Corporation tax is imposed by :

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

Welcome to your first step in mastering the Indian taxation system! To understand taxes, we must first look at the Constitution of India, which is the ultimate source of power. According to Article 265, no tax can be levied or collected except by the "authority of law." This means the government cannot just pick a number and charge you; they need a specific law passed by the legislature. The blueprint for who gets to make which law is found in Article 246 and the Seventh Schedule of the Constitution.

The Seventh Schedule divides the power to tax into distinct "Lists" to prevent the Union and States from constantly clashing over the same revenue sources M. Laxmikanth, Centre-State Relations, p.164. For direct taxes, the most important entry is Entry 82 of List I (Union List), which gives the Central Government the power to tax "taxes on income other than agricultural income." This is why your personal income tax goes to the Centre. Similarly, Entry 85 of List I gives the Centre the exclusive right to levy Corporation Tax (tax on company profits). By keeping these major direct taxes under the Union, the Constitution ensures a uniform tax structure across the country.

On the other hand, State Governments have their own specific domains under List II (State List). For example, while the Union taxes general income, the power to tax agricultural income is reserved for the States (Entry 46 of List II). States also have the power to levy a "tax on professions, trades, callings and employment" under Entry 60, though Article 276 famously caps this at ₹2,500 per annum per person D. D. Basu, Introduction to the Constitution of India, DISTRIBUTION OF FINANCIAL POWERS, p.384. This clear demarcation ensures that both levels of government have independent sources of revenue to function effectively.

Tax Category	Authority (List)	Key Examples
Union Taxation	List I (Entries 82-92)	Income Tax (non-agri), Corporation Tax, Customs Duty
State Taxation	List II (Entries 45-63)	Agricultural Income Tax, Land Revenue, State Excise, Professions Tax
Residuary Power	Article 248	Any tax not mentioned in List II or III (belongs to Union)

Finally, there is a concept of mutual immunity. Generally, the property of the Union is exempt from State taxation (Article 285), and the property and income of a State are exempt from Union taxation (Article 289) D. D. Basu, Introduction to the Constitution of India, DISTRIBUTION OF FINANCIAL POWERS, p.385. However, if a State engages in a commercial business not considered part of its ordinary government functions, the Union can tax that business income. This balance ensures that neither level of government unfairly drains the resources of the other.

Sources: M. Laxmikanth, Indian Polity (7th ed.), Centre-State Relations, p.164; D. D. Basu, Introduction to the Constitution of India (26th ed.), DISTRIBUTION OF FINANCIAL POWERS, p.384; D. D. Basu, Introduction to the Constitution of India (26th ed.), DISTRIBUTION OF FINANCIAL POWERS, p.385

2. Direct vs. Indirect Taxes (basic)

At its simplest level, a tax is a compulsory payment made by individuals or entities to the government to fund public expenditure. You cannot deny paying it if you fall under the legal criteria, and you don’t get a direct, proportional service in return for that specific payment Indian Economy, Nitin Singhania, Chapter 5, p.85. To understand the difference between direct and indirect taxes, we must look at two technical terms: Impact (who the government initially levies the tax on) and Incidence (who ultimately bears the money burden of the tax).

Direct Taxes are those where the person who pays the tax to the government is also the person who bears the final burden. In other words, the impact and incidence fall on the same person Indian Economy, Nitin Singhania, Chapter 5, p.85. These taxes are typically linked to your income or wealth. If you earn a salary or a company makes a profit, you pay the tax directly from that income. Because these taxes are often progressive (the tax rate increases as your income increases), they help reduce income inequality by putting a higher burden on the wealthy Indian Economy, Vivek Singh, Chapter 4, p.166.

Indirect Taxes, on the other hand, are imposed on goods and services. Here, the government levies the tax on a seller (impact), but the seller shifts that burden to the consumer by including the tax in the price of the product (incidence) Indian Economy, Nitin Singhania, Chapter 5, p.90. Thus, the impact and incidence fall on different people. These are often considered regressive because a poor person and a rich person pay the same amount of tax on a loaf of bread or a bottle of water, which consumes a larger portion of a poor person's income Indian Economy, Nitin Singhania, Chapter 5, p.85.

Feature	Direct Tax	Indirect Tax
Incidence & Impact	Falls on the same person.	Falls on different persons.
Shiftability	Cannot be shifted.	Can be shifted (from seller to buyer).
Examples	Income Tax, Corporate Tax.	GST, Customs Duty, Excise Duty.
Nature	Generally Progressive.	Generally Regressive.

Sources: Indian Economy, Nitin Singhania, Indian Tax Structure and Public Finance, p.85; Indian Economy, Nitin Singhania, Indian Tax Structure and Public Finance, p.90; Indian Economy, Vivek Singh, Government Budgeting, p.166

3. Revenue Sources of the Union vs. States (intermediate)

In a federal structure like India, the power to levy taxes is not arbitrary; it is meticulously divided between the Union (Central Government) and the States to ensure fiscal clarity and administrative efficiency. This demarcation is primarily found in the Seventh Schedule of the Constitution, which contains three lists: the Union List, the State List, and the Concurrent List. When it comes to direct taxation, the dividing line is often drawn between agricultural and non-agricultural sources of wealth and income.

The Union Government is empowered to levy the most significant and buoyant direct taxes. These include Corporation Tax (Entry 85), which is a tax on the net profits of companies, and Taxes on Income (Entry 82)—with the critical caveat that this excludes agricultural income Introduction to the Constitution of India, D. D. Basu (26th ed.), Tables, p.556. Additionally, the Union handles taxes on the capital value of assets (excluding agricultural land) and estate/succession duties for non-agricultural property. Because these taxes are uniform across the country, they allow the Union to maintain a stable and centralized revenue stream from the industrial and service sectors Indian Economy, Nitin Singhania (2nd ed. 2021-22), Chapter 5, p.85.

Conversely, the State Governments have jurisdiction over taxes closely tied to the land and local economy. The most prominent among these are Land Revenue and Taxes on Agricultural Income Indian Polity, M. Laxmikanth (7th ed.), World Constitutions, p.711. While the Union taxes corporate profits, the States have the authority to levy taxes on Professions, Trades, Callings, and Employment, though this is capped by the Constitution (currently at ₹2,500 per person per year) to prevent it from overlapping with the Union’s income tax powers Introduction to the Constitution of India, D. D. Basu (26th ed.), Distribution of Financial Powers, p.384.

Tax Category	Union Government (List I)	State Government (List II)
Income Tax	Non-agricultural income	Agricultural income
Corporate/Entity Tax	Corporation Tax	Taxes on Professions/Trades
Property/Land	Estate duty (Non-agri)	Land Revenue & Agri Estate duty

It is important to note that Land Revenue is often determined based on the classification and average yield of the land, making it a state-specific levy that accounts for regional productivity Indian Economy, Vivek Singh (7th ed. 2023-24), Government Budgeting, p.171. This division ensures that while the Union manages the broader macro-economic revenue, States retain control over localized, land-based wealth.

Sources: Introduction to the Constitution of India, D. D. Basu (26th ed.), Tables / Distribution of Financial Powers, p.556, 384, 386; Indian Economy, Vivek Singh (7th ed. 2023-24), Government Budgeting, p.171; Indian Polity, M. Laxmikanth (7th ed.), World Constitutions, p.711; Indian Economy, Nitin Singhania (2nd ed. 2021-22), Chapter 5: Indian Tax Structure and Public Finance, p.85

4. Distribution of Tax Proceeds (Finance Commission) (intermediate)

In the Indian federal structure, there is a natural fiscal imbalance: the Central Government has the most lucrative sources of revenue (like Corporation Tax and Income Tax), while the State Governments carry the heavy burden of social expenditures like health, education, and law and order. To bridge this gap, the Constitution provides a mechanism for the distribution of tax proceeds between the Union and the States.

The cornerstone of this distribution is Article 280 of the Constitution, which mandates the President of India to constitute a Finance Commission (FC) every five years (or earlier if necessary). The FC acts as a quasi-judicial body that recommends how the "net proceeds" of taxes should be shared. As noted in Laxmikanth, Finance Commission, p.431, the Commission provides the blueprint for both Vertical Devolution (how much the Center gives to all States combined) and Horizontal Devolution (how that total share is divided among individual States based on criteria like population and forest cover).

However, it is vital to understand that not every rupee collected by the Union enters the sharing basket. The funds that are eligible for distribution are known as the Divisible Pool. According to Vivek Singh, Government Budgeting, p.182, certain items are specifically excluded from this pool, meaning the Central Government keeps 100% of these collections for itself. This is a common point of contention in Center-State relations, especially regarding the rising use of Cesses and Surcharges.

Included in Divisible Pool	Excluded from Divisible Pool
Net proceeds of Union Taxes (e.g., Corporation Tax, Income Tax, Customs)	Cess and Surcharges (levied for specific purposes)
Central GST (CGST) shares	Cost of collection of taxes
Tax revenue of Union Territories	National Calamity Contingency Duty (NCCD)

Under Article 270, almost all Central taxes (except for those mentioned in Articles 268 and 269, and certain cesses) are distributed between the Union and the States D. D. Basu, Distribution of Financial Powers, p.387. This ensures that even though the Union collects a major direct tax like Corporation Tax, a significant portion of it eventually flows back to the States to fund local development.

Sources: Laxmikanth, M. Indian Polity, Finance Commission, p.431; Introduction to the Constitution of India, D. D. Basu, DISTRIBUTION OF FINANCIAL POWERS, p.387; Indian Economy, Vivek Singh, Government Budgeting, p.182

5. Surcharge and Cess: Specific Levies (intermediate)

In our journey through the direct taxation system, we encounter two specific types of levies that often confuse students: Surcharge and Cess. At their core, both are essentially a 'tax on tax'—meaning they are not calculated on your total income, but on the tax amount you have already calculated. However, their purpose and how the government handles the money differ significantly.

A Surcharge is an additional charge on the tax payable, usually applied to higher income brackets to ensure vertical equity (the idea that those who earn more should contribute a higher proportion). Under Article 271 of the Constitution, the Parliament has the power to levy surcharges on certain taxes and duties. The most critical point for you to remember is that the proceeds of surcharges go exclusively to the Centre; the State governments have no share in this revenue Laxmikanth, M. Indian Polity, Centre State Relations, p.154. For example, if a wealthy individual owes ₹1,00,000 in tax and a 10% surcharge is applied, they pay an extra ₹10,000, all of which stays with the Union government.

A Cess, on the other hand, is a levy for a specific, earmarked purpose. While a surcharge can be used for any general expenditure by the Union, a cess must be used for the objective it was created for—such as the Health and Education Cess or the Social Welfare Surcharge on customs Nitin Singhania, Indian Economy, Indian Tax Structure and Public Finance, p.95. If the government collects a cess for primary education, it cannot legally spend that money on building a highway. Similar to surcharges, cesses are also not part of the 'divisible pool' shared with states, which often makes them a point of contention in Centre-State financial relations.

Feature	Surcharge	Cess
Calculation	Tax on Tax	Tax on Tax
Purpose	General revenue for the Centre	Specific purpose (e.g., Education, Road)
Sharing	Not shared with States	Not shared with States
GST Application	Cannot be imposed on GST	GST Compensation Cess exists (Special Case)

Sources: Laxmikanth, M. Indian Polity, Centre State Relations, p.154; Nitin Singhania, Indian Economy, Indian Tax Structure and Public Finance, p.95

6. Deep Dive into Corporation Tax (CIT) (exam-level)

Corporation Tax (CIT) is a direct tax levied by the Central Government on the net profits or income earned by corporate entities. A fundamental principle of modern commerce is that a company is a separate legal entity; therefore, it is taxed independently of its owners or shareholders. While an individual pays Personal Income Tax on their earnings, the company as an artificial person pays CIT on its business profits Nitin Singhania, Indian Tax Structure and Public Finance, p.87. Under the Seventh Schedule of the Constitution, the power to levy taxes on income (other than agricultural income) is vested in the Union Government, making CIT a major source of revenue for the Centre Vivek Singh, Government Budgeting, p.168.

The applicability of this tax extends to both domestic and foreign corporations. A domestic company is one registered in India under the Companies Act, while a foreign company is taxed specifically on the income it generates within Indian borders. To make India a more attractive investment destination, the government introduced significant reforms in 2019, slashing the base corporate tax rate. For instance, the rate was reduced to 25% for companies with a turnover up to ₹250 crore, and a highly competitive rate of 15% was introduced for new domestic manufacturing companies Nitin Singhania, Indian Tax Structure and Public Finance, p.87.

Feature	Personal Income Tax	Corporation Tax (CIT)
Entity	Individuals, HUFs, etc.	Registered Companies/Corporations
Basis	Slab-based progressive rates	Usually flat rates based on turnover/type
Nature	Direct Tax	Direct Tax

Interestingly, the digital economy has challenged traditional CIT collection because companies like Google or Meta can generate revenue in India without having a physical office (Permanent Establishment). To address this, India introduced the Equalization Levy (or "Google Tax") in 2016 to tax payments made to non-resident entities for digital advertising Vivek Singh, Government Budgeting, p.170. Furthermore, while state property is generally exempt from Central taxation, the Parliament has the power to tax the commercial operations of a state government if it so chooses M. Laxmikanth, Centre-State Relations, p.157.

Sources: Indian Economy, Nitin Singhania, Indian Tax Structure and Public Finance, p.87; Indian Economy, Vivek Singh, Government Budgeting, p.168, 170; Indian Polity, M. Laxmikanth, Centre-State Relations, p.157

7. Solving the Original PYQ (exam-level)

This question acts as a bridge between your understanding of the Seventh Schedule of the Constitution and the practical classification of taxes. You have recently learned how the Constitution demarcates taxing powers; this question tests that specific building block. Since Corporation Tax (or Corporate Income Tax) is essentially a tax on the non-agricultural income of legal entities, it falls under the Union's exclusive jurisdiction. As noted in Indian Economy, Nitin Singhania (2nd ed.), the Central Government is empowered to levy taxes on all income other than agricultural income, making the Central Government the correct authority for this direct tax.

To arrive at the correct answer, you must follow a logical chain: first, identify that a corporation is a distinct legal person; second, recognize that its profit is a form of income. Ask yourself: who has the power to tax income in India? Per the division of powers, the Union handles non-agricultural income to ensure a uniform tax regime across the country. According to Indian Economy, Vivek Singh (7th ed.), the administration and collection of this tax are major revenue receipts for the Union Government, reinforcing why it cannot be a state or local subject.

UPSC frequently uses the State Government or the "Both" option as a trap to confuse students about the Finance Commission's role. While the proceeds of Corporation Tax are shared with the states, the power to impose and collect it rests solely with the Center. Local Governments are limited to specific areas like property and municipal taxes, while State Governments are restricted to taxes like State Excise and Land Revenue. Therefore, even if a company operates within a state, its corporate profits are taxed only by the Central Government.