Types of Taxes in India: Direct vs. Indirect Taxes, GST, GST Council & Exemptions

1The Indian tax system at a glance

Every tax in India ultimately falls into one of two families — direct taxes (paid straight to the government by the person or entity earning the income) and indirect taxes (collected through the supply chain and finally borne by the consumer). The map below shows how the major taxes fit together.

The structure of India's tax system — direct and indirect taxes and their key sub-types.

2Constitutional basis of taxation

Taxes in India are not levied arbitrarily — the power to tax flows directly from the Constitution. These articles are high-yield:

• Article 265 — No tax shall be levied or collected except by authority of law. (The foundation of all taxation.)
• Article 246 & the Seventh Schedule — Divide taxing powers between the Centre and States through the Union List (income tax, customs, corporate tax), the State List (land revenue, state excise on alcohol, stamp duty) and the Concurrent List.
• 101st Constitutional Amendment Act, 2016 — The amendment that introduced GST in India.
• Article 246A — Gives both Parliament and State legislatures the concurrent power to levy GST.
• Article 279A — Provides for the creation of the GST Council.
• Article 280 — Establishes the Finance Commission, which recommends how central tax revenue is shared with the States. (Do not confuse it with the GST Council.)

3The two pillars: Direct vs. Indirect taxes

India's tax architecture is broadly divided based on who bears the tax and how it is collected.

4Direct taxes in detail — and the taxes that were abolished

Direct taxes currently levied

• Income Tax — on the income of individuals, HUFs, firms, etc.
• Corporate Tax — on the profits of companies.
• Capital Gains Tax — on profit from selling assets; split into Short-Term (STCG) and Long-Term (LTCG).
• Securities Transaction Tax (STT) — on trades of listed securities.

Abolished direct taxes (a favourite MCQ)

• Wealth Tax — abolished in 2015.
• Estate Duty — abolished in 1985.
• Gift Tax — abolished in 1998 (gifts are now taxed under income tax in certain cases).
• Fringe Benefit Tax and Banking Cash Transaction Tax — also discontinued.

5Indirect taxes & what GST subsumed

When GST was rolled out on 1 July 2017, it replaced roughly 17 central and state taxes, ending the messy "tax on tax" (cascading) system. Knowing which taxes were merged — and which were not — is a classic exam question.

Central taxes subsumed into GST

Central Excise Duty, Service Tax, Additional Customs Duty (CVD) and Special Additional Duty (SAD).

State taxes subsumed into GST

State VAT, Central Sales Tax, Octroi, Entry Tax, Luxury Tax, Entertainment Tax, Purchase Tax and taxes on lottery/betting.

6The GST framework & slabs

India follows a dual-GST model: both the Centre and the States levy tax concurrently on a single transaction. GST is a destination-based (consumption) tax — revenue accrues to the state where goods or services are finally consumed.

The three components of GST

• CGST (Central GST) — collected by the Centre on intra-state transactions (within the same state).
• SGST / UTGST (State / UT GST) — collected by the State or Union Territory on intra-state transactions.
• IGST (Integrated GST) — levied by the Centre on inter-state transactions and imports; the revenue is later shared with the consuming state.

The current GST slabs (post GST 2.0)

Niche rates still exist — e.g. 3% on gold & silver and 0.25% on rough diamonds.

7GST 2.0 — the landmark 2025 reform

The slab structure above is not the original GST — it is the result of GST 2.0, the biggest overhaul since 2017.

• Approved at the 56th GST Council meeting on 3 September 2025; new rates effective 22 September 2025.
• The old 12% and 28% slabs were abolished, and a new 40% rate was introduced for luxury and sin goods.
• Roughly 99% of items in the old 12% slab moved to 5%, and about 90% of the old 28% slab moved to 18%.
• The structure went from five main slabs (0/5/12/18/28) to essentially two core rates — 5% and 18% — plus 0% for essentials and 40% for de-merit goods.

8How GST actually runs

• Input Tax Credit (ITC) — the mechanism that removes the cascading "tax on tax" effect by letting businesses offset the tax already paid on inputs.
• Composition Scheme — small taxpayers with turnover up to ₹1.5 crore pay a flat, low rate but cannot claim ITC.
• GSTN — the IT backbone of GST; goods are classified by HSN codes and services by SAC codes.
• E-way bill — required for the movement of goods above a threshold value.
• Returns — key forms include GSTR-1, GSTR-3B and the annual GSTR-9.

GST registration thresholds

Businesses below these turnover limits are exempt from mandatory GST registration.

9The GST Council — the decision-makers

The GST Council is a constitutional body established under Article 279A to ensure federal cooperation between the Centre and the States.

• Who is in it? Chaired by the Union Finance Minister, with the Finance Ministers (or nominated ministers) of all States and UTs as members.
• Quorum: 50% of the total members.
• Passing a decision: a 75% majority of weighted votes is required.
• Voting weight: the Centre holds 1/3 (33.3%) and all States combined hold 2/3 (66.6%) — so neither side can force a decision alone, mandating consensus.

10Key tax exemptions you should know

Direct tax exemptions

• Agricultural Income — under Section 10(1), income from farming and basic agricultural operations is fully exempt from central income tax.
• Zero-tax threshold (new regime, FY 2025-26): the basic exemption limit is ₹4 lakh, but thanks to the enhanced Section 87A rebate (up to ₹60,000), income up to ₹12 lakh effectively pays zero tax. For salaried individuals, the ₹75,000 standard deduction pushes the zero-tax level to ₹12.75 lakh.

Indirect tax (GST) exemptions

• Completely outside GST: petroleum products (crude, petrol, diesel, ATF, natural gas) and alcohol for human consumption — still taxed under state excise and VAT.
• Essential services: institutional education, public transit and individual health/life insurance premiums are shielded from standard GST.
• Small-business relief: micro-enterprises below the registration turnover limits (see §8) are exempt from mandatory GST registration.

11The new Income-Tax Act, 2025

The six-decade-old Income-Tax Act, 1961 has been replaced — a near-certain current-affairs question.

• The Income-Tax Act, 2025 comes into effect from 1 April 2026, completely replacing the Income-Tax Act, 1961.
• It slims the law from 800+ sections to 536 sections across 23 chapters, using simpler language.
• It replaces the twin concepts of "Previous Year" and "Assessment Year" with a single "Tax Year" (1 April – 31 March).
• Tax rates and slabs are unchanged — the reform is about structure and simplification.
• Enacted as Act No. 30 of 2025; the Select Committee that reviewed the Bill was chaired by Baijayant Panda.

12Key terms & tax bodies

The key bodies

• CBDT — administers direct taxes.
• CBIC — administers indirect taxes & customs.
• GST Council — Article 279A.
• Finance Commission — Article 280 (Centre–State revenue sharing).

13Quick revision — one-liners