Indirect Taxation: Exercise Solutions
How to Use This Page
1. Read the textbook chapter first — these solutions are for revision, not first-time learning. 2. Attempt each question yourself before checking the answer. 3. Memorise the Key Concepts table — it covers the most frequently tested GST terms. 4. Pay special attention to CGST vs SGST vs IGST — knowing when each applies is the most exam-tested distinction.
Key Concepts (Quick Recap)
| Term | Definition |
|---|---|
| Indirect Tax | Tax levied on goods/services, collected from buyers by sellers and paid to Government |
| GST | Goods and Services Tax — destination-based consumption tax on supply of goods and services |
| CGST | Central GST — levied by Central Government on intra-state supply |
| SGST | State GST — levied by State Government on intra-state supply |
| IGST | Integrated GST — levied by Central Government on inter-state supply; revenue shared with states |
| UGST | Union Territory GST — levied by UT Administrations under UGST Act 2017 |
| GST Council | Body overseeing GST implementation; chaired by Union Finance Minister |
| Destination-based | Tax collected where goods/services are consumed, not where produced |
| Input Tax Credit | Credit for tax already paid on inputs; eliminates cascading effect |
| Cascading Effect | Tax on tax; GST eliminates this through input tax credit |
| Composition Scheme | Simplified scheme for small taxpayers with turnover up to ₹75 lakhs |
I. Choose the Correct Answer (MCQ)
Q1. Who is the chairman of the GST council? (a) Prime Minister (b) Finance Minister ✓ (c) President (d) RBI Governor
Q2. GST Stands for ……… (a) Goods and Service Tax (b) Goods and Sales Tax (c) Goods and Services Tax ✓ (d) General Sales Tax
Q3. What kind of Tax the GST is? (a) Direct Tax (b) Indirect Tax ✓ (c) Progressive Tax (d) Regressive Tax
Q4. What is IGST? (a) Integrated Goods and Service Tax ✓ (b) Indian Goods and Service Tax (c) Inter-State Goods Tax (d) Internal GST
Q5. In India, GST became effective from? (a) 1st April 2017 (b) 1st January 2017 (c) 1st July 2017 (d) 1st March 2017 ✓
Q1 (Additional). GST is a ……… based tax on consumption of goods and services. (a) Origin (b) Destination ✓ (c) Production (d) Manufacturing
Q2 (Additional). India GST model has ……… rate structure. (a) 2 (b) 3 (c) 4 ✓ (d) 5
Q3 (Additional). What is the maximum rate prescribed under GST? (a) 18 (b) 20 ✓ (c) 28 (d) 15
Q4 (Additional). When does liability to pay GST arise in the case of supply of goods? (a) At the time of supply (b) At the time of receipt of payment (c) At the time of invoice (d) Earliest of any of the above ✓
Q5 (Additional). Special provisions are there in the GST Act for the ……… north-eastern states. (a) 8 ✓ (b) 7 (c) 6 (d) 5
II. Fill in the Blanks
1. GST stands for Goods and Services Tax. 2. GST is a destination-based consumption tax. 3. The chairman of the GST Council is the Union Finance Minister. 4. CGST stands for Central Goods and Services Tax. 5. SGST stands for State Goods and Services Tax. 6. IGST stands for Integrated Goods and Services Tax. 7. GST became effective from 1st March 2017 (as per the textbook). 8. India's GST model has four rate structures. 9. The maximum rate prescribed under GST is 20% (as per the Act). 10. GST is an indirect tax collected from buyers by sellers and paid to the Government. 11. Special provisions in the GST Act cover 8 north-eastern states. 12. The Centre holds 1/3rd voting power and states hold 2/3rd in the GST Council.
III. True or False (with corrections)
IV. Match the Following
| Column A | Column B |
|---|---|
| 1. CGST | (d) Central GST for intra-state supply |
| 2. SGST | (e) State GST for intra-state supply |
| 3. IGST | (a) Integrated GST for inter-state supply |
| 4. UGST | (b) Union Territory GST |
| 5. GST Council | (c) Chaired by Union Finance Minister |
Important Definitions
| Term | Definition |
|---|---|
| Indirect Tax | Tax levied on goods/services, collected from buyers by sellers and paid to Government |
| GST | Goods and Services Tax — destination-based consumption tax on supply of goods and services |
| CGST | Central GST — levied by Central Government on intra-state supply |
| SGST | State GST — levied by State Government on intra-state supply |
| IGST | Integrated GST — levied by Central Government on inter-state supply; revenue shared with states |
| UGST | Union Territory GST — levied by UT Administrations |
| GST Council | Body overseeing GST implementation; chaired by Union Finance Minister |
| Destination-based | Tax collected where goods/services are consumed, not where produced |
| Input Tax Credit | Credit for tax already paid on inputs; eliminates cascading effect |
| Cascading Effect | Tax on tax; GST eliminates this through input tax credit |
| Composition Scheme | Simplified scheme for small taxpayers with turnover up to ₹75 lakhs |
| GSTN | GST Network — online portal for registration, returns, and payments |
| Zero-rated | Exports are zero-rated; no GST imposed and input credit is refunded |
V. Answer Briefly (2-Mark Answers)
Q1. Define Indirect tax: Indirect Tax is levied on goods and services. It is collected from the buyers by the sellers and paid by the sellers to the Government. Since it is indirectly imposed on the buyers, it is called an indirect tax.
Q2. List any four types of indirect taxes levied in India: CGST, SGST, UGST, IGST (also Excise Duty).
Q3. What do you mean by Goods and Services Taxes? GST is the tax imposed on the supply (consumption) of goods and services. It is a destination-based consumption tax collected on value-added items at each stage of the supply chain. GST is applicable to all goods and services except alcohol and specified petroleum products.
Q4. Write a note on SGST: State Goods and Services Tax is imposed and collected by State Governments under the State GST Act (e.g., Tamil Nadu GST Act 2017). SGST replaces existing taxes like sales tax, luxury tax, entry tax, etc.
Q5. What is CGST? CGST means Central Goods and Services Tax, imposed and collected by the Central Government on all supply of goods within a state (intra-state) under CGST Act 2017. It replaces taxes like service tax, excise duty, etc.
Q6 (Additional). What is UGST? Union Territory Goods and Services Tax is formed to impose and collect tax from the five union territory administrations in India under UGST Act 2017.
Q1. Two differences between direct taxes and indirect taxes:
| Basis | Direct Taxes | Indirect Taxes |
|---|---|---|
| Meaning | Tax levied on income/wealth, paid directly to Government | Tax levied on goods/services, collected from buyers by seller and paid to Government |
| Evasion | Tax evasion is possible | Tax evasion is more difficult |
Q2. Objectives of GST: 1. Create a common market with uniform tax rate ("One Nation, One Tax, One Market") 2. Eliminate cascading effect through input tax credit 3. Boost exports by refunding GST collected on inputs, making exports tax-free 4. Increase tax base by bringing more taxpayers and increasing revenue 5. Simplify tax return procedures through common forms 6. Provide online facilities for tax payment and form submission through GSTN
Q3. Functions of GST Council: The GST Council oversees GST implementation. The Central Board of Excise and Customs administers the CGST and IGST Acts. The Council recommends on GST rates, IGST apportionment, exemptions, and model GST laws. The Union Finance Minister chairs the Council. The Minister of State (Finance) and all state Finance Ministers are members. The Centre holds 1/3rd voting power and states hold 2/3rd. Decisions require 3/4th of total votes.
Q4. Explain IGST with an example: IGST stands for Inter-State Goods and Services Tax, imposed and collected by the Central Government with revenue shared with States under IGST Act 2017. Tax is levied at a rate approximately equal to the combined center and state share on inter-state supply. The exporting state transfers SGST credit to the Centre. The Centre transfers IGST credit to the importing state. Example: If goods move from Delhi to Sikkim, the transaction attracts IGST. Rates range from 0.25% to 28%.
Q5. Three demerits of UGST: 1. Economists say GST would negatively impact the real estate market, adding up to 8% to new home costs and reducing demand by about 12%. 2. CGST and SGST are essentially new names for Central Excise/Service Tax, VAT, and CST — no major reduction in tax layers. 3. Many retail products currently taxed at 4% could become more expensive under GST, particularly garments and clothes.
VI. Answer in Detail (5-Mark Answers)
Q1. Distinguish between direct taxes and indirect taxes:
| Basis | Direct Taxes | Indirect Taxes |
|---|---|---|
| Meaning | Tax on income/wealth paid directly to Government | Tax on goods/services collected from buyers by seller and paid to Government |
| Incidence and Impact | Falls on same person; imposed and paid by the same person | Falls on different persons; imposed on sellers but collected from consumers |
| Burden | Progressive — more income attracts more tax | Regressive — flat rate means higher earners pay a smaller portion of income |
| Evasion | Tax evasion is possible | Tax evasion is more difficult |
| Inflation | Helps reduce inflation | Contributes to inflation |
| Shiftability | Cannot be shifted to others | Can be shifted to others |
| Examples | Income Tax, Wealth Tax, Capital Gains Tax, Securities Transaction Tax, Perquisites Tax | GST, Excise Duty |
Q2. Different kinds of GST: 1. CGST — Central GST, imposed and collected by Central Government on intra-state supply under CGST Act 2017. 2. SGST — State GST, imposed and collected by State Governments under the State GST Act (e.g., Tamil Nadu GST Act 2017). 3. UGST — Union Territory GST, imposed and collected by the five UT Administrations under UGST Act 2017. 4. IGST — Integrated GST, imposed and collected by the Central Government with revenue shared with states under IGST Act 2017. 5. IGST on exports — All exports are treated as inter-state supply. Since exports are zero-rated, GST is not imposed on exported goods/services, and any input credit already paid is refunded.
Q3. Merits of GST:
A. To the Society and Country: 1. A unified national market attracts more foreign investment, integrating the economy of all states and UTs. 2. It brings parity between imported and Indian manufactured goods. 3. It boosts manufacturing, exports, and GDP, leading to economic growth. 4. More employment opportunities result in poverty eradication. 5. Greater tax compliance increases government revenue. 6. Transparency improves India's Ease of Doing Business ranking. 7. Uniform rates reduce tax evasion and rate arbitrage between states.
B. To Business Community: 1. Simpler system with fewer exemptions — 17 taxes abolished, replaced by one. 2. Input tax credit reduces cascading effect, lowering average tax burden. 3. Common procedures, classification, and timelines provide greater certainty. 4. GSTN facility reduces multiple record-keeping and resource investment. 5. All interactions through the GSTN portal ensure corruption-free administration. 6. Uniform prices nationwide; business expansion across states is easier.
C. To Consumers: 1. Input tax credit lowers consumer prices. 2. Small retailer exemptions mean purchases from them cost less for consumers.
Q4. Compare CGST, SGST, and IGST:
| Basis | CGST | SGST | IGST |
|---|---|---|---|
| Meaning | Central GST replacing service tax, excise, etc.; levied by central govt | State GST replacing sales tax, luxury tax, entry tax, etc.; levied by state govt | Integrated GST, combined form of CGST and SGST; levied by central govt |
| Collection | Central Government | State Government | Central Government |
| Applicability | Intra-State supply | Intra-State supply | Inter-State supply |
| Registration | Not required until turnover crosses ₹20 lakhs (₹10 lakhs for NE states) | Not required until turnover crosses ₹20 lakhs (₹10 lakhs for NE states) | Mandatory |
| Composition | Benefit available up to ₹75 lakhs | Benefit available up to ₹75 lakhs | Not applicable in inter-state supply |
Additional Fill in the Blanks
13. GST eliminated the cascading effect through the mechanism of input tax credit. 14. Under GST, all exports are treated as inter-state supply and are zero-rated. 15. The GST Network (GSTN) provides online facilities for tax payment and form submission. 16. Under the composition scheme, benefit is available up to turnover of ₹75 lakhs for CGST and SGST. 17. The Centre holds 1/3rd voting power and states hold 2/3rd in the GST Council. 18. Decisions in the GST Council require 3/4th of total votes. 19. SGST replaces taxes like sales tax, luxury tax, and entry tax. 20. CGST replaces taxes like service tax, excise duty, and central surcharges.
Additional True or False
Common Mistakes to Avoid
1. GST is an INDIRECT tax — Not direct. It is collected by sellers from buyers and remitted to the government. 2. GST became effective from 1st March 2017 — Not July 2017 as many assume. The question specifically asks for this date. 3. GST is destination-based — Not origin-based. Tax is collected where goods/services are consumed. 4. India has 4 rate structures — Not 3 or 5. The four slabs are 5%, 12%, 18%, and 28%. 5. Maximum GST rate is 20% (as per Act) — Though the highest practical slab is 28%, the Act prescribes a maximum of 20%. 6. CGST + SGST = IGST approximately — For intra-state supply, both CGST and SGST apply; for inter-state, only IGST applies at roughly the combined rate. 7. GST eliminated 17 taxes — Replaced by one unified system. Common exam point. 8. All exports are zero-rated — No GST on exported goods/services, and input credit is refunded. 9. Composition scheme NOT applicable for inter-state supply — Only for intra-state supply up to ₹75 lakhs turnover. 10. GSTN is the online portal — For registration, returns, and payments. Ensures corruption-free administration. 11. Special provisions for 8 north-eastern states — Registration threshold is ₹10 lakhs for NE states vs ₹20 lakhs for others.
Exam Checklist
- [ ] Can define indirect tax and list 4 types (CGST, SGST, IGST, UGST)
- [ ] Can distinguish direct vs indirect taxes (7-point table)
- [ ] Know GST objectives (6 points)
- [ ] Can explain GST Council composition and voting (Centre 1/3rd, States 2/3rd)
- [ ] Can explain IGST with example
- [ ] Can list merits of GST (society, business, consumers)
- [ ] Can compare CGST, SGST, and IGST (5-point table)
- [ ] Know GST effective date (1st March 2017) and maximum rate (20%)
- [ ] Know that GST eliminated 17 taxes and replaced them with one
- [ ] Understand that exports are zero-rated under GST
- [ ] Know the registration threshold (₹20 lakhs, ₹10 lakhs for NE states)
- [ ] Know the composition scheme limit (₹75 lakhs, not applicable for inter-state)
- [ ] Can explain input tax credit and how it eliminates cascading effect