Taxation & GST MCQs for UPSC Prelims

73 practice questions on Taxation & GST from the Economy section of the UPSC Prelims syllabus. 73 come with a written explanation and 17 are actual previous year questions. Try the sample set below - the answer stays hidden until you ask for it.

17 Easy 41 Medium 15 Hard 17 from past papers

Sample questions

Q1
Previous year question medium

A decrease in tax to GDP ratio of a country indicates which of the following? 1. Slowing economic growth rate 2. Less equitable distribution of national income Select the correct answer using the code given below.

  1. A 1 only
  2. B 2 only
  3. C Both 1 and 2
  4. D Neither 1 nor 2
Show answer and explanation

Correct answer: A - 1 only

Tax revenue is an elastic component of the economy: when growth slows, corporate profits, incomes and consumption weaken, so tax collections tend to fall faster than nominal GDP and the tax to GDP ratio drops. A falling ratio is therefore taken as a broad indicator of slowing growth, making statement 1 correct as per the official key. Statement 2 is incorrect because equity in income distribution is measured by tools like the Gini coefficient; the tax to GDP ratio can fall because of rate cuts, exemptions or weaker compliance without any change in how income is distributed. A few early coaching keys argued for 'neither', but the accepted answer is 1 only.

Q2
Previous year question easy

The sales tax you pay while purchasing a toothpaste is a

  1. A tax imposed by the Central Government
  2. B tax imposed by the Central Government but collected by the State Government
  3. C tax imposed by the State Government but collected by the Central Government
  4. D tax imposed and collected by the State Government
Show answer and explanation

Correct answer: D - tax imposed and collected by the State Government

Sales tax on goods such as toothpaste was a levy on intra-state sale of goods, a subject in the State List, so it was both imposed and collected by the State Government, making option (d) correct. It was not a central tax (a), nor one collected on behalf of another government (b and c).

Q3
Previous year question easy

Which one of the following effects of creation of black money in India has been the main cause of worry to the Government of India?

  1. A Diversion of resources to the purchase of real estate and investment in luxury housing
  2. B Investment in unproductive activities and purchase of precious stones, jewellery, gold, etc.
  3. C Large donations to political parties and growth of regionalism
  4. D Loss of revenue to the State Exchequer due to tax evasion
Show answer and explanation

Correct answer: D - Loss of revenue to the State Exchequer due to tax evasion

The principal government concern with black money is that income kept outside the books escapes taxation, causing a direct loss of revenue to the State Exchequer. The other options describe consequences such as diversion to real estate, unproductive assets like gold, or political donations, which are secondary effects rather than the central fiscal worry. Loss of tax revenue undermines public finances and the ability to fund welfare and development, making it the primary concern.

Q4
Previous year question medium

Which one of the following is not a feature of "Value Added Tax"?

  1. A It is a multi-point destination-based system of taxation
  2. B It is a tax levied on value addition at each stage of transaction in the production-distribution chain
  3. C It is a tax on the final consumption of goods or services and must ultimately be borne by the consumer
  4. D It is basically a subject of the Central Government and the State Governments are only a facilitator for its successful implementation
Show answer and explanation

Correct answer: D - It is basically a subject of the Central Government and the State Governments are only a facilitator for its successful implementation

The question asks which statement is not a feature of VAT. Option (d) is incorrect because VAT (as introduced in India in 2005) was a state-level tax administered by the State Governments, not basically a Central subject. The other statements are genuine features: VAT is multi-point and destination-based (a), it taxes the value added at each stage of the chain (b), and the burden ultimately falls on the final consumer (c). Hence (d) is the statement that is not a feature.

Q5
Previous year question hard

With reference to India's decision to levy an equalization tax of 6% on online advertisement services offered by non-resident entities, which of the following statements is/are correct? 1. It is introduced as a part of the Income Tax Act. 2. Non-resident entities that offer advertisement services in India can claim a tax credit in their home country under the "Double Taxation Avoidance Agreements". Select the correct answer using the code given below:

  1. A 1 only
  2. B 2 only
  3. C Both 1 and 2
  4. D Neither 1 nor 2
Show answer and explanation

Correct answer: D - Neither 1 nor 2

Both statements are incorrect, so 'D' is the answer. The equalization levy was introduced under Chapter VIII of the Finance Act, 2016, not as part of the Income Tax Act, so statement 1 is wrong. Statement 2 is also wrong: because the levy is not an income tax, non-resident entities cannot claim a foreign tax credit for it under Double Taxation Avoidance Agreements. Hence neither statement holds.

Q6
Previous year question medium

What is/are the most likely advantages of implementing 'Goods and Services Tax (GST)'? 1. It will replace multiple taxes collected by multiple authorities and will thus create a single market in India. 2. It will drastically reduce the 'Current Account Deficit' of India and will enable it to increase its foreign exchange reserves. 3. It will enormously increase the growth and size of economy of India and will enable it to overtake China in the near future. Select the correct answer using the code given below :

  1. A 1 only
  2. B 2 and 3 only
  3. C 1 and 3 only
  4. D 1, 2 and 3
Show answer and explanation

Correct answer: A - 1 only

Statement 1 captures the core rationale of GST: it subsumes numerous central and state indirect taxes into one levy, creating a unified national market, so it is correct. Statement 2 is an overreach because GST is a domestic indirect tax and does not directly control the current account deficit, which depends on trade and capital flows. Statement 3 is exaggerated and speculative; GST may aid growth but cannot by itself make India overtake China. Hence only statement 1 is a likely advantage.

Q7
Previous year question hard

Which of the following statements with regard to recommendations of the 15th Finance Commission of India are correct? I. It has recommended grants of Rs. 4,800 crores from the year 2022-23 to the year 2025-26 for incentivizing States to enhance educational outcomes. II. 45% of the net proceeds of Union taxes are to be shared with States. III. Rs. 45,000 crores are to be kept as performance-based incentive for all States for carrying out agricultural reforms. IV. It reintroduced tax effort criteria to reward fiscal performance. Select the correct answer using the code given below.

  1. A I, II and III
  2. B I, II and IV
  3. C I, III and IV
  4. D II, III and IV
Show answer and explanation

Correct answer: C - I, III and IV

The 15th Finance Commission recommended Rs. 4,800 crores for educational outcomes, Rs. 45,000 crores as performance-based incentive for agricultural reforms, and reintroduced a tax-effort criterion to reward fiscal performance, making statements I, III and IV correct. Statement II is wrong because the Commission recommended a vertical devolution of 41% of net Union tax proceeds, not 45%. Hence I, III and IV are correct.

Q8
Previous year question medium

Consider the following items: 1. Cereal grains hulled 2. Chicken eggs cooked 3. Fish processed and canned 4. Newspapers containing advertising material Which of the above items is/are exempted under GST (Goods and Services Tax) ?

  1. A 1 only
  2. B 2 and 3 only
  3. C 1, 2 and 4 only
  4. D 1, 2, 3 and 4
Show answer and explanation

Correct answer: C - 1, 2 and 4 only

Cereal grains hulled (1), cooked chicken eggs in shell (2) and newspapers (including those carrying advertising) (4) are exempt under GST, while fish that is processed and canned (3) is a value-added product attracting GST, so the answer is (c) 1, 2 and 4 only. The key distinction is that basic, unbranded food items and newspapers are exempt, whereas processing and canning of fish makes it taxable. Statement 3 is the only excluded item.

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