Direct & Indirect Tax MCQ Quiz - Objective Question with Answer for Direct & Indirect Tax - Download Free PDF

The correct answer is A, B, and C.

Key Points

• Agricultural Land Tax is one of the primary sources of land revenue in India, levied on income generated from agricultural land.
• Water Tax is a tax levied on the use of irrigation water, contributing significantly to land revenue in agricultural regions.
• Non-agricultural Land Assessment involves the assessment and taxation of land used for non-agricultural purposes such as industrial, commercial, or residential purposes.
• These taxes form a critical revenue source for state governments, particularly in regions where agriculture and land-based economic activities dominate.
• Land revenue is collected and managed by state governments as per the Constitution of India, which lists it under the State List.

Additional Information

• Land Revenue System: The land revenue system in India dates back to ancient times and was formalized during British rule through systems like Zamindari, Ryotwari, and Mahalwari.
• Constitutional Provision: Land revenue falls under the State List in the Seventh Schedule of the Indian Constitution, giving states exclusive power to legislate on it.
• Modern Use: Revenue collected through these sources is often used for state welfare programs, infrastructure development, and rural development initiatives.
• Challenges in Collection: Issues such as under-assessment, evasion, and lack of updated land records can reduce the efficiency of land revenue collection.
• Digitization of Land Records: Programs like the Digital India Land Records Modernization Programme (DILRMP) aim to create a transparent, efficient, and updated land revenue collection system.

The correct answer is 101st Amendment.

Key Points

• The 101st Constitutional Amendment Act was passed by the Parliament of India in August 2016.
• This amendment led to the introduction of the Goods and Services Tax (GST), which came into effect from 1st July 2017.
• GST replaced multiple indirect taxes like VAT, service tax, excise duty, etc., with a single tax regime.
• The amendment aimed to streamline the tax structure and enhance the efficiency of the tax system in India.
• The GST Council was established under this amendment to make recommendations on various GST-related issues.

Additional Information

• Goods and Services Tax (GST)
  • GST is a comprehensive, multi-stage, destination-based tax that is levied on every value addition.
  • It is divided into Central GST (CGST), State GST (SGST), Integrated GST (IGST), and Union Territory GST (UTGST).
  • GST has subsumed numerous indirect taxes such as excise duty, VAT, service tax, and more.
  • It simplifies the taxation system and reduces the cascading effect of taxes by allowing seamless input tax credit.
  • The GST regime aims to create a unified market and promote economic growth by reducing tax evasion and enhancing transparency.
• GST Council
  • The GST Council is a constitutional body established under Article 279A.
  • It comprises the Union Finance Minister, the Union Minister of State for Finance, and the Finance Ministers of all states.
  • The council is responsible for making recommendations on aspects like tax rates, exemptions, thresholds, and other matters related to GST.
  • Decisions in the GST Council are made by a majority of not less than three-fourths of the weighted votes of the members present.
• Input Tax Credit (ITC)
  • ITC allows businesses to claim the tax paid on purchase of goods and services used for business purposes.
  • It helps in reducing the overall tax liability and ensures that tax is paid only on the value addition.
  • ITC is available for both goods and services under the GST regime.
• GST Rates
  • GST has multiple rates ranging from 0%, 5%, 12%, 18%, to 28%, based on the type of goods and services.
  • Luxury items and sin goods attract higher tax rates, whereas essential goods and services are taxed at lower rates.

The correct answer is Customs duty.

Key Points

• Customs duty is a type of indirect tax levied on goods imported into or exported out of a country.
• It is imposed by the government to generate revenue and protect domestic industries from foreign competition.
• Unlike direct taxes, customs duty is paid indirectly by the consumer as it is included in the price of the goods.
• The rate of customs duty varies depending on the type of goods and their value.
• Customs duty is administered by the customs authorities at the ports and borders of a country.

Additional Information

• Indirect Taxes
  • Indirect taxes are levied on goods and services rather than on income or profits.
  • Examples include Value Added Tax (VAT), Goods and Services Tax (GST), and excise duty.
  • These taxes are typically passed on to the consumer as part of the purchase price.
  • Indirect taxes are easier to collect and harder to evade compared to direct taxes.
• Direct Taxes
  • Direct taxes are levied directly on an individual's income or wealth.
  • Examples include individual income tax, corporate income tax, and property tax.
  • These taxes are paid directly to the government by the individual or entity upon whom they are imposed.
  • Direct taxes are progressive in nature, meaning higher income earners pay a higher rate of tax.
• Taxation Objectives
  • Revenue Generation: To fund government spending on public services and infrastructure.
  • Redistribution: To reduce economic inequalities by taxing the rich and providing for the poor.
  • Economic Regulation: To control inflation, stabilize the economy, and encourage or discourage certain behaviors.
  • Protection: To protect domestic industries from foreign competition through tariffs and duties.
• Customs Authorities
  • Customs authorities are responsible for enforcing customs laws and regulations.
  • They ensure that all goods entering or leaving a country comply with customs regulations.
  • Customs authorities are also involved in preventing smuggling, ensuring the collection of import and export duties, and protecting national security.
  • They play a critical role in facilitating legitimate international trade while safeguarding the country's economic interests.

The correct answer is I, II, III, IV.

Key Points

• Land revenue was one of the oldest forms of taxation implemented during ancient and medieval periods.
• Sales tax was introduced much later as a form of indirect tax on the sale of goods.
• MODVAT (Modified Value Added Tax) was introduced in 1986 to allow manufacturers to obtain credit for the excise duty paid on inputs.
• Service tax was introduced in 1994 as a tax levied on services provided.

Additional Information

• Land Revenue
  • Land revenue is a tax or revenue imposed by the government on the ownership or use of land.
  • It has been a major source of revenue for many governments historically, especially in agrarian societies.
  • In India, during the British rule, land revenue was a significant component of colonial administration.
  • Land revenue systems like the Zamindari, Ryotwari, and Mahalwari were implemented in different regions.
• Sales Tax
  • Sales tax is a tax levied by the government on the sale of goods and services.
  • It is generally a percentage of the sale price and is added to the total cost paid by the consumer.
  • This form of tax is an important source of revenue for state governments.
  • With the introduction of Goods and Services Tax (GST) in India in 2017, the sales tax regime was subsumed under GST.
• MODVAT (Modified Value Added Tax)
  • MODVAT was introduced in India in 1986.
  • It allowed manufacturers to claim credit for the excise duty paid on inputs used in the production of goods.
  • This system aimed to avoid the cascading effect of taxes and to make the tax structure more efficient.
  • MODVAT was later replaced by CENVAT (Central Value Added Tax) and subsequently subsumed under GST.
• Service Tax
  • Service tax was introduced in India in 1994.
  • It was levied on specified services provided by service providers.
  • Service tax was a part of the indirect tax regime and contributed significantly to the government’s revenue.
  • With the advent of GST, service tax was abolished and integrated into the new tax structure.

The correct answer is Revenue Receipts.Key Points

• Non-tax revenue refers to the income generated by the government from sources other than taxes, such as fees, fines, and grants.
• It is a part of revenue receipts, which are the inflows of funds to the government from all sources.
• The approximations of non-tax revenue receipts from a range of sources, including interest, fees, fines, and other miscellaneous receipts collected during the exercise of sovereign functions, regulatory and license fees, and user fees for goods and services made available to the public.

Additional Information

• Revenue expenditure refers to the expenses incurred by the government on day-to-day activities and welfare programs.
  • Revenue expenditures are basically the same as operating expenses because they comprise the costs necessary to cover a business's continuous operating costs.
• Capital expenditure is the spending on long-term investments such as infrastructure and equipment.
  • A company uses capital expenditures to pay for the purchase, upkeep, and improvement of tangible assets like real estate, machinery, buildings, plants, and technology.
• Capital receipts are the funds raised by the government through borrowings and disinvestment of assets.
  • Income that increases liabilities or decreases financial assets is referred to as a capital receipt.
  • They also make mention of cash inflows.
  • Both debt and non-debt receipts are considered capital receipts.

The correct answer is a Wealth tax.

Key Points

Direct Taxes:

• The tax that is directly paid to the Government, is directly imposed on the taxpayer and the liability of tax cannot be passed on to other taxpayers.  
• Some examples of Direct taxes are Income-tax, Wealth tax, Corporate tax, Minimum Alternate Tax, Dividend Distribution Tax, Securities Transaction Tax, Capital gains Tax, etc.  

Indirect Taxes:

• An indirect Tax is a tax imposed on an individual or entity which is passed on to other individuals.
• The is imposed on products or services which are used by the customer.
• Common examples of indirect taxes are Goods and services taxes, excise duties, sales tax, etc. ​

Additional Information

• The tax levied on all services is called Service Tax.
• The tax levied on the sale of goods under indirect tax is called sales tax.
• The tax levied on the products made in the country is called Excise Duty.
• Types of Indirect Taxes -
  • Sales Tax
  • Service Tax
  • Excise Duty
  • Professional Tax
  • Entertainment Tax
  • Stamp Duty
  • VAT Tax (VAT)
  • Toll Tax

Important Points

• GK Trick: Trick to remember Direct & Indirect Taxes
  Trick –– "Wepro, co, in (Direct Taxes)"
  • We- Wealth Tax
  • Pro- Property Tax
  • Co- Corporate Tax
  • In-Income Tax
  Trick –– "Excuse Me (Indirect Taxes)"
  • Ex- Excise tax
  • Cu- Custom tax
  • Se- Service tax
  • M- Market tax/vat
  • E- Entertainment tax

The correct answer is Proportional income tax.

Key Points

• Proportional income tax can act as an automatic stabilizer in the economy because it changes in response to changes in income levels.
• This means that as income levels rise or fall, the tax burden for individuals and households changes proportionally, which can help to stabilize the economy during periods of economic growth or recession.
• During periods of economic growth, when income levels rise, the government collects more revenue from income taxes.
• This increased revenue can be used to fund government spending programs or to reduce the budget deficit.
• The government can also use this increased revenue to reduce taxes or to provide tax incentives, which can further stimulate economic growth.

Additional Information

• Professional tax
  • ​ is a tax levied by some state governments in India on individuals who earn an income through professions, trades, callings or employment.
  • It is a form of tax that is collected by the state government, and the rates and rules may vary from state to state. 
  • The professional tax is usually deducted by the employer from the salary of the employee and then remitted to the state government.
  • The amount of professional tax that an individual has to pay depends on the monthly or annual income earned, as well as the state in which the individual is employed.
  • The purpose of the professional tax is to help state governments generate revenue for their various development projects and public services.
  • It is a mandatory tax that must be paid by individuals who are liable to pay it, and failure to do so can result in penalties and fines.
• Wealth tax:
  • ​A tax on an individual's net wealth or assets.
  • A form of direct taxation aimed at reducing wealth inequality.
  • Levied annually based on the value of an individual's assets at a particular point in time.
  • Can be applied to a range of assets including cash, property, investments, and personal possessions.
  • The tax rate is usually a percentage of the net value of these assets and can vary depending on the level of wealth.
  • Used by some countries to generate revenue and fund public services
• Capital gains tax:​
  • Capital gains tax is a tax on the profit earned from the sale of an asset, such as stocks, real estate, or artwork.
  • It is a form of direct tax that is imposed by the government on the capital gains realized by an individual or a business.
  • When a person or a business sells an asset, the capital gain is the difference between the selling price of the asset and the purchase price or the cost basis of the asset.
  • The capital gains tax is then calculated based on the capital gain realized.
  • The capital gains tax rate can vary depending on the asset, the length of time the asset was held, and the taxpayer's income level.

The correct answer is Revenue Receipts.Key Points

• Non-tax revenue refers to the income generated by the government from sources other than taxes, such as fees, fines, and grants.
• It is a part of revenue receipts, which are the inflows of funds to the government from all sources.
• The approximations of non-tax revenue receipts from a range of sources, including interest, fees, fines, and other miscellaneous receipts collected during the exercise of sovereign functions, regulatory and license fees, and user fees for goods and services made available to the public.

Additional Information

• Revenue expenditure refers to the expenses incurred by the government on day-to-day activities and welfare programs.
  • Revenue expenditures are basically the same as operating expenses because they comprise the costs necessary to cover a business's continuous operating costs.
• Capital expenditure is the spending on long-term investments such as infrastructure and equipment.
  • A company uses capital expenditures to pay for the purchase, upkeep, and improvement of tangible assets like real estate, machinery, buildings, plants, and technology.
• Capital receipts are the funds raised by the government through borrowings and disinvestment of assets.
  • Income that increases liabilities or decreases financial assets is referred to as a capital receipt.
  • They also make mention of cash inflows.
  • Both debt and non-debt receipts are considered capital receipts.

The correct answer is 101st Amendment.

Key Points

• The 101st Constitutional Amendment Act was passed by the Parliament of India in August 2016.
• This amendment led to the introduction of the Goods and Services Tax (GST), which came into effect from 1st July 2017.
• GST replaced multiple indirect taxes like VAT, service tax, excise duty, etc., with a single tax regime.
• The amendment aimed to streamline the tax structure and enhance the efficiency of the tax system in India.
• The GST Council was established under this amendment to make recommendations on various GST-related issues.

Additional Information

• Goods and Services Tax (GST)
  • GST is a comprehensive, multi-stage, destination-based tax that is levied on every value addition.
  • It is divided into Central GST (CGST), State GST (SGST), Integrated GST (IGST), and Union Territory GST (UTGST).
  • GST has subsumed numerous indirect taxes such as excise duty, VAT, service tax, and more.
  • It simplifies the taxation system and reduces the cascading effect of taxes by allowing seamless input tax credit.
  • The GST regime aims to create a unified market and promote economic growth by reducing tax evasion and enhancing transparency.
• GST Council
  • The GST Council is a constitutional body established under Article 279A.
  • It comprises the Union Finance Minister, the Union Minister of State for Finance, and the Finance Ministers of all states.
  • The council is responsible for making recommendations on aspects like tax rates, exemptions, thresholds, and other matters related to GST.
  • Decisions in the GST Council are made by a majority of not less than three-fourths of the weighted votes of the members present.
• Input Tax Credit (ITC)
  • ITC allows businesses to claim the tax paid on purchase of goods and services used for business purposes.
  • It helps in reducing the overall tax liability and ensures that tax is paid only on the value addition.
  • ITC is available for both goods and services under the GST regime.
• GST Rates
  • GST has multiple rates ranging from 0%, 5%, 12%, 18%, to 28%, based on the type of goods and services.
  • Luxury items and sin goods attract higher tax rates, whereas essential goods and services are taxed at lower rates.

The correct answer is a Wealth tax.

Key Points

Direct Taxes:

• The tax that is directly paid to the Government, is directly imposed on the taxpayer and the liability of tax cannot be passed on to other taxpayers.  
• Some examples of Direct taxes are Income-tax, Wealth tax, Corporate tax, Minimum Alternate Tax, Dividend Distribution Tax, Securities Transaction Tax, Capital gains Tax, etc.  

Indirect Taxes:

• An indirect Tax is a tax imposed on an individual or entity which is passed on to other individuals.
• The is imposed on products or services which are used by the customer.
• Common examples of indirect taxes are Goods and services taxes, excise duties, sales tax, etc. ​

Additional Information

• The tax levied on all services is called Service Tax.
• The tax levied on the sale of goods under indirect tax is called sales tax.
• The tax levied on the products made in the country is called Excise Duty.
• Types of Indirect Taxes -
  • Sales Tax
  • Service Tax
  • Excise Duty
  • Professional Tax
  • Entertainment Tax
  • Stamp Duty
  • VAT Tax (VAT)
  • Toll Tax

Important Points

• GK Trick: Trick to remember Direct & Indirect Taxes
  Trick –– "Wepro, co, in (Direct Taxes)"
  • We- Wealth Tax
  • Pro- Property Tax
  • Co- Corporate Tax
  • In-Income Tax
  Trick –– "Excuse Me (Indirect Taxes)"
  • Ex- Excise tax
  • Cu- Custom tax
  • Se- Service tax
  • M- Market tax/vat
  • E- Entertainment tax

The correct answer is Proportional income tax.

Key Points

• Proportional income tax can act as an automatic stabilizer in the economy because it changes in response to changes in income levels.
• This means that as income levels rise or fall, the tax burden for individuals and households changes proportionally, which can help to stabilize the economy during periods of economic growth or recession.
• During periods of economic growth, when income levels rise, the government collects more revenue from income taxes.
• This increased revenue can be used to fund government spending programs or to reduce the budget deficit.
• The government can also use this increased revenue to reduce taxes or to provide tax incentives, which can further stimulate economic growth.

Additional Information

• Professional tax
  • ​ is a tax levied by some state governments in India on individuals who earn an income through professions, trades, callings or employment.
  • It is a form of tax that is collected by the state government, and the rates and rules may vary from state to state. 
  • The professional tax is usually deducted by the employer from the salary of the employee and then remitted to the state government.
  • The amount of professional tax that an individual has to pay depends on the monthly or annual income earned, as well as the state in which the individual is employed.
  • The purpose of the professional tax is to help state governments generate revenue for their various development projects and public services.
  • It is a mandatory tax that must be paid by individuals who are liable to pay it, and failure to do so can result in penalties and fines.
• Wealth tax:
  • ​A tax on an individual's net wealth or assets.
  • A form of direct taxation aimed at reducing wealth inequality.
  • Levied annually based on the value of an individual's assets at a particular point in time.
  • Can be applied to a range of assets including cash, property, investments, and personal possessions.
  • The tax rate is usually a percentage of the net value of these assets and can vary depending on the level of wealth.
  • Used by some countries to generate revenue and fund public services
• Capital gains tax:​
  • Capital gains tax is a tax on the profit earned from the sale of an asset, such as stocks, real estate, or artwork.
  • It is a form of direct tax that is imposed by the government on the capital gains realized by an individual or a business.
  • When a person or a business sells an asset, the capital gain is the difference between the selling price of the asset and the purchase price or the cost basis of the asset.
  • The capital gains tax is then calculated based on the capital gain realized.
  • The capital gains tax rate can vary depending on the asset, the length of time the asset was held, and the taxpayer's income level.

The correct answer is Revenue Receipts.Key Points

• Non-tax revenue refers to the income generated by the government from sources other than taxes, such as fees, fines, and grants.
• It is a part of revenue receipts, which are the inflows of funds to the government from all sources.
• The approximations of non-tax revenue receipts from a range of sources, including interest, fees, fines, and other miscellaneous receipts collected during the exercise of sovereign functions, regulatory and license fees, and user fees for goods and services made available to the public.

Additional Information

• Revenue expenditure refers to the expenses incurred by the government on day-to-day activities and welfare programs.
  • Revenue expenditures are basically the same as operating expenses because they comprise the costs necessary to cover a business's continuous operating costs.
• Capital expenditure is the spending on long-term investments such as infrastructure and equipment.
  • A company uses capital expenditures to pay for the purchase, upkeep, and improvement of tangible assets like real estate, machinery, buildings, plants, and technology.
• Capital receipts are the funds raised by the government through borrowings and disinvestment of assets.
  • Income that increases liabilities or decreases financial assets is referred to as a capital receipt.
  • They also make mention of cash inflows.
  • Both debt and non-debt receipts are considered capital receipts.

The correct answer is I, II, III, IV.

Key Points

• Land revenue was one of the oldest forms of taxation implemented during ancient and medieval periods.
• Sales tax was introduced much later as a form of indirect tax on the sale of goods.
• MODVAT (Modified Value Added Tax) was introduced in 1986 to allow manufacturers to obtain credit for the excise duty paid on inputs.
• Service tax was introduced in 1994 as a tax levied on services provided.

Additional Information

• Land Revenue
  • Land revenue is a tax or revenue imposed by the government on the ownership or use of land.
  • It has been a major source of revenue for many governments historically, especially in agrarian societies.
  • In India, during the British rule, land revenue was a significant component of colonial administration.
  • Land revenue systems like the Zamindari, Ryotwari, and Mahalwari were implemented in different regions.
• Sales Tax
  • Sales tax is a tax levied by the government on the sale of goods and services.
  • It is generally a percentage of the sale price and is added to the total cost paid by the consumer.
  • This form of tax is an important source of revenue for state governments.
  • With the introduction of Goods and Services Tax (GST) in India in 2017, the sales tax regime was subsumed under GST.
• MODVAT (Modified Value Added Tax)
  • MODVAT was introduced in India in 1986.
  • It allowed manufacturers to claim credit for the excise duty paid on inputs used in the production of goods.
  • This system aimed to avoid the cascading effect of taxes and to make the tax structure more efficient.
  • MODVAT was later replaced by CENVAT (Central Value Added Tax) and subsequently subsumed under GST.
• Service Tax
  • Service tax was introduced in India in 1994.
  • It was levied on specified services provided by service providers.
  • Service tax was a part of the indirect tax regime and contributed significantly to the government’s revenue.
  • With the advent of GST, service tax was abolished and integrated into the new tax structure.

The correct answer is 101st Amendment.

Key Points

• The 101st Constitutional Amendment Act was passed by the Parliament of India in August 2016.
• This amendment led to the introduction of the Goods and Services Tax (GST), which came into effect from 1st July 2017.
• GST replaced multiple indirect taxes like VAT, service tax, excise duty, etc., with a single tax regime.
• The amendment aimed to streamline the tax structure and enhance the efficiency of the tax system in India.
• The GST Council was established under this amendment to make recommendations on various GST-related issues.

Additional Information

• Goods and Services Tax (GST)
  • GST is a comprehensive, multi-stage, destination-based tax that is levied on every value addition.
  • It is divided into Central GST (CGST), State GST (SGST), Integrated GST (IGST), and Union Territory GST (UTGST).
  • GST has subsumed numerous indirect taxes such as excise duty, VAT, service tax, and more.
  • It simplifies the taxation system and reduces the cascading effect of taxes by allowing seamless input tax credit.
  • The GST regime aims to create a unified market and promote economic growth by reducing tax evasion and enhancing transparency.
• GST Council
  • The GST Council is a constitutional body established under Article 279A.
  • It comprises the Union Finance Minister, the Union Minister of State for Finance, and the Finance Ministers of all states.
  • The council is responsible for making recommendations on aspects like tax rates, exemptions, thresholds, and other matters related to GST.
  • Decisions in the GST Council are made by a majority of not less than three-fourths of the weighted votes of the members present.
• Input Tax Credit (ITC)
  • ITC allows businesses to claim the tax paid on purchase of goods and services used for business purposes.
  • It helps in reducing the overall tax liability and ensures that tax is paid only on the value addition.
  • ITC is available for both goods and services under the GST regime.
• GST Rates
  • GST has multiple rates ranging from 0%, 5%, 12%, 18%, to 28%, based on the type of goods and services.
  • Luxury items and sin goods attract higher tax rates, whereas essential goods and services are taxed at lower rates.

The correct answer is They do not generate much revenue in comparison to others.

Key Points

• Wealth taxes and gift taxes are considered "paper taxes" due to their negligible contribution to overall tax revenue.
• The administrative cost of collecting these taxes often exceeds the revenue generated, making them less economically viable.
• In India, the Wealth Tax Act, 1957, was abolished in 2015, emphasizing its limited utility as a revenue generator.
• Gift taxes were similarly repealed in 1998 but were later incorporated under the Income Tax Act, 1961, with restricted applicability, further reducing their impact on revenue.
• These taxes are primarily symbolic and have limited practical enforcement, leading to their classification as "paper taxes."

Additional Information

• Wealth Tax Act, 1957:
  • Introduced to impose a tax on an individual's net wealth exceeding a certain threshold.
  • Abolished in 2015 due to its low revenue yield and high compliance costs.
  • Replaced by an additional surcharge on the super-rich as part of direct taxes.
• Gift Tax Act, 1958:
  • Initially imposed a tax on monetary or property gifts exceeding a certain value.
  • Repealed in 1998 and later brought under the Income Tax Act, 1961, with specific provisions for taxing gifts received above ₹50,000.
• Income Tax Act, 1961:
  • Gifts above ₹50,000 are taxable under "Income from Other Sources" unless received from relatives or on special occasions like marriage.
  • Gift tax provisions are limited to ensure simplicity and reduce administrative burden.
• Economic Rationale:
  • Wealth and gift taxes are challenging to implement effectively due to evasion and valuation complexities.
  • Countries with high compliance costs often shift to alternative taxation mechanisms to improve efficiency.