prices lower than their home market, while Safeguard Duty is triggered by a sudden surge in imports that threatens to hurt domestic producers Indian Economy, Nitin Singhania (ed 2nd 2021-22), Indian Tax Structure and Public Finance, p.96.

Feature	Excise Duty	Customs Duty
Taxable Event	Manufacture/Production within India	Import/Export across borders
GST Status	Mostly subsumed (except Petroleum, Alcohol, Tobacco)	Not subsumed; continues alongside GST
Key Authority	Union (Petroleum/Tobacco) & States (Alcohol)	Union Government (List I, Entry 83)

Sources: Indian Economy, Nitin Singhania (ed 2nd 2021-22), Indian Tax Structure and Public Finance, p.95-96; Macroeconomics (NCERT class XII 2025 ed.), Government Budget and the Economy, p.83; Introduction to the Constitution of India, D. D. Basu (26th ed.), TABLES, p.555

7. Solving the Original PYQ (exam-level)

Now that you have mastered the fundamental distinction between Direct Taxes (where the liability and burden fall on the same person) and Indirect Taxes (where the burden is shifted to the final consumer), this question becomes a straightforward application of those principles. As noted in Indian Economy, Nitin Singhania, indirect taxes are typically levied on goods and services rather than income. Customs duty (II) is charged on the movement of goods across borders, and Excise duty (IV) is levied on the manufacture of goods; in both cases, the cost is ultimately recovered from the buyer, making them classic examples of indirect taxation.

To arrive at the correct answer (B), you must use the process of elimination by identifying the Direct Taxes in the list. Corporation tax (I) is a tax on the net income or profit of companies, and Wealth tax (III) is levied on the value of assets owned by an individual. Since both are paid directly by the entity or person earning the income or owning the asset, they cannot be categorized as indirect. The common trap in UPSC is confusing "Corporation" with a general business activity; however, because it targets profits, it remains a direct levy. By filtering out I and III, only the combination of II and IV remains, leading you to the accurate conclusion.