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UPSC MainsGeneral Studies Paper IIIIndian EconomyPractice question

Major Taxes Duties Cesses and Levies in India

Enumerate the major taxes, duties, cesses & levies in India. Classify them into Direct Taxes & Indirect Taxes with suitable examples.

EnumerateClassify~250 words3 min readeasy
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How to approach

Begin by introducing India's tax structure and citing recent revenue metrics such as the tax-to-GDP ratio. Systematically categorize fiscal instruments into Direct and Indirect Taxes, clearly defining taxes, duties, cesses, and levies within each category alongside concrete examples. Conclude with a forward-looking perspective on fiscal federalism and direct tax simplification.

Model answer

437 words

Introduction

India's tax-to-GDP ratio is projected at a historic 11.8% in the Union Budget 2024-25, with direct taxes driving significant revenue growth at approximately 6.6% of GDP. The Union Government mobilises public resources through varied fiscal instruments—taxes, duties, cesses, and levies—which are distinguished by whether the incidence falls directly on the earner or is shifted to the end consumer.

1. Direct Taxes (Administered by the Central Board of Direct Taxes - CBDT)

Direct taxes are those where both the legal impact (liability to pay) and economic incidence (ultimate monetary burden) rest on the same entity and cannot be shifted.

  • Taxes: Compulsory, non-quid-pro-quo payments imposed on income, profits, or capital gains. Examples: Personal Income Tax (levied on individuals and HUFs) and Corporate Tax (levied on corporate net profits).
  • Surcharges: A progressive 'tax on tax' levied on individuals and corporations in higher income brackets. Surcharge proceeds flow directly to the Consolidated Fund of India without entering the divisible tax pool. Example: Surcharge on individual income exceeding ₹50 lakh.
  • Levies: Specific or regulatory fiscal charges enacted under dedicated statutory mandates. Example: 6% Equalisation Levy on specified digital advertising services provided by non-resident enterprises (the 2% e-commerce supply levy was abolished in Budget 2024-25).
  • Cesses: Earmarked direct charges added over the basic tax liability for specific socio-economic purposes. Example: Health and Education Cess (4% on income tax and corporation tax).

2. Indirect Taxes (Administered by the Central Board of Indirect Taxes and Customs - CBIC)

Indirect taxes are levied on transactions, manufacture, sales, or imports. The legal liability lies on the supplier or intermediary, but the economic burden is transferred to the ultimate consumer.

  • Taxes: Comprehensive consumption levies imposed across the value chain with input tax credit facilities. Example: Goods and Services Tax (GST), subsuming Central GST (CGST), State GST (SGST), and Integrated GST (IGST).
  • Duties: Specific charges levied on the manufacture, processing, or cross-border transport of goods. Examples: Customs Duty (imposed on cross-border imports and exports) and Central Excise Duty (retained on non-GST commodities such as crude petroleum, diesel, and petrol).
  • Cesses: Additional targeted indirect levies earmarked for specific sectors or funds. These do not form part of the divisible pool shared with the States. Examples: Agriculture Infrastructure and Development Cess (AIDC) on select imports, and the GST Compensation Cess (extended through March 2026 to repay transition borrowing).

Conclusion

While cesses and surcharges enable the Union Government to mobilize targeted resources for national priorities, their growing share has restricted the divisible pool of central taxes, impacting fiscal federalism. A balanced fiscal strategy requires rationalising discretionary cesses, preserving state tax autonomy, and enacting a modernised Direct Tax Code to enhance compliance and equity.

Key facts to remember

definition
Cess vs. Surcharge

A cess is a tax on tax earmarked exclusively for a predefined purpose (e.g., Health and Education Cess), whereas a surcharge is an additional tax on tax meant for general expenditure; neither is shared with the States under Article 270.

statistic

India's gross tax-to-GDP ratio was projected at approximately 11.8% for FY 2024-25, with direct taxes contributing a 15-year high of 6.6% of GDP.

— Union Budget 2024-25
scheme
Agriculture Infrastructure and Development Cess (AIDC), 2021

A specialized cess imposed on specified imported goods and customs tariffs to build post-harvest agriculture infrastructure and enhance farmers' market linkages.

Frequently asked questions

Why do Indian States raise concerns over the proliferation of cesses and surcharges?

Under Article 270 of the Constitution, cesses and surcharges are excluded from the net divisible pool of Union taxes. An increasing reliance on them reduces the proportion of revenue devolved to States under Finance Commission formulas.

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