UPSC Prelims 2006 Q107: Indian Economy – Taxation
Which one of the following is the correct statement? Service tax is a/an
- (a) direct tax levied by the Central Government
- (b) indirect tax levied by the Central Government
- (c) direct tax levied by the State Government
- (d) indirect tax levied by the State Government
Answer: (b) indirect tax levied by the Central Government
Explanation
Nature of service tax
| Option | Verdict |
|---|---|
| Direct tax levied by the Central Government | No, it is collected from the consumer through the service provider |
| Indirect tax levied by the Central Government | Yes |
| Direct tax levied by the State Government | No |
| Indirect tax levied by the State Government | No |
Service tax was an indirect tax levied by the Central Government on specified services (under the Finance Act, 1994) and passed on to the consumer.
Answer: (b) indirect tax levied by the Central Government.
Why each option is right or wrong
- (a) Incorrect. Service tax is not a direct tax; its burden is shifted to the consumer.
- (b) CORRECT. Service tax is an indirect tax levied by the Central Government.
- (c) Incorrect. It is neither direct nor levied by the State Government.
- (d) Incorrect. The Centre, not the States, levied service tax.
Key point
Service tax was an indirect tax levied by the Central Government on services.
Remember
Service tax: indirect tax by the Central Government.
Common mistakes
- Calling it a direct tax because it is levied on service providers.
- Assuming States levied it like sales tax.
- Confusing it with excise duty, which is on goods.
Exam tip
Direct tax: burden stays on the payer; indirect tax: burden passes to the consumer.
Sources
- Finance Act, 1994, Chapter V (Service Tax)
- NCERT Class XII Economics — Introductory Macroeconomics — Government Budget and the Economy (direct and indirect taxes)