Direct Taxes & Tax Reforms
Direct Taxes
Direct taxes now contribute 56% of India's total tax revenue. Exams test income tax slabs (old vs new regime), corporate tax rates (22%/15%), capital gains overhaul (Budget 2024), MAT, GAAR, TDS machinery, and the Pillar 1/Pillar 2 global tax framework. Budget-related changes appear as current affairs questions every year.
Key Dates
Income tax first introduced in India by Sir James Wilson during the British Raj to meet the financial crisis after the 1857 revolt
Income Tax Act 1886 — first comprehensive income tax legislation in India; regularised what had been ad hoc levies
Indian Income Tax Act 1922 enacted — introduced the concept of assessment year, heads of income, and centralised administration
Income Tax Act 1961 enacted — replaced the Indian Income Tax Act 1922; remains the governing statute for all direct taxes
Long-term capital gains tax introduced for the first time on equity shares; wealth tax on net wealth above threshold
Kelkar Task Force on Direct Taxes recommended simplification, broadening the base, reducing exemptions, lowering rates
Fringe Benefit Tax introduced (later abolished in 2009); Securities Transaction Tax (STT) introduced on stock exchange transactions
First Direct Taxes Code (DTC) draft submitted by Arbind Modi Panel; Akhilesh Ranjan Committee later submitted revised DTC in 2019
Black Money (Undisclosed Foreign Income and Assets) and Imposition of Tax Act 2015 — penalty up to 120%, rigorous imprisonment up to 10 years
Wealth Tax abolished from AY 2016-17 — replaced by additional surcharge of 2% on super-rich (income above Rs 1 crore); IDS 2016 raised Rs 65,250 crore
Demonetisation followed by income tax raids and Operation Clean Money — 18 lakh suspect cases identified; GAAR effective from April 2017
Corporate tax rate slashed from 30% to 22% (25.17% effective with surcharge/cess) for existing companies via Taxation Laws Amendment Ordinance
New optional income tax regime introduced with lower rates but fewer exemptions; Faceless Assessment Scheme and Vivad Se Vishwas launched
New tax regime made default from FY 2023-24; rebate limit raised to Rs 7 lakh; GST Appellate Tribunal established same year
Capital gains tax regime overhauled in Union Budget 2024-25 — STT on F&O raised, LTCG on equity raised to 12.5%; indexation removed
Union Budget 2025-26 raised income tax exemption limit to Rs 12 lakh under new regime; new simplified Income Tax Act announced to replace 1961 Act
Income Tax — Structure & Slabs
Income tax is levied under the Income Tax Act 1961, administered by CBDT under the Department of Revenue, Ministry of Finance. It is a central tax (Union List, Entry 82). Assessment Year (AY) vs Previous Year (PY): Income earned in PY is assessed in the following AY. Five heads of income (Section 14): Salary, House Property, Business/Profession, Capital Gains, Other Sources. New Tax Regime (default from FY 2023-24, revised Budget 2025-26): 0-4 lakh Nil; 4-8 lakh 5%; 8-12 lakh 10%; 12-16 lakh 15%; 16-20 lakh 20%; 20-24 lakh 25%; above 24 lakh 30%. Rebate under Section 87A: Full rebate up to Rs 12 lakh (zero tax). Standard deduction Rs 75,000 for salaried. NPS employer contribution (Section 80CCD(2)) up to 14% of salary. Very few other deductions. Old Tax Regime (optional): Higher rates but extensive deductions. Section 80C (Rs 1.5 lakh), 80D (health insurance), HRA, LTA, home loan interest (Section 24). Basic exemption Rs 2.5 lakh (Rs 3 lakh for seniors). Slabs: 5%, 20%, 30%. Government nudges taxpayers toward the new regime through better slabs. Total ITR filers: 7.28 crore (AY 2024-25), up from 3.36 crore (AY 2014-15). Exam essential: New regime slabs, Rs 12 lakh rebate, and five heads of income.
Corporate Tax
Corporate tax underwent a major overhaul in September 2019. Current rates (FY 2024-25): Existing domestic companies: 22% (effective 25.17% with 10% surcharge + 4% cess). No exemptions/deductions. New manufacturing companies (incorporated after October 1, 2019, production before March 31, 2024): 15% (effective 17.16%). Companies not opting for lower rates: 30% (turnover above Rs 400 crore), 25% (turnover up to Rs 400 crore), with exemptions available. MAT (Minimum Alternate Tax): Companies claiming exemptions and paying below 15% of book profits must pay MAT at 15%. Companies under the 22% regime are exempt from MAT. Dividend taxation: DDT abolished from FY 2020-21. Dividends now taxed in shareholders' hands at slab rates. This benefits small shareholders and increases tax for high-income recipients. Buyback tax: 20% on the company. From October 2024, buyback proceeds taxed as dividend in shareholders' hands. Revenue: Corporate tax Rs 10.22 lakh crore (FY24). The 2019 rate cut cost Rs 1.45 lakh crore annually but aimed to make India competitive with Singapore (17%), Thailand (20%), and Vietnam (20%). Exam must-know: 22% and 15% rates, MAT at 15%, and DDT abolition.
Capital Gains Tax
Capital gains tax was overhauled in Budget 2024-25. Capital assets: land, buildings, securities, jewellery, patents, vehicles. Holding periods: Listed securities under 12 months = short-term. Unlisted shares, immovable property under 24 months. Other assets under 36 months. Post-Budget 2024-25 rates: STCG on listed equity/equity MFs (STT paid): 20% (raised from 15%). STCG on other assets: Slab rates. LTCG on listed equity/equity MFs: 12.5% (raised from 10%). Exemption: Rs 1.25 lakh/year (raised from Rs 1 lakh). LTCG on other assets (real estate, gold, debt MFs, unlisted shares): 12.5% without indexation. Major change: Indexation benefit removed. Previously 20% with CII adjustment. The 2024 change benefits short-holding-period assets but hurts long-held real estate (where inflation adjustment was significant). Section 54: LTCG from house sale exempted if reinvested in another house within 2 years (purchase) or 3 years (construction). Section 54EC: LTCG exempted if invested in NHAI/REC bonds (max Rs 50 lakh) within 6 months. STT increased in Budget 2024: Options 0.1% on premium (from 0.0625%), Futures 0.02% on price (from 0.0125%). Targeted at curbing F&O speculation (9,800 crore contracts in FY24, globally highest). Exam essential: LTCG 12.5% rate, indexation removal, and STT increase on F&O.
Tax Administration — CBDT & Assessment
CBDT chairs direct tax administration under the Department of Revenue. It has a Chairman and 6 Members. ITD employs about 85,000 people. Assessment types: Self-Assessment (Section 140A): Taxpayer computes, pays, and files. Regular Assessment (Section 143(3)): Scrutiny by assessing officer. Faceless Assessment (2020) eliminates face-to-face interaction through random officer allocation and team review. Best Judgment (Section 144): When taxpayer fails to comply. Income Escaping Assessment (Section 147): Reopening past returns. Time limit: 3 years normally, 10 years if Rs 50 lakh+ income escaped. E-filing is mandatory for most. ITR-1 (Sahaj) for salaried. ITR-4 (Sugam) for presumptive income. Pre-filled returns populate TDS, bank, and stock exchange data. Advance tax: Required if liability exceeds Rs 10,000. Quarterly instalments: 15% by June 15, 45% by September 15, 75% by December 15, 100% by March 15. TDS: Major collection mechanism. Employer deducts on salary (Section 192), banks on interest (194A), buyer on property above Rs 50 lakh (194-IA, 1%). Non-deduction triggers penalty and interest. Direct tax collection FY24: Rs 19.58 lakh crore (14.5% growth). Direct taxes now constitute 56% of total tax revenue (up from 49% in FY19). Exam favourite: Faceless assessment purpose and advance tax schedule.
Tax Reforms & Dispute Resolution
Key reforms since 2014: Black Money Act 2015: Targets undisclosed foreign income. Penalty up to 120%. Imprisonment up to 10 years. One-time window attracted Rs 4,164 crore. IDS 2016 (pre-demonetisation amnesty): 45% effective rate. Rs 65,250 crore disclosed. PMGKY 2016 (post-demonetisation): 49.9% effective rate. Rs 5,000 crore disclosed. Vivad Se Vishwas 2020: Taxpayers settled appeals by paying disputed tax (no interest/penalty). 1.5 lakh cases settled. Rs 54,000 crore collected. VSV 2.0 launched 2024 for disputes pending as of July 22, 2024. Faceless Assessment (2020): Random allocation, team review, no geographic jurisdiction. Reduced harassment and corruption. Faceless Appeal from 2021. Pending: A new simplified Income Tax Act was announced in Budget 2025-26 to replace the 1961 Act. Previous DTC attempts (Kelkar 2002, Akhilesh Ranjan 2019) recommended wholesale replacement but government chose incremental reform instead. Exam tip: Know VSV scheme collection (Rs 54,000 crore) and the new Act announcement.
Tax Base & International Taxation
Only ~7% of India files ITRs (7.28 crore out of 143 crore). About 5.27 crore returns show zero tax. Effective taxpayers: ~2 crore. Top 0.1% (~2.6 lakh individuals) contribute 30%+ of personal income tax. Base broadening doubled ITR filers from 3.36 crore (AY 2014-15) to 7.28 crore through demonetisation, GST linkage, PAN-Aadhaar linking, and digital payments. Agricultural income is exempt (Section 10(1)) by convention. No government has taxed it. Transfer Pricing (Sections 92-92F): Ensures MNC inter-company transactions follow arm's length pricing. India runs ~6,500 TP audits annually with Rs 70,000+ crore in adjustments. APAs (Advance Pricing Agreements) agree methodology for 5 years plus 4-year rollback. 500+ APAs signed. DTAA with 100+ countries. India-Mauritius DTAA amended in 2016 (capital gains now taxable in India). GAAR (April 2017): Denies treaty benefits if the primary purpose is tax avoidance. BEPS: India joined the 137-country Inclusive Framework. Pillar 1 (digital taxation) and Pillar 2 (15% global minimum tax) are being implemented. India withdrew its equalisation levy in 2024 as Pillar 1 progresses. Exam essential: Tax base (2 crore effective taxpayers), GAAR purpose, and Pillar 1/2 distinction.
Constitutional Framework of Direct Taxation
Tax power derives from the Constitution. Direct taxes fall under Union List (List I, Seventh Schedule). Entry 82: Income tax (other than agricultural). Entry 85: Corporation tax. Entry 86: Wealth tax (erstwhile). Article 265: "No tax shall be levied or collected except by authority of law." The annual Finance Act provides the legal basis for budget tax proposals. Article 271 allows Parliament to impose surcharges on Union taxes. Surcharges and cesses are not shared with states through the Finance Commission formula. The Centre increasingly relies on cesses/surcharges (4% Health and Education Cess, high-income surcharges). These grew from 10% of gross tax revenue (FY12) to 22% (FY24), fuelling Centre-state fiscal tension. The 15th Finance Commission (NK Singh, 2020-26) recommended 41% devolution of the divisible pool, which excludes cesses and surcharges. Agricultural income exemption (Section 10(1)) derives from Entry 46, List II (State List). States can tax agricultural income but generally have not (only Assam, Kerala, Bihar, West Bengal had mostly defunct laws). The exemption covers cultivation income, agricultural land rent, and farm operation income. Individuals exploit it for tax avoidance. The KN Raj Committee (1972) recommended taxing agricultural income above a threshold, but no government has implemented this politically sensitive reform. Exam must-know: Article 265, the cess/surcharge non-sharing issue, and agricultural income exemption basis.
Historical Evolution of Direct Taxes in India
Ancient India: Kautilya's Arthashastra prescribed 1/6th of produce as land revenue (bhaga). Mughal Akbar's minister Todar Mal introduced the zabti (measurement-based) revenue system. British era: Sir James Wilson introduced income tax in 1860 to address the post-1857 financial crisis. The Indian Income Tax Act 1886 created a permanent framework. The 1922 Act introduced assessment year, heads of income, and centralised administration based on the British model. Post-independence: The Income Tax Act 1961 followed the Tyagi Committee (1958) and Kaldor Committee (1956). Kaldor recommended comprehensive taxation covering capital gains, wealth, gifts, and expenditure. This spawned: Wealth Tax (1957, abolished 2015), Gift Tax (1958, abolished 1998), Estate Duty (abolished 1985), Expenditure Tax (1987, abolished 1999). Top marginal rates reached 97.75% (income tax + surcharge) in the 1970s. The Chelliah Committee (Raja Chelliah, 1991-92) recommended cutting the maximum rate to 40%, broadening the base, and reducing exemptions. The top rate fell from 56% to 40% (1992) and eventually to 30%. Major committees: Kelkar (2002) recommended DTC. Shome (2012) advised against retrospective taxation after the Vodafone case. Easwar (2015) simplified individual provisions. Akhilesh Ranjan (2019) submitted a draft DTC but incremental reform prevailed. Exam tip: Know the committee sequence and the 97.75% historical peak rate.
Income Tax for Individuals — Deductions & Exemptions
Old regime deductions (most frequently tested): Section 80C (Rs 1.5 lakh): LIC premium, PPF, NSC, ELSS (3-year lock-in), tuition fees (2 children), home loan principal, SSY, 5-year FD, EPF, NPS (additional Rs 50,000 under 80CCD(1B)). About 4 crore taxpayers claim 80C. Section 80D: Health insurance Rs 25,000 (Rs 50,000 for seniors). Parents' cover: additional Rs 25,000/50,000. Preventive health check-up: Rs 5,000 within limit. Section 80E: Education loan interest (no limit, 8 years). Section 80G: Donations (50% or 100% based on donee). Section 80TTA/80TTB: Savings interest Rs 10,000 (non-senior) / Rs 50,000 (senior). Exemptions: HRA (Section 10(13A)): Lowest of actual HRA, rent minus 10% salary, or 50%/40% of salary (metro/non-metro). LTA: Two journeys per 4-year block, travel fare only. Standard deduction: Rs 50,000 (old regime), Rs 75,000 (new from FY25-26). Section 24: Home loan interest up to Rs 2 lakh (self-occupied). Let-out property: full interest deductible. Under the new regime: Only NPS employer contribution (14% of salary), standard deduction, and family pension deduction are allowed. The simplification trades deductions for lower slab rates. Exam essential: 80C limit (Rs 1.5 lakh), 80D limits, and HRA calculation formula.
Surcharges, Cess & Effective Tax Rates
Effective tax rates exceed stated slabs due to surcharges and cess. Health and Education Cess: 4% on total tax + surcharge (a "tax on tax"). Replaced the earlier 3% education cess from FY 2018-19. Individual surcharges: Rs 50 lakh-1 crore: 10%. Rs 1-2 crore: 15%. Rs 2-5 crore: 25%. Above Rs 5 crore: 37% (reduced to 25% for income above Rs 2 crore under new regime). Marginal relief prevents anomalies where earning Rs 1 above the threshold creates disproportionate tax. Corporate surcharge: 7% (Rs 1-10 crore income), 12% (above Rs 10 crore). 10% for companies on 22%/15% rates. Effective rates (FY 2024-25): Individual highest (old): 30% + 37% + 4% = 42.744%. Individual highest (new): 30% + 25% + 4% = 39%. Corporate (22% option): 22% + 10% + 4% = 25.168%. New manufacturing (15%): 15% + 10% + 4% = 17.16%. Revenue from cess/surcharges: Rs 5.88 lakh crore (FY25 BE), ~15.5% of gross tax revenue. These are not shared with states, prompting repeated demands for subsuming them into basic rates. Exam favourite: Calculate effective corporate tax rate from statutory rate + surcharge + cess.
TDS, TCS & Advance Tax Machinery
TDS contributes ~40% of gross direct tax revenue. The payer deducts tax before making payment and deposits with the government. Key provisions: Section 192: Salary (slab rates). 194A: Bank interest (10%, threshold Rs 40,000; Rs 50,000 seniors). 194B: Lottery/game winnings (30%, threshold Rs 10,000). 194C: Contractor (1% individual, 2% others; threshold Rs 30,000 single/Rs 1 lakh annual). 194H: Commission (5%, Rs 15,000). 194-IA: Property transfer (1% above Rs 50 lakh). 194-IB: Rent by individual (5% above Rs 50,000/month). 194N: Cash withdrawal (2% above Rs 1 crore; 20% for non-filers). 194Q: Goods purchase (0.1% above Rs 50 lakh). 206C(1H): Goods sale (TCS 0.1% above Rs 50 lakh). 206C(1G): LRS foreign remittance (5% above Rs 7 lakh; 20% for tour packages). Non-compliance: Payer is "assessee in default" with 1% monthly interest for late deduction and 1.5% for late deposit. Advance tax: Required if liability exceeds Rs 10,000. Four instalments: 15% (June 15), 45% (Sep 15), 75% (Dec 15), 100% (Mar 15). Interest under Sections 234B and 234C for non-payment/deferment. TDS/TCS collections FY24: Rs 10.44 lakh crore (~53% of gross direct tax). Exam essential: Section 192 (salary), 194-IA (property), and LRS TCS rate.
Wealth Tax, Estate Duty & Related Historical Taxes
India experimented with several wealth-related taxes. Wealth Tax (1957-2015): 1% on net wealth above Rs 30 lakh. Taxable: residential houses (beyond one), cars, jewellery, bullion, urban land, cash above Rs 50,000. Excluded: commercial property, financial assets. Abolished because revenue was negligible (Rs 1,008 crore in 2013-14) and administrative costs exceeded collection. Replaced by 2% super-rich surcharge and mandatory asset/liability disclosure for high earners. Estate Duty (1953-1985): Tax on deceased's estate. Max rate 85%. Abolished due to easy evasion through lifetime gifts. Gift Tax (1958-1998): Tax on gifts above Rs 30,000. Abolished but Section 56(2)(x) now taxes gifts above Rs 50,000 from non-relatives as "Other Sources" income (exceptions: relatives, marriage occasions, will/inheritance, registered trusts). FBT (2005-2009): 30% on employer perquisites. Abolished as double taxation (benefits already taxable under Section 17). STT (2004-present): Tax on stock exchange transactions. Post-Budget 2024: Delivery equity 0.1% each side. Intraday sale 0.025%. Options 0.1% on premium. Futures 0.02%. The F&O STT hike targeted speculation (9,800 crore contracts in FY24, globally highest). Exam tip: Know why wealth tax was abolished (low revenue) and the current STT rates.
Anti-Tax Avoidance Measures — GAAR, POEM & Transfer Pricing
GAAR (Chapter X-A, effective April 2017): Allows tax authorities to declare an arrangement "impermissible" if it primarily seeks a tax benefit, creates non-arm's-length obligations, misuses tax provisions, or lacks commercial substance. Consequence: Arrangement disregarded, tax benefit denied. Used to challenge Mauritius/Singapore route investments structured for capital gains avoidance. Cannot override pre-2017 grandfathered DTAA investments. POEM (Section 6(3), April 2017): A company is Indian-resident if its place of effective management is in India, even if incorporated abroad. Prevents shell companies in low-tax jurisdictions managed from India. Transfer Pricing (Sections 92-92F): Applies to international transactions between associated enterprises (26%+ holding). Arm's length principle mandates fair market pricing. Five methods: CUP, Resale Price, Cost Plus, Profit Split, TNMM (most used in India). APAs let taxpayers agree methodology with CBDT for 5 years (+ 4-year rollback). 500+ signed. Safe Harbour Rules set predetermined margins (IT/ITeS 17-18%, contract R&D 24%). India runs ~6,500 TP audits annually. Total adjustments: Rs 70,000+ crore. CbCR: MNEs with Rs 5,500 crore+ consolidated revenue file country-by-country reports disclosing income, taxes, and employees per jurisdiction. Exam essential: GAAR trigger conditions, POEM concept, and TNMM as the most used TP method.
Digital Taxation & International Tax Reform
Equalisation Levy 1.0 (2016): 6% on online advertising from non-residents. Targeted Google and Facebook ad revenue. EL 2.0 (2020): 2% on non-resident e-commerce operators (above Rs 2 crore). Covered Amazon, Netflix, Spotify. Withdrawn August 2024 as India committed to OECD Pillar 1. Pillar 1 (Amount A): Market jurisdictions tax a share of profits from MNEs with EUR 20 billion+ revenue and 10%+ profitability. 25% of residual profits (above 10% margin) allocated by revenue. India gains taxing rights over tech giants. Delayed beyond 2025. Pillar 2 (GloBE rules): 15% minimum effective tax for MNEs with EUR 750 million+ revenue. IIR (Income Inclusion Rule): Parent pays top-up tax if subsidiary's rate is below 15%. UTPR (Undertaxed Payments Rule): Other jurisdictions deny deductions or charge top-up tax. India introduced provisions from April 2024. About 1,700 affected MNEs. India must restructure SEZ/IFSC incentives offering sub-15% rates. DTAAs with 100+ countries. India-Mauritius (amended 2016), India-Singapore (amended 2016), India-UAE, India-USA, India-UK. DTAAs allocate rights on dividends, interest, royalties, capital gains, and business profits. GAAR and PPT (Principal Purpose Test) under BEPS Action 6 address treaty shopping. Exam must-know: Pillar 1 vs Pillar 2 scope and the India-Mauritius DTAA amendment.
Direct Tax Revenue Trends & Compliance
Revenue growth has been strong. Key milestones: FY18 crossed Rs 10 lakh crore. FY22 surged to Rs 14.10 lakh crore (post-COVID recovery). FY24 reached Rs 19.58 lakh crore. FY25 RE: Rs 22.07 lakh crore. Direct tax as % of GDP: 6.7% (FY24, up from 5.5% in FY16). As % of total tax revenue: 56% (up from 49% in FY16). PIT collections (Rs 10.44 lakh crore, FY24) exceeded CIT (Rs 9.11 lakh crore) for the first time. This is a structural shift: PIT is growing faster as the base widens. Compliance drivers: PAN-Aadhaar linking (mandatory 2017). Demonetisation (November 2016). GST data linkage (supplier-buyer matching identifies underreporting). TDS expansion. Digital payments (UPI processed Rs 199 lakh crore in FY24, creating audit trails). Pre-filled returns from Form 26AS, AIS, TDS, and SFTs. Project Insight uses AI/ML to identify non-filers and suspicious transactions. Operation Clean Money (2017) analysed 18 lakh post-demonetisation suspect accounts, recovering Rs 29,000+ crore. AIS (Annual Information Statement) creates a 360-degree financial profile from property, securities, cash, foreign remittances, MF, dividends, and interest data. Exam essential: PIT exceeding CIT for the first time and AIS's role in compliance.
Direct Tax Litigation & Dispute Resolution
About Rs 10.5 lakh crore was locked in disputes (FY24) across ~5 lakh pending cases. The litigation pyramid: CIT(A): First appeal. ~3.5 lakh cases pending. Faceless from 2021. 18-24 month disposal. ITAT: Second appeal. ~1 lakh cases. Binding on CIT(A). 2-3 year disposal. High Court: Substantial questions of law from ITAT. ~40,000 tax cases. Supreme Court: ~5,000 cases. Landmark: Vodafone International Holdings (2012). SC ruled indirect transfer of Indian assets was not taxable under existing law. Government passed a retrospective amendment (Finance Act 2012, Section 9(1)(i) Explanation 5). India lost Cairn Energy and Vodafone international arbitrations. The retrospective amendment was repealed in 2021. VSV 1.0 (2020): Pay 100% disputed tax, no interest/penalty. 1.5 lakh cases settled. Rs 54,000+ crore collected (30% of pending appeals). VSV 2.0 (2024): For appeals pending as of July 22, 2024. 100% by December 31 or 110% after. Covers disputes up to Rs 50 crore. Faceless assessment and appeal aim to reduce new litigation. The Taxpayer's Charter (2020) commits ITD to fair treatment, timely scrutiny completion, and confidentiality. Exam tip: Know the Vodafone retrospective amendment and VSV scheme outcomes.
Taxation of Special Entities — Trusts, Cooperatives & NRIs
Trusts (Sections 11-13): Income exempt if 85% is applied to charitable purposes, the trust is registered under Section 12AB, and investments are in prescribed modes. Violation triggers full-income taxation. Political parties: Fully exempt under Section 13A. Must maintain books and report contributions above Rs 20,000 with donor details. Electoral Bond Scheme (2018-2024): Struck down by Supreme Court (February 2024). SBI disclosed Rs 16,518 crore in bonds purchased. Cooperatives: Income deductible under Section 80P. New cooperative rate: 22% (effective 25.168%). AMT at 15% for non-corporates. NRI taxation depends on residential status. ROR (Resident and Ordinarily Resident): Global income taxable. RNOR: Indian income plus foreign business income. NR: Only Indian-sourced income. NRI threshold: 182+ days in India, OR 60+ days and 365+ in preceding 4 years. Budget 2020 added: Indian citizen earning Rs 15+ lakh in India and not tax-resident elsewhere is deemed ROR (targeting "stateless" treaty shoppers). NRI investment income taxed at 20% (Section 115E). DTAAs may provide lower rates (India-USA: dividends 25%, interest 15%). Exam essential: Electoral Bond strike-down and NRI residential status criteria.
Tax Incentives & SEZ Taxation
Key incentives: Section 10AA (SEZ units): 100% export profit exemption for 5 years, 50% for next 5, 50% of ploughed-back profits for next 5. MAT applies. Pillar 2's 15% minimum may make SEZ benefits less attractive for large MNEs. India may restructure incentives as grants rather than tax exemptions. Section 35AD: 100% capital expenditure deduction for specified businesses (cold chain, hospitals, warehouses, hotels, semiconductor fabs). Encourages capital investment over profit manipulation. GIFT IFSC (Section 80LA): 100% deduction for 10 out of 15 years. No STT. LTCG exemption on specified securities. No GST on financial services. 700+ entities including JPMorgan and Deutsche Bank. Transactions crossed $620 billion (FY24). Startup incentives (Section 80-IAC): 100% exemption for 3 years out of first 10 (DPIIT-recognised, post-April 2016, turnover up to Rs 100 crore). Capital gains exemptions under 54EE/54GB for investment in startups. PLI scheme (14 sectors, Rs 1.97 lakh crore): Output-linked subsidies (taxable as business income). Combined with lower corporate tax (15-22%), PLI is India's manufacturing FDI strategy competing with Vietnam (20%), Thailand (20%), and Indonesia (22%). Exam tip: Know GIFT IFSC benefits and the Pillar 2 impact on SEZ tax incentives.
Relevant Exams
Direct taxes are extensively tested across all exams. UPSC Prelims asks about MAT, DDT abolition, GAAR, capital gains regime, DTAA provisions, and Pillar 1/Pillar 2 global tax framework. Budget-related changes (new regime, slab changes, capital gains overhaul) are standard current affairs questions. SSC CGL and CHSL test basic concepts — heads of income, TDS, PAN, assessment year vs previous year. IBPS PO asks about CBDT, corporate tax rates, and recent amendments. UPSC Mains GS Paper 3 has questions on tax reforms, black money measures, international taxation, and the direct-to-indirect tax ratio.