Corporation tax

1. Constitutional Basis of Taxation (Article 265 & 7th Schedule) (basic)

In a democracy, the power to tax is not an inherent right of the government but a mandate granted by the people through their elected representatives. The bedrock of India's taxation system is Article 265, which states: "No tax shall be levied or collected except by authority of law." This serves as a vital safeguard against arbitrary taxation. It means the Executive (the government or tax officials) cannot simply announce a new tax or increase an existing one; it must be backed by a specific statute passed by the Legislature Introduction to the Constitution of India, D. D. Basu, p.95. If the Executive seeks to impose a levy without legislative sanction, a citizen has the legal right to challenge it in court.

While Article 265 establishes that a law is mandatory, the Seventh Schedule of the Constitution specifies which legislature—the Parliament or the State Assembly—has the authority to make that law. To prevent overlapping jurisdictions and "tax wars" between different levels of government, the Constitution demarcates taxation powers clearly:

List	Authority	Examples of Taxes
Union List (List I)	Parliament	Income tax (excluding agriculture), Corporation tax, Customs duties.
State List (List II)	State Legislature	Land revenue, Taxes on mineral rights, Duties on alcoholic liquors.
Concurrent List (List III)	Both	Generally, this list contains very few tax entries to avoid dual taxation conflicts.

What happens if a new type of tax arises that wasn't envisioned by the makers of the Constitution? In India, the Residuary Power of taxation—the power to tax subjects not mentioned in any of the three lists—rests exclusively with the Parliament under Entry 97 of the Union List Introduction to the Constitution of India, D. D. Basu, p.384. For example, taxes like the Gift Tax and Expenditure Tax were historically derived from this residuary power.

Finally, it is essential to distinguish between the power to levy (making the law and collecting the tax) and the power to appropriate (using the money). Under our federal setup, the Centre might levy a tax (like Corporation Tax), but the proceeds are often shared with the States through a "divisible pool" based on the recommendations of the Finance Commission Indian Polity, M. Laxmikanth, p.139. This ensures that while the authority to tax is centralized for efficiency, the revenue is distributed to maintain federal balance.

Sources: Introduction to the Constitution of India, D. D. Basu (26th ed.), Fundamental Rights and Fundamental Duties, p.95; Introduction to the Constitution of India, D. D. Basu (26th ed.), Distribution of Financial Powers, p.384; Indian Polity, M. Laxmikanth (7th ed.), Federal System, p.139

2. Direct vs. Indirect Taxes in the Indian Economy (basic)

To understand the backbone of India's fiscal architecture, we must first distinguish between Direct and Indirect taxes. This distinction relies on two technical terms: Impact (the legal responsibility to pay the tax) and Incidence (the actual economic burden). In a Direct Tax, both the impact and incidence fall on the same person; you cannot shift the burden to someone else Nitin Singhania, Indian Tax Structure and Public Finance, p.85. For instance, if you earn a salary, you pay Personal Income Tax directly to the government. Similarly, Corporation Tax is a direct tax levied on the profits of companies, which are treated as separate legal entities from their owners Nitin Singhania, Indian Tax Structure and Public Finance, p.87.

Conversely, an Indirect Tax is one where the impact and incidence fall on different people. The government collects the tax from an intermediary (like a shopkeeper), but the shopkeeper recovers that amount from you, the consumer, by including it in the price of the product Vivek Singh, Government Budgeting, p.167. Common examples include the Goods and Services Tax (GST) and Customs Duty. Indirect taxes are often considered inflationary because they directly increase the market price of commodities Nitin Singhania, Indian Tax Structure and Public Finance, p.85.

In the context of Centre-State relations, a crucial nuance exists regarding Corporation Tax. While it is administered and collected exclusively by the Union government, it is not for the Centre's use alone. Under Article 270 of the Constitution, the net proceeds of most Central taxes, including Corporation Tax, form a "divisible pool" that must be shared with the States based on the recommendations of the Finance Commission. This ensures that even though the Centre has more robust taxing powers, the States receive a fair share of the revenue to fund their development.

Feature	Direct Tax	Indirect Tax
Incidence & Impact	Falls on the same person	Falls on different persons
Shiftability	Cannot be shifted	Can be shifted to the consumer
Examples	Income Tax, Corporation Tax	GST, Customs Duty, Excise
Inflation Effect	May help reduce inflation	May promote inflation

Sources: Indian Economy, Nitin Singhania, Indian Tax Structure and Public Finance, p.85; Indian Economy, Nitin Singhania, Indian Tax Structure and Public Finance, p.87; Indian Economy, Vivek Singh, Government Budgeting, p.167

3. The 80th Constitutional Amendment and Divisible Pool (intermediate)

Welcome back! Now that we understand how the Centre and States are generally positioned, let’s look at the massive architectural shift that occurred in the year 2000. Before this, the distribution of tax revenue was quite fragmented. Only certain taxes like Income Tax were mandatorily shared, while others like Union Excise Duties were shared at the discretion of Parliament. This created a friction point: the Centre often preferred raising taxes that it didn't have to share (like Corporation Tax), which left States feeling short-changed. To fix this "vertical imbalance," the 80th Constitutional Amendment Act (2000) was enacted, based on the recommendations of the 10th Finance Commission M. Laxmikanth, Indian Polity, Centre State Relations, p.153.

The 80th Amendment introduced what is known as the 'Alternative Scheme of Devolution'. It radically simplified the system by amending Article 270 and omitting Article 272. Instead of picking and choosing specific taxes to share, the Amendment brought almost all Central taxes into a single bucket called the Divisible Pool. The 10th Finance Commission suggested that 29% of the total proceeds of all Central taxes and duties should be shared with the States. This change was actually applied retrospectively from April 1, 1996 D. D. Basu, Introduction to the Constitution of India, DISTRIBUTION OF FINANCIAL POWERS, p.386.

So, what exactly counts as the Divisible Pool today? It is the portion of the Union Government’s gross tax revenue that is eligible for sharing with the States. However, not every rupee collected by the Centre goes into this pool. Certain items are strictly excluded before the sharing starts:

• Cess and Surcharges: These are earmarked for specific purposes and belong exclusively to the Centre.
• Cost of Collection: The administrative expenses incurred to collect the taxes.
• Tax Revenue of Union Territories: Since the Centre manages UTs directly, this revenue isn't shared with States.
• National Calamity Contingency Duty (NCCD): Specifically reserved for disaster relief Vivek Singh, Indian Economy, Government Budgeting, p.182.

A great example of this shift is Corporation Tax (tax on company profits). Originally, it was a "non-shareable" tax that the Union kept entirely for itself. Today, while it remains a Central tax administered by the Union, its yield is a vital part of the divisible pool and is apportioned between the Union and States based on the Finance Commission's formula Nitin Singhania, Indian Economy, Indian Tax Structure and Public Finance, p.87.

Feature	Pre-80th Amendment	Post-80th Amendment
Sharing Logic	Selective (specific taxes shared)	Pool-based (almost all taxes shared)
Corporation Tax	Exclusively for the Centre	Part of the Divisible Pool
Key Article	Articles 270 and 272	Article 270 (Article 272 omitted)

Sources: Introduction to the Constitution of India, D. D. Basu, DISTRIBUTION OF FINANCIAL POWERS, p.386; Indian Polity, M. Laxmikanth, Centre State Relations, p.153; Indian Economy, Vivek Singh, Government Budgeting, p.182; Indian Economy, Nitin Singhania, Indian Tax Structure and Public Finance, p.87

4. The Finance Commission (Article 280) (intermediate)

To understand the Finance Commission, we must first recognize a fundamental reality of the Indian federation: the fiscal imbalance. While the Union government has the most buoyant sources of revenue (like Corporation Tax and Income Tax), the States carry the heavy responsibility of social expenditures like education and healthcare. To bridge this gap, Article 280 of the Constitution provides for a Finance Commission—a quasi-judicial body that acts as the 'balancing wheel' of fiscal federalism Indian Polity (Laxmikanth), Finance Commission, p.431. It is constituted by the President of India every five years (or earlier if necessary) to ensure that the distribution of financial resources remains fair and updated according to the nation's needs.

The Commission’s primary role is to make recommendations on two fronts: Vertical Devolution (how much of the Central taxes should go to the States collectively) and Horizontal Devolution (how that share should be divided among individual States based on criteria like population, income distance, and forest cover) Indian Economy (Nitin Singhania), Indian Tax Structure and Public Finance, p.123. Since the 80th Amendment Act (2000), we follow an 'Alternative Scheme of Devolution' where almost all central taxes—including Corporation Tax—form a common divisible pool to be shared with the states Indian Polity (Laxmikanth), Centre-State Relations, p.153. For example, the 15th Finance Commission fixed the vertical devolution at 41%, ensuring a steady flow of 'untied' funds that states can spend as per their specific priorities Indian Economy (Vivek Singh), Government Budgeting, p.182.

Beyond tax sharing, the Commission also recommends the principles for Grants-in-aid to the States (under Article 275) and suggests measures to augment the Consolidated Fund of a State to supplement the resources of local bodies like Panchayats and Municipalities Introduction to the Constitution of India (Basu), DISTRIBUTION OF FINANCIAL POWERS, p.387. It is important to note that while the Union collects taxes like Corporation Tax, these are not its exclusive property; they are part of the constitutional mechanism intended to keep the entire federal structure financially healthy.

Feature	Details
Constitutional Basis	Article 280; Quasi-judicial body
Appointing Authority	President of India (every 5th year)
Composition	Chairman + 4 members (Qualifications defined by Parliament)
Major Function	Recommending the distribution of the 'Divisible Pool' of taxes

Sources: Indian Polity (Laxmikanth), Finance Commission, p.431; Indian Economy (Nitin Singhania), Indian Tax Structure and Public Finance, p.123; Indian Polity (Laxmikanth), Centre-State Relations, p.153; Indian Economy (Vivek Singh), Government Budgeting, p.182; Introduction to the Constitution of India (Basu), DISTRIBUTION OF FINANCIAL POWERS, p.387

5. Grants-in-Aid and Non-Tax Revenue (intermediate)

Beyond the sharing of tax proceeds, the Indian Constitution provides for two other vital streams of revenue to ensure financial stability and balanced development: Grants-in-Aid and Non-Tax Revenue. While taxes are the primary source of income, grants act as a balancing wheel to correct fiscal imbalances between the Centre and the States, particularly for those states that lack adequate resources despite tax sharing.

Grants-in-Aid are broadly divided into two categories: Statutory Grants and Discretionary Grants. Statutory grants are governed by Article 275 and are given to states in need of financial assistance on the recommendation of the Finance Commission. These can be general or specific (for example, for the welfare of scheduled tribes). On the other hand, Article 282 allows for Discretionary Grants, which the Centre or States can provide for any "public purpose," even if it falls outside their direct legislative domain Laxmikanth, M. Indian Polity, Centre-State Relations, p.155.

Feature	Statutory Grants (Art. 275)	Discretionary Grants (Art. 282)
Nature	Mandatory for specific states based on need.	Optional/Discretionary; no obligation.
Recommendation	Finance Commission.	Central Government (historically via Planning Commission).
Purpose	To bridge fiscal gaps and promote welfare.	To fulfill plan targets and influence state action.

Finally, we have Non-Tax Revenue. These are receipts generated from the government's sovereign functions, commercial activities, and services. For the Union, major sources include the Railways, Posts and Telegraphs, Broadcasting, and profits from Central Public Sector Undertakings (PSUs) D. D. Basu, Introduction to the Constitution of India, DISTRIBUTION OF FINANCIAL POWERS, p.386. For States, the primary non-tax sources include irrigation charges, forest produce, fisheries, and state-run enterprises, alongside escheat (property passing to the state when there are no heirs) Laxmikanth, M. Indian Polity, Centre-State Relations, p.155.

Sources: Laxmikanth, M. Indian Polity, Centre-State Relations, p.155; D. D. Basu, Introduction to the Constitution of India, DISTRIBUTION OF FINANCIAL POWERS, p.386

6. Article 270: Distribution of Union Taxes (exam-level)

To understand how India maintains its federal balance, we must look at Article 270, which governs the 'Divisible Pool' of taxes. Since the Union government has more expansive powers to levy productive taxes while States have heavy social sector responsibilities, Article 270 acts as a bridge. It mandates that taxes levied and collected by the Union are distributed between the Union and the States based on the recommendations of the Finance Commission Introduction to the Constitution of India, D. D. Basu, DISTRIBUTION OF FINANCIAL POWERS, p.385.

The current structure is the result of the 80th Amendment Act, 2000. Before this amendment, only specific taxes like Income Tax were shared. This amendment implemented the 'Alternative Scheme of Devolution,' which simplified the system by bringing almost all Central taxes into a single shared pool Introduction to the Constitution of India, D. D. Basu, DISTRIBUTION OF FINANCIAL POWERS, p.386. For instance, Corporation Tax (tax on company profits) and Customs Duty are collected exclusively by the Union, but their proceeds are apportioned between the Centre and States rather than belonging to the Centre alone Indian Economy, Nitin Singhania, Indian Tax Structure and Public Finance, p.87.

However, not everything the Union collects is shared. The following items are explicitly excluded from the divisible pool and stay entirely with the Centre:

• Surcharges: Any surcharge levied under Article 271 for Union purposes Laxmikanth, M. Indian Polity, Centre State Relations, p.154.
• Cesses: Any cess levied for a specific purpose, such as a 'Health and Education Cess' Indian Economy, Nitin Singhania, Indian Tax Structure and Public Finance, p.95.
• Taxes under Articles 268, 269, and 269-A: These have their own specific distribution rules.

Type of Levy	Collection Agency	Distribution Status
Corporation Tax	Union	Shared with States (Divisible Pool)
Income Tax	Union	Shared with States (Divisible Pool)
Surcharge (Art. 271)	Union	Retained exclusively by Union
Specific Cess	Union	Retained exclusively by Union

Sources: Introduction to the Constitution of India, D. D. Basu, DISTRIBUTION OF FINANCIAL POWERS, p.385-386; Indian Polity, M. Laxmikanth, Centre-State Relations, p.154; Indian Economy, Nitin Singhania, Indian Tax Structure and Public Finance, p.87, 95

7. Nature and Administration of Corporation Tax (exam-level)

To understand Corporation Tax (CIT), we must first view a company as a "legal person." Just as you pay personal income tax on your earnings, a company—being a separate legal entity—pays tax on its net profits. This distinction is crucial: the tax is not on the owners (shareholders), but on the book profits generated by the business itself Indian Economy, Nitin Singhania, Indian Tax Structure and Public Finance, p. 87. In India, this applies to both public and private companies registered under the Companies Act. Since 2019, the tax regime has become more competitive, with domestic companies generally paying 25% if their turnover is up to ₹250 crore, and 30% if it exceeds that, though new manufacturing units have been offered rates as low as 15% to boost the 'Make in India' initiative Indian Economy, Nitin Singhania, Indian Tax Structure and Public Finance, p. 87. From a Centre-State administrative perspective, Corporation Tax is a Union Tax. It is levied and collected entirely by the Central Government under the authority of the Income Tax Act, 1961. However, since the 80th Constitutional Amendment, it no longer belongs exclusively to the Centre. Under Article 270, Corporation Tax forms a significant part of the 'Divisible Pool'. This means the net proceeds are shared between the Union and the States based on the recommendations of the Finance Commission. This makes CIT one of the most vital pillars of fiscal federalism in India, as its growth directly impacts the financial health of State governments. To ensure companies don't use excessive exemptions to avoid paying their fair share, the government utilizes Minimum Alternate Tax (MAT). If a company's normal tax liability is lower than a certain percentage of its book profit, it must pay MAT instead Indian Economy, Nitin Singhania, Indian Tax Structure and Public Finance, p. 87. Furthermore, in the digital age, India has introduced an Equalization Levy (often called the 'Google Tax') to capture revenue from foreign digital giants that do not have a physical 'permanent establishment' in India but earn significant revenue from Indian consumers Indian Economy, Vivek Singh, Government Budgeting, p. 170.

Feature	Details
Nature	Direct Tax on corporate profits (separate from personal income tax).
Authority	Levied and Collected by the Union (Central Government).
Sharing	Distributed between Centre and States via Article 270 (Divisible Pool).
Safeguard	MAT (Minimum Alternate Tax) ensures even 'zero-tax' companies pay a minimum share.

Sources: Indian Economy, Nitin Singhania, Indian Tax Structure and Public Finance, p.87; Indian Economy, Vivek Singh, Government Budgeting, p.170

8. Solving the Original PYQ (exam-level)

Now that you have mastered the basics of the Indian Tax Structure and the Constitutional division of fiscal powers, this question serves as the perfect application of those building blocks. You have learned that Corporation Tax is a Direct Tax levied on the net income or profit of companies. Under the Seventh Schedule of the Constitution, it falls squarely within the Union List, meaning the Union government has the sole authority to levy and collect it. However, the crucial connection you must make here is to Article 270 and the concept of the Divisible Pool. As noted in Indian Economy, Nitin Singhania, while the Union administers this tax, the net proceeds are not for its exclusive use.

To arrive at the correct answer, you must distinguish between the authority to levy and the final appropriation of the revenue. While the Union government levies and collects the tax, it is constitutionally mandated to share these proceeds with the States based on the Finance Commission's recommendations. This makes (C) is levied by the Union and shared by the Union and the States the only accurate description of the current fiscal arrangement. Always remember: Post the 80th Constitutional Amendment, almost all Central taxes (excluding cesses and surcharges) are part of this shared pool.

UPSC often includes Option (D) as a "knowledge trap" because, historically, Corporation Tax was not shared with the States. If you rely on outdated logic, you might think it belongs to the Union exclusively, but the 80th Amendment changed this fundamental rule. Options (A) and (B) are incorrect because they suggest the States have a role in levying or appropriating the tax directly, which contradicts the Union List entry for taxes on income other than agricultural income. By identifying that the Union manages it but the proceeds are distributed, you can confidently navigate these fiscal policy questions.