CA Inter Taxation MCQ Test 10 (Income-tax + GST): answer key

Question 1 · 2 marks · Chapter 9 · hard

Scenario. Mr. Devansh Mehta, aged 36 years, is employed as a senior finance manager with a multinational company in Pune. He is resident and ordinarily resident in India for P.Y. 2025-26 and does not have income from business or profession. His gross salary for the year ended 31st March 2026 was ₹12,93,000, comprising basic salary of ₹6,00,000, house rent allowance of ₹1,80,000 and other taxable salary components. He paid rent of ₹2,20,000 during the year for accommodation occupied in Pune. His employer deducted tax from his salary every month on the basis of his initial declaration under the default tax regime. Devansh had purchased a self-occupied residential flat in Pune in 2022 using a housing loan from a scheduled bank. Interest payable on the loan for P.Y. 2025-26 was ₹2,00,000, and all conditions for claiming the deduction under the normal provisions of the Act were satisfied. During the year, he contributed ₹1,50,000 towards eligible investments under section 80C and paid ₹25,000 towards medical insurance premium qualifying under section 80D. He maintained all supporting documents for his rent payments and investments. He had no capital gains, lottery winnings, agricultural income or other sources of income during the year. His employer subsequently informed him that the initial tax declaration could be reconsidered before filing his return. Devansh is now evaluating the tax consequences of continuing under the default tax regime under section 115BAC or exercising the option of shifting out of it and paying tax under the normal provisions of the Act. Assume that all the stated deductions and exemptions satisfy the applicable statutory conditions.

Compute the income-tax liability of Mr. Devansh under the default tax regime under section 115BAC for A.Y. 2026-27, including the applicable marginal relief and health and education cess.

1. His tax liability is ₹18,720, because the marginal relief reduces the income-tax payable to the amount by which his total income exceeds ₹12,00,000, followed by cess at 4%. (correct answer)
2. Rs. 11,40,000, because only basic salary and dearness allowance forming part of retirement benefits are included for perquisite valuation, while commission and bonus are completely excluded.
3. His tax liability is ₹65,208, because the income-tax of ₹62,700 is increased by cess at 4% without allowing marginal relief.
4. His tax liability is Nil, because the rebate under section 87A eliminates the entire income-tax payable whenever total income is close to ₹12,00,000.

Answer: A — His tax liability is ₹18,720, because the marginal relief reduces the income-tax payable to the amount by which his total income exceeds ₹12,00,000, followed by cess at 4%.

Working. Total income = ₹12,93,000 - ₹75,000 = ₹12,18,000. Tax = ₹20,000 + ₹40,000 + ₹2,700 = ₹62,700. Income exceeding ₹12 lakh = ₹18,000. Marginal relief = ₹62,700 - ₹18,000 = ₹44,700. Tax after relief = ₹18,000. Cess = ₹720. Final liability = ₹18,720.

Explanation. Total income under section 115BAC is ₹12,18,000 (₹12,93,000 less standard deduction of ₹75,000). Tax before marginal relief is ₹62,700: ₹20,000 on the ₹4 lakh slab, ₹40,000 on the next ₹4 lakh and ₹2,700 on ₹18,000. Since income exceeds ₹12 lakh by ₹18,000, marginal relief reduces tax to ₹18,000. Cess at 4% is ₹720, making the liability ₹18,720. Option (c) overlooks marginal relief.

Where it goes wrong. Applying the rebate threshold mechanically without examining marginal relief when total income marginally exceeds ₹12 lakh.

Authority. Chapter 9, section 115BAC: slab rates for A.Y. 2026-27; Chapter 9, section 87A: rebate and marginal relief; Chapter 9: Health and Education Cess at 4%

Question 2 · 2 marks · Chapter 9 · hard

If Mr. Devansh exercises the option of shifting out of the default tax regime, what would be his income-tax liability under the normal provisions of the Act for A.Y. 2026-27?

1. ₹56,264, because the taxable income is ₹7,08,000 after allowing HRA exemption, standard deduction and the eligible deductions under sections 24(b), 80C and 80D. (correct answer)
2. ₹64,064, because the taxable income is ₹7,33,000 after allowing HRA exemption, standard deduction and deductions under sections 80C and 80D, but not section 24(b).
3. ₹82,680, because the taxable income is ₹8,35,000 after allowing standard deduction and deductions under sections 80C, 80D and 24(b), but no HRA exemption.
4. ₹97,500, because the taxable income is ₹14,25,000 after allowing only the standard deduction and applying the normal tax slab rates.

Answer: A — ₹56,264, because the taxable income is ₹7,08,000 after allowing HRA exemption, standard deduction and the eligible deductions under sections 24(b), 80C and 80D.

Working. HRA exemption = least of ₹1,80,000, ₹1,60,000 and ₹3,00,000 = ₹1,60,000. Total income = ₹12,93,000 - ₹1,60,000 - ₹50,000 - ₹1,50,000 - ₹25,000 - ₹2,00,000 = ₹7,08,000. Tax = ₹12,500 + ₹41,600 = ₹54,100. Cess = ₹2,164. Total = ₹56,264.

Explanation. HRA exemption is the least of ₹1,80,000, ₹1,60,000 (rent less 10% of basic salary) and ₹3,00,000 (50% of basic salary), hence ₹1,60,000. After standard deduction of ₹50,000, section 80C deduction of ₹1,50,000, section 80D deduction of ₹25,000 and section 24(b) deduction of ₹2,00,000, total income is ₹7,08,000. Tax is ₹54,100 plus cess of ₹2,164. Option (b) incorrectly omits the housing-loan interest deduction.

Where it goes wrong. Confusing the restrictions under section 115BAC with the deductions and exemptions available under the optional tax regime.

Authority. Chapter 3, Unit 1: HRA exemption under section 10(13A); Chapter 3, Unit 1: Standard deduction from salary; Chapter 3, Unit 2: Section 24(b); Chapter 6: Sections 80C and 80D; Chapter 1: Normal slab rates for individuals

Question 3 · 2 marks · Chapter 9 · medium

Considering the respective tax liabilities computed under both regimes, which option should Mr. Devansh choose for A.Y. 2026-27?

1. He should shift to the optional tax regime because the availability of deductions under sections 80C and 80D necessarily makes that regime more beneficial.
2. He should continue under the default tax regime because his liability of ₹18,720 is lower than the liability of ₹56,264 under the normal provisions. (correct answer)
3. He should continue under the default tax regime because his liability is ₹18,000, whereas the optional regime results in a liability of ₹56,264, and cess is not payable under the default regime.
4. He should shift to the optional tax regime because marginal relief under section 87A is available only under the normal provisions of the Act.

Answer: B — He should continue under the default tax regime because his liability of ₹18,720 is lower than the liability of ₹56,264 under the normal provisions.

Working. Default regime liability = ₹18,720. Optional regime liability = ₹56,264. Tax saving under default regime = ₹56,264 - ₹18,720 = ₹37,544. The default tax regime is preferable.

Explanation. The default regime results in a liability of ₹18,720, whereas the optional regime results in ₹56,264. The default regime is therefore more beneficial by ₹37,544. The availability of deductions under the optional regime does not automatically make it preferable; the final tax liabilities must be compared. Option (c) reaches the same regime choice but incorrectly excludes cess from the default-regime liability.

Where it goes wrong. Choosing a regime merely because it permits more deductions rather than comparing the resulting tax liabilities.

Authority. Chapter 9: Computation and comparison of tax liability under both regimes; Chapter 9: Section 115BAC; Chapter 9: Section 87A and Health and Education Cess

Question 4 · 2 marks · Chapter 4 · hard

Scenario. Mr. Raghav Sinha and his wife, Mrs. Kavya Sinha, are residents and ordinarily residents of India. Raghav is a director in a manufacturing company and has a substantial interest in the concern. Kavya is a qualified architect employed by the same company. During P.Y. 2025-26, she received remuneration of ₹9,00,000, wholly attributable to the application of her professional knowledge, technical qualifications and experience. On 1st April 2025, Raghav transferred listed equity shares and listed debentures worth ₹12,00,000 to Kavya without consideration. During the year, these investments generated dividend income of ₹80,000 and interest income of ₹30,000 respectively. Kavya deposited the dividend received into her own savings account and earned additional interest of ₹5,000 on that deposit. The couple also has a minor daughter, Siya, aged 15 years, who participated in music competitions and received prizes of ₹60,000 through activities involving her musical talent. Separately, she earned interest of ₹22,000 on fixed deposits created out of ₹3,00,000 gifted to her by Raghav. Both parents have independent taxable income before considering Siya's income. Raghav's income is ₹16,00,000 and Kavya's income is ₹8,00,000. They have exercised the option of shifting out of the default tax regime for A.Y. 2026-27, and the marriage between them subsists throughout the previous year. Raghav also carries on an independent trading business. For P.Y. 2025-26, he incurred a business loss of ₹90,000. His other computations disclosed a loss from house property of ₹2,60,000 and short-term capital loss of ₹1,20,000. He also earned long-term capital gains of ₹2,00,000. His salary income was ₹16,00,000. Assume the losses are current-year losses, the capital assets satisfy the relevant classification conditions and the return of income is furnished within the prescribed due date.

What amount of income arising from the assets transferred by Raghav to Kavya is includible in Raghav's total income under the clubbing provisions for P.Y. 2025-26?

1. Rs. 7,40,000, because indexed cost of acquisition is allowable for long-term capital assets acquired prior to 23 July 2024, and the transfer expenses are fully deductible from sale consideration.
2. ₹1,10,000, because dividend income and interest on the transferred debentures are clubbed, but interest arising from reinvestment of dividend income is not clubbed. (correct answer)
3. ₹10,00,000, because the dividend, debenture interest and entire remuneration received by Kavya must be included in Raghav's income.
4. Nil, because the investments were transferred before the income arose and Kavya independently received the dividend and interest.

Answer: B — ₹1,10,000, because dividend income and interest on the transferred debentures are clubbed, but interest arising from reinvestment of dividend income is not clubbed.

Working. Dividend income = ₹80,000. Debenture interest = ₹30,000. Amount clubbed = ₹1,10,000. Interest on reinvested dividend = ₹5,000, not clubbed. Kavya's professional remuneration = ₹9,00,000, not clubbed.

Explanation. Under section 64(1)(iv), income arising to a spouse from assets transferred without adequate consideration is clubbed with the transferor's income. Thus, ₹80,000 dividend and ₹30,000 debenture interest are clubbed. The subsequent ₹5,000 interest earned by reinvesting dividend income is income from accretion and is not clubbed. Kavya's remuneration is also excluded because it is wholly attributable to her professional knowledge and experience, attracting the statutory exception under section 64(1)(ii).

Where it goes wrong. Including income generated by reinvestment of the original income and spouse remuneration despite the professional-qualification exception.

Authority. Chapter 4, section 64(1)(iv): Transfer of assets to spouse; Chapter 4, section 64(1)(ii): Remuneration attributable to professional knowledge and experience; Chapter 4: Distinction between income from transferred assets and accretion

Question 5 · 2 marks · Chapter 4 · hard

Determine the amount of Siya's income includible in Raghav's total income for P.Y. 2025-26 after considering the applicable exemption.

1. ₹22,000, because interest income is clubbed with Raghav, but exemption under section 10(32) is unavailable even under the optional tax regime.
2. Rs. 1,50,000, because interest on housing loan for self-occupied property is deductible up to a maximum limit of Rs. 1,50,000 under the normal provisions of section 24(b) of the Act.
3. ₹20,500, because interest income of ₹22,000 is clubbed with the income of the parent having higher income after allowing exemption of ₹1,500, whereas music prizes arising from application of talent are excluded. (correct answer)
4. ₹60,000, because income derived from musical competitions is always included in the income of the parent having higher income, irrespective of the minor's talent.

Answer: C — ₹20,500, because interest income of ₹22,000 is clubbed with the income of the parent having higher income after allowing exemption of ₹1,500, whereas music prizes arising from application of talent are excluded.

Working. Parent with higher income = Raghav (₹16,00,000). Passive interest clubbed = ₹22,000. Exemption under section 10(32) = ₹1,500. Amount includible = ₹20,500. Music competition prizes of ₹60,000 are excluded under the skill-and-talent exception.

Explanation. Section 64(1A) generally includes minor children's income in the income of the parent having higher income before such inclusion. Raghav's income of ₹16 lakh exceeds Kavya's ₹8 lakh. However, income arising from an activity involving the minor's skill or talent is excluded. Thus, the ₹60,000 music prizes are not clubbed. Interest of ₹22,000 is clubbed after exemption of ₹1,500 under section 10(32), available because Raghav exercises the optional tax regime.

Where it goes wrong. Ignoring the skill-and-talent exception or assuming that the exemption under section 10(32) is available under the default tax regime.

Authority. Chapter 4, section 64(1A): Clubbing of minor child's income; Chapter 4, section 10(32): Exemption of ₹1,500 per minor child; Chapter 4: Exception for income involving minor's skill, talent or specialised knowledge

Question 6 · 2 marks · Chapter 5 · hard

After applying the current-year set-off provisions under the normal provisions of the Act, what is the aggregate amount of losses that Raghav can carry forward, assuming all other conditions are satisfied?

1. ₹60,000, because the business loss can be adjusted against salary income and only the unabsorbed house property loss can be carried forward.
2. ₹2,70,000, comprising house property loss of ₹60,000, business loss of ₹90,000 and short-term capital loss of ₹1,20,000, since capital losses cannot be adjusted against long-term capital gains.
3. ₹1,50,000, comprising house property loss of ₹60,000 and business loss of ₹90,000, since the short-term capital loss is fully adjusted against long-term capital gains. (correct answer)
4. ₹90,000, because the entire house property loss can be adjusted against salary and capital gains, whereas business loss cannot be carried forward.

Answer: C — ₹1,50,000, comprising house property loss of ₹60,000 and business loss of ₹90,000, since the short-term capital loss is fully adjusted against long-term capital gains.

Working. House property loss = ₹2,60,000. Current-year inter-head set-off = ₹2,00,000. Carry forward = ₹60,000. Business loss = ₹90,000, not adjustable against salary. STCL ₹1,20,000 is adjusted against LTCG ₹2,00,000. Unabsorbed LTCG = ₹80,000. Aggregate losses carried forward = ₹60,000 + ₹90,000 = ₹1,50,000.

Explanation. Under section 71(3A), house property loss can be adjusted against income under other heads only up to ₹2 lakh, leaving ₹60,000. Business loss cannot be set off against salary income under section 71(2A), so ₹90,000 remains available for carry forward. Short-term capital loss can be set off against long-term capital gains, leaving no unabsorbed capital loss. Therefore, aggregate carry-forward losses are ₹1,50,000. Option (b) incorrectly restricts adjustment of short-term capital loss.

Where it goes wrong. Applying the ₹2 lakh restriction to the entire house property loss rather than treating the excess as carry forward, and incorrectly preventing short-term capital loss from being adjusted against long-term capital gains.

Authority. Chapter 5: Section 71(3A), restriction on inter-head set-off of house property loss; Chapter 5: Section 71(2A), restriction on business loss against salary; Chapter 5: Section 70, inter-source set-off of capital losses; Chapter 5: Sections 72 and 74, carry forward of business and capital losses

Question 7 · 2 marks · Chapter 2 – Residence and Scope of Total Income · medium

Scenario. Nikhil Verma, an Indian citizen residing in Germany after leaving India on 15 March 2025 for employment there, visited India during the previous year 2025-26. His total stay in India during that year was 90 days, and his stay in India during the four preceding previous years was 500 days. He earned salary of ₹15,00,000 for services rendered entirely in Germany, credited to his German bank account. He also earned ₹80,000 as interest on a German fixed deposit, credited outside India. Neither amount was received or deemed to be received in India. He owns a residential property in Jaipur, from which his income under the head 'Income from house property', computed after the applicable deduction under section 24(a), is ₹2,10,000.

Determine Nikhil's residential status for the previous year 2025-26 and the amount of income taxable in India.

1. Nikhil is a resident and ordinarily resident, and his entire income of ₹17,90,000 is taxable in India because he has stayed in India for more than 60 days in the previous year.
2. Nikhil is a resident but not ordinarily resident, and ₹17,90,000 is taxable in India because his stay in India exceeds 60 days and his preceding four-year stay exceeds 365 days.
3. Nikhil is a non-resident, but ₹17,90,000 is taxable in India because the salary and foreign deposit interest of an Indian citizen are taxable in India irrespective of where they are received.
4. Nikhil is a non-resident, and ₹2,10,000 is taxable in India because, as an Indian citizen residing abroad who visits India and has income other than foreign-source income below ₹15 lakh, he is subject to the 182-day test, while his Indian property income is taxable in India. (correct answer)

Answer: D — Nikhil is a non-resident, and ₹2,10,000 is taxable in India because, as an Indian citizen residing abroad who visits India and has income other than foreign-source income below ₹15 lakh, he is subject to the 182-day test, while his Indian property income is taxable in India.

Working. Total stay in India during P.Y. 2025-26: 90 days. As Nikhil is an Indian citizen residing abroad who visits India and has ₹2,10,000 income other than foreign-source income, the applicable residence test is 182 days. He is therefore non-resident. Foreign salary and German fixed-deposit interest are not taxable on the facts given. Jaipur property income of ₹2,10,000 is taxable in India.

Explanation. Nikhil is an Indian citizen residing abroad who visits India. His income other than foreign-source income is ₹2,10,000, below ₹15 lakh, so the 182-day visit test applies under section 6(1). His 90-day stay makes him non-resident. Under section 5(2), his German salary and deposit interest are not taxable on these facts, while income from the Jaipur property accrues in India. Therefore, ₹2,10,000 is taxable in India.

Where it goes wrong. Applying the general 60-days-plus-365-days test without considering the 182-day visit rule where non-foreign-source income does not exceed ₹15 lakh.

Authority. Chapter 2 – Residence and Scope of Total Income: Section 6(1), visit-to-India rule for an Indian citizen residing abroad.; Chapter 2 – Residence and Scope of Total Income: Section 5(2), scope of total income of a non-resident.; Chapter 4 – Income from House Property: Income from property situated in India.

Question 8 · 1 marks · Chapter 7 · hard

Scenario. PQR Ltd., a company, had turnover of ₹12.50 crore during F.Y. 2024-25. During F.Y. 2025-26, it purchased goods worth ₹45,00,000 from a resident seller and subsequently credited another invoice of ₹29,00,000 to the same seller on 20th February 2026. The seller's PAN was inoperative on that date. However, the seller linked Aadhaar with PAN and the PAN became operative on 15th April 2026. Assume the transactions are otherwise covered by the applicable TDS provisions and the seller has furnished the PAN.

What is the amount of tax PQR Ltd. is required to deduct at source on the transaction dated 20th February 2026, considering section 194Q, section 206AA and the applicable CBDT circular?

1. Nil, because the seller's PAN was inoperative on the date of credit and tax deduction becomes applicable only after the PAN is made operative.
2. ₹2,900, because tax is deductible at 0.1% on the entire invoice value of ₹29 lakh without considering the earlier purchases.
3. Rs. 50,000, because deduction under section 80D is allowed up to Rs. 25,000 for self and family, plus an additional deduction of Rs. 25,000 for parents who are senior citizens.
4. ₹2,400, because tax is deductible at 0.1% on purchases exceeding ₹50 lakh and the subsequent activation of PAN within the prescribed period attracts relief from the higher deduction rate. (correct answer)

Answer: D — ₹2,400, because tax is deductible at 0.1% on purchases exceeding ₹50 lakh and the subsequent activation of PAN within the prescribed period attracts relief from the higher deduction rate.

Working. Aggregate purchases = ₹45,00,000 + ₹29,00,000 = ₹74,00,000. Amount exceeding threshold = ₹74,00,000 - ₹50,00,000 = ₹24,00,000. TDS = ₹24,00,000 × 0.1% = ₹2,400. PAN became operative on 15.04.2026, within two months from the end of February 2026. Higher-rate relief applies.

Explanation. PQR Ltd.'s preceding-year turnover exceeds ₹10 crore, and aggregate purchases from the resident seller exceed ₹50 lakh. Under section 194Q, TDS at 0.1% applies to the excess ₹24 lakh, giving ₹2,400. Although PAN was initially inoperative, Circular No. 9/2025 dated 21.07.2025 provides relief where PAN becomes operative within two months from the end of the month of payment or credit. Activation on 15th April falls within this period.

Where it goes wrong. Applying the higher PAN-related deduction rate without considering the subsequent activation relief under Circular No. 9/2025, or calculating TDS on the entire invoice instead of the amount exceeding the threshold.

Authority. Chapter 7, section 194Q: TDS on purchase of goods; Chapter 7, section 206AA: Higher TDS for failure to furnish operative PAN; Statutory Update for January 2027, Chapter 8: Circular No. 9/2025 dated 21.07.2025

Question 9 · 2 marks · Chapter 2 - Supply under GST · hard

Scenario. Aarav Industrial Systems Ltd. (AIS), a registered manufacturer of specialised electrical equipment in Maharashtra, undertakes several transactions during the financial year 2025-26. The company maintains its books on the mercantile basis and makes taxable outward supplies under the regular scheme.\n\nOn 12 June 2025, AIS permanently transfers a testing machine, on which it had availed full ITC, to its wholly owned subsidiary, Zenith Components Pvt. Ltd. (ZCPL), without charging any amount. Both companies are separately registered and operate from the same industrial premises. Their directors have common business interests, but they maintain separate legal identities and accounts.\n\nOn 5 August 2025, AIS receives an advance of ₹8,00,000 from an unrelated customer for a customised production machine. The machine is dispatched on 19 August 2025 and the tax invoice is issued on the same date. The customer pays the remaining consideration on 10 September 2025. AIS is neither a composition taxpayer nor engaged in supplying specified actionable claims. Separately, AIS enters into a technical consultancy agreement on 1 October 2025. The consultancy service is provided on 20 November 2025, an invoice is issued on 25 November 2025, and an advance of ₹3,00,000 had already been received on 10 October 2025.\n\nIn December 2025, AIS sells equipment to its distributor, Nova Electrical Traders, for ₹24,00,000. The manufacturer subsequently grants Nova a financial credit note of ₹2,00,000 as a general volume discount. There is no agreement between the manufacturer and the ultimate customers regarding any compulsory resale price or discount. Nova independently owns the equipment after purchase and undertakes ordinary promotional activities for its own sales. No separate consideration is agreed for those activities. AIS does not reduce its original output tax liability against the financial credit note.\n\nDuring January 2026, AIS purchases raw materials for ₹12,00,000 plus GST of ₹2,16,000, supported by valid tax invoices. The materials are received and used exclusively for taxable manufacturing operations. AIS pays the supplier within 180 days. In addition, it distributes some finished products as unconditional gifts to business associates without charging consideration. The related input tax credit had been availed earlier. AIS also receives a commercial credit note from another supplier for a post-sale discount, without any reduction in the supplier's original tax liability or the tax charged in the original invoice.\n\nAIS maintains separate records for each transaction and has filed its regular returns. Ignore any other transactions, exemptions and adjustments not specifically mentioned.

Examine the GST implications of the permanent transfer of the testing machine by AIS to ZCPL without consideration. Which of the following statements is correct?

1. Yes, it is a supply because the companies are separately registered and the transfer of a business asset on which ITC was availed falls under Schedule I. (correct answer)
2. Haryana, because the supplier and recipient are both registered in Haryana and the physical movement of goods originally commenced from the supplier's registered warehouse in Gurugram.
3. Yes, it is a supply only if the subsidiary pays consideration, because a permanent transfer of a capital asset cannot independently constitute a supply.
4. No, it is not a supply because a wholly owned subsidiary and its holding company are treated as the same person for GST purposes.

Answer: A — Yes, it is a supply because the companies are separately registered and the transfer of a business asset on which ITC was availed falls under Schedule I.

Working. Permanent transfer of a business asset + ITC previously availed = supply even without consideration.

Explanation. Schedule I treats permanent transfer or disposal of business assets on which ITC has been availed as supply even without consideration. Further, AIS and ZCPL are separate legal persons and their relationship falls within the related-person framework. The most tempting wrong option is b: absence of consideration does not prevent a transaction covered by Schedule I from being treated as supply. Their common premises do not alter this result.

Where it goes wrong. Confusing the general requirement of consideration with transactions specifically covered by Schedule I.

Authority. Section 7(1)(c); Schedule I, paragraph 1; Section 2(84); Section 15(5)

Question 10 · 2 marks · Chapter 6 - Time of Supply · hard

Determine the time of supply of the customised production machine for the purpose of payment of GST by AIS. Consider the advance received on 5 August 2025 and the subsequent dispatch and invoice.

1. Rs. 5,00,000, because the contract price agreed between the parties is the transaction value under section 15(1) and pre-delivery testing charges cannot be added under section 15(2) of the Central Goods and Services Tax Act, 2017.
2. 19 August 2025, because Notification No. 66/2017 CT prescribes payment of GST on outward supplies of goods by reference to the date of invoice or the last date on which the invoice ought to have been issued. (correct answer)
3. 10 September 2025, because GST becomes payable only when the entire consideration is received by the supplier.
4. 19 August 2025, because receipt of advance is outside the scope of consideration under section 2(31) and the invoice date is therefore irrelevant.

Answer: B — 19 August 2025, because Notification No. 66/2017 CT prescribes payment of GST on outward supplies of goods by reference to the date of invoice or the last date on which the invoice ought to have been issued.

Working. Advance: 05.08.2025; invoice and dispatch: 19.08.2025. Special procedure under Notification No. 66/2017 CT applies. Time of supply for payment of GST: 19.08.2025.

Explanation. Although section 12(2) ordinarily considers the earlier of the invoice date or payment date, Notification No. 66/2017 CT prescribes the special procedure for registered suppliers of goods, excluding composition suppliers and specified actionable-claim suppliers. Under this procedure, GST on outward supplies of goods is payable with reference to the invoice date or the date on which the invoice ought to have been issued. Hence, 19 August is the applicable date. Option a applies the general provision without considering the special procedure.

Where it goes wrong. Applying the ordinary earlier-of-two-dates rule without considering the special procedure for outward supplies of goods.

Authority. Section 12(2)(a); Section 31(1); Notification No. 66/2017 CT dated 15.11.2017

Question 11 · 2 marks · Chapter 6 - Time of Supply · medium

What is the time of supply of the technical consultancy service provided by AIS, assuming the advance was received in relation to the identified service?

1. 10 October 2025, because the advance was received before the service was completed and before the invoice was issued. (correct answer)
2. 20 November 2025, because the time of supply of services is invariably the date of actual provision of service.
3. 25 November 2025, because the invoice date always determines the time of supply where an invoice is issued within the prescribed period.
4. 1 October 2025, because Notification No. 66/2017 CT exempts all registered taxpayers from paying GST on advances for goods and services.

Answer: A — 10 October 2025, because the advance was received before the service was completed and before the invoice was issued.

Working. Advance receipt: 10.10.2025; service: 20.11.2025; invoice: 25.11.2025. Earlier relevant date under section 13(2): 10.10.2025.

Explanation. Under section 13(2), the time of supply of services under forward charge is generally the earlier of the invoice date, where the invoice is timely issued, and the date of receipt of payment. The advance was received on 10 October, before the service was provided and the invoice issued. Therefore, 10 October determines the time of supply. Notification No. 66/2017 CT provides relief for goods, not services.

Where it goes wrong. Extending the relief for advances received against goods to services.

Authority. Section 13(2); Section 31(2); Notification No. 66/2017 CT dated 15.11.2017

Question 12 · 2 marks · Chapter 7 - Value of Supply · hard

Determine the treatment of the ₹2,00,000 financial credit note granted by the manufacturer to Nova Electrical Traders and the implications for the value of supply made by the manufacturer to Nova.

1. Rs. 1,20,000, because rent-a-cab service is eligible for input tax credit when used exclusively for transportation of factory workers during night shifts under statutory requirement.
2. The transaction value remains ₹24,00,000, but the discount constitutes consideration for an independent promotional service supplied by Nova to the manufacturer.
3. The transaction value remains ₹24,00,000 because the financial credit note does not satisfy the conditions for reducing the value under section 15(3), and the ordinary promotional activities do not constitute a separate service merely because the discount was granted. (correct answer)
4. The transaction value becomes ₹26,00,000 because every financial credit note received by a dealer is treated as additional consideration for the original supply.

Answer: C — The transaction value remains ₹24,00,000 because the financial credit note does not satisfy the conditions for reducing the value under section 15(3), and the ordinary promotional activities do not constitute a separate service merely because the discount was granted.

Working. Original transaction value = ₹24,00,000. No qualifying prior agreement or other required conditions for deduction are established. Financial credit note = ₹2,00,000. Taxable transaction value remains ₹24,00,000.

Explanation. Under section 15(3), a post-supply discount can be excluded from value only when the statutory conditions, including the prior agreement and the required linkage to relevant invoices, are satisfied. The facts do not establish those conditions. Circular No. 251/08/2025 GST also clarifies that ordinary promotional activities undertaken by a dealer for its own sales do not automatically amount to a separate service. Option b incorrectly treats routine dealer promotion as an independent taxable supply.

Where it goes wrong. Confusing a financial credit note with a qualifying post-supply discount and confusing ordinary promotional activity with a separately contracted service.

Authority. Section 15(1); Section 15(3); Circular No. 251/08/2025 GST dated 12.09.2025; Section 2(31)

Question 13 · 2 marks · Chapter 8 - Input Tax Credit · hard

Consider the ITC implications of the commercial credit note received by AIS and the unconditional gifts distributed by AIS. Which statement correctly describes the position?

1. Noida, because the billboard is an immovable structure fixed to earth and advertising display services in relation to immovable property are governed by section 12(3) of the IGST Act, 2017.
2. AIS need not reverse ITC attributable to the commercial credit note merely because of the financial adjustment, but ITC attributable to goods distributed as unconditional gifts is blocked. (correct answer)
3. AIS must reverse all ITC on its January purchases because any commercial credit note automatically reduces the taxable value of the original purchases.
4. AIS may retain ITC on both transactions because every purchase made in the course of business qualifies for credit under section 16.

Answer: B — AIS need not reverse ITC attributable to the commercial credit note merely because of the financial adjustment, but ITC attributable to goods distributed as unconditional gifts is blocked.

Working. Commercial credit note without reduction of original tax liability: no corresponding ITC reversal merely on that ground. Unconditional gifts: ITC blocked under section 17(5)(h).

Explanation. Circular No. 251/08/2025 GST clarifies that the recipient is not required to reverse ITC merely because a supplier issues a financial or commercial credit note without reducing its original tax liability. Conversely, section 17(5)(h) blocks ITC on goods disposed of by way of gift or free samples. Option d overlooks the specific statutory restriction applicable to gifts, notwithstanding the general business-use condition under section 16.

Where it goes wrong. Assuming that the general business-use eligibility condition overrides the specific blocked-credit provision for gifts.

Authority. Section 16(1); Section 17(5)(h); Circular No. 251/08/2025 GST dated 12.09.2025

Question 14 · 2 marks · Chapter 8 - Input Tax Credit · medium

AIS has availed ITC of ₹2,16,000 on eligible raw materials received in January 2026 and used exclusively for taxable manufacturing operations. The supplier is paid within 180 days. Which statement correctly describes the eligibility of this credit?

1. ITC is unavailable because the raw materials are capitalised in the books of account, even though they are used in taxable manufacturing.
2. ITC is available only if AIS establishes a one-to-one correlation between the raw materials purchased and each individual taxable outward supply.
3. ITC of ₹2,16,000 is available, subject to fulfilment of the statutory conditions under section 16, because the goods are received, supported by valid tax invoices, used for business and paid for within 180 days. (correct answer)
4. ITC is available only after the supplier files its annual return, irrespective of receipt of goods, possession of the invoice and payment of consideration.

Answer: C — ITC of ₹2,16,000 is available, subject to fulfilment of the statutory conditions under section 16, because the goods are received, supported by valid tax invoices, used for business and paid for within 180 days.

Working. Eligible ITC = ₹2,16,000. Goods received, valid invoice available, business use exclusively for taxable supplies and payment within 180 days. Subject to the remaining statutory conditions, full ITC is available.

Explanation. Section 16(2) prescribes the relevant conditions for taking ITC, including possession of a tax invoice, receipt of goods, payment of tax to the Government and furnishing of the prescribed return. The 180-day payment condition is also satisfied. Since the materials are used exclusively for taxable business supplies, no apportionment or blocked-credit restriction arises on the stated facts. Option b incorrectly introduces a one-to-one correlation requirement, which GST law does not prescribe.

Where it goes wrong. Confusing the general eligibility conditions with a non-existent one-to-one correlation requirement.

Authority. Section 16(1); Section 16(2); Second proviso to section 16(2); Section 17(1)

Question 15 · 2 marks · Chapter 15 - Returns · medium

Scenario. Mitra Engineering Pvt. Ltd. is a registered regular taxpayer having an aggregate turnover of ₹1.96 crore during the financial year 2025-26. Its turnover includes taxable domestic supplies, exempt supplies and inter-State supplies, and excludes GST and compensation cess. The company has furnished all applicable monthly returns and discharged its tax liability. It has not opted for the composition scheme and is not covered by any special category of registration. Its management is considering whether it must prepare and furnish an annual return for FY 2025-26. The company had also furnished its annual return for the preceding financial year.

Determine whether Mitra Engineering Pvt. Ltd. is required to furnish an annual return for FY 2025-26.

1. Yes, because every registered person making taxable supplies is required to furnish an annual return irrespective of aggregate turnover.
2. Yes, because the exemption applies only to taxpayers whose aggregate turnover is strictly less than ₹2 crore.
3. No, because all regular taxpayers having aggregate turnover below ₹5 crore are permanently exempt from furnishing annual returns under section 44.
4. No, because the statutory notification exempts registered persons having aggregate turnover up to ₹2 crore in any financial year from furnishing the annual return for that financial year, effective for FY 2024-25 onwards. (correct answer)

Answer: D — No, because the statutory notification exempts registered persons having aggregate turnover up to ₹2 crore in any financial year from furnishing the annual return for that financial year, effective for FY 2024-25 onwards.

Working. Aggregate turnover = ₹1.96 crore. Exemption threshold = up to ₹2 crore. ₹1.96 crore is within the prescribed threshold. Annual return for FY 2025-26 is not required.

Explanation. Section 44(1) empowers the Commissioner, on the recommendations of the Council, to exempt specified classes of registered persons from furnishing annual returns. Notification 15/2025-CT provides this exemption to registered persons whose aggregate turnover in a financial year is up to ₹2 crore, effective from FY 2024-25 onwards. Mitra's turnover of ₹1.96 crore falls within the threshold. Option b incorrectly interprets the inclusive expression 'up to' as excluding ₹2 crore.

Where it goes wrong. Misinterpreting the inclusive ₹2 crore threshold and overlooking the statutory update.

Authority. Section 44(1); Notification 15/2025-CT

Question 16 · 1 marks · Chapter 13 - Payment of Tax · hard

Scenario. Rudra Manufacturing Ltd. is a registered regular taxpayer. Its value of taxable supplies, excluding exempt and zero-rated supplies, during October 2026 is ₹58 lakh. The company is subject to rule 86B. Its cumulative output tax liability from April to October 2026 is ₹20 lakh, of which ₹1.50 lakh has already been discharged through the electronic cash ledger. No other exception to rule 86B applies. The company proposes to discharge the remaining October output tax liability entirely through its electronic credit ledger.

Determine whether Rudra Manufacturing Ltd. can discharge its entire October 2026 output tax liability through the electronic credit ledger, considering the amended exceptions to rule 86B effective from 01.02.2026.

1. Yes, because rule 86B does not apply to registered manufacturers whose taxable supplies exceed ₹50 lakh in a month.
2. No, because the value of taxable supplies exceeds ₹50 lakh in October 2026, and rule 86B invariably restricts ITC utilisation to 99% of the output tax liability.
3. No, because the exception under rule 86B requires cash payment exceeding 1% of the current month's output tax liability rather than the cumulative liability up to that month.
4. Yes, because its cumulative cash payment of ₹1.50 lakh exceeds 1% of its cumulative output tax liability of ₹20 lakh, and it therefore falls within an exception to rule 86B. (correct answer)

Answer: D — Yes, because its cumulative cash payment of ₹1.50 lakh exceeds 1% of its cumulative output tax liability of ₹20 lakh, and it therefore falls within an exception to rule 86B.

Working. Monthly taxable supplies = ₹58 lakh, exceeding ₹50 lakh. Cumulative output tax liability = ₹20,00,000. One per cent = ₹20,000. Cumulative cash payment = ₹1,50,000. Since ₹1,50,000 exceeds ₹20,000, the exception applies. Rule 86B restriction is inapplicable.

Explanation. Rule 86B generally restricts ITC utilisation to 99% of output tax liability where the monthly value of taxable supplies, excluding exempt and zero-rated supplies, exceeds ₹50 lakh. However, the amendment effective from 01.02.2026 provides an exception where cumulative output tax discharged through the electronic cash ledger exceeds 1% of cumulative output tax liability up to the relevant month in the current financial year. Here, ₹1.50 lakh exceeds ₹20,000 (1% of ₹20 lakh). Hence, the restriction does not apply. Option c incorrectly uses the current month's liability instead of the cumulative figure.

Where it goes wrong. Applying the monthly ₹50 lakh threshold without examining the amended cumulative cash-payment exception.

Authority. Rule 86B of the CGST Rules; Notification No. 20/2025 CT dated 31.12.2025; Section 49(4)