Fiscal Policy and Revenue (Economic Development) Part-III

Total Questions: 50

41. 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? [I.A.S. (Pre) 2018]

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 belo

Correct Answer: (d) Neither 1 nor 2
Solution:Equalization tax is a levy imposed on certain specified digital services provided by a non-resident to a resident in India, which was introduced by Chapter-VIII of the Finance Act, 2016. It does not form a part of Income Tax Act, 1961 and it has its existence similar to Service Tax under a Finance Act.

Since equalization tax is outside the scope of 'Double Taxation Avoidance Agreements' (as it is not a part of Indian Income Tax), the non-resident entities that offer online advertisement services in India cannot claim a tax credit in their home countries under these agreements. Hence, both of the given statements are incorrect.

42. Tax on sale of inherited property is: [Jharkhand P.C.S. (Pre) 2021]

Correct Answer: (a) Capital Gain Tax
Solution:Tax on sale of inherited property is called 'Capital Gain Tax'. Any profit or gain that arises from the sale of a 'capital asset' is a capital gain. Capital gains are not applicable to an inherited property as there is no sale, only a transfer of owner- ship.

Under Section 56 (ii) of the Income Tax Act, there is no inheritance tax applicable in India irrespective of the cost of the inherited property. However, if the person who inherited the asset decides to sell it, capital gains tax will be applicable.

43. Under which of the following circumstances may gains' arise? [I.A.S. (Pre) 2012]

1. When there is an increase in the sales of a product.

2. When there is a natural increase in the value of the property owned.

3. When you purchase a painting and there is a growth in its value due to increase in its popularity.

Select the correct answer using the code given below:

Correct Answer: (b) 2 and 3 only
Solution:Capital gain is an increase in the value of a capital asset (investment or real estate) that gives it a higher worth than the purchase price. The gain is the difference between a higher selling price and a lower purchase price. The increase in the sales of a product does not mean increase in the selling price of the product.

Capital Assets: These include a wide range of items, such as land, buildings, jewelry, stocks, mutual funds, and even virtual digital assets like cryptocurrencies.
Types of Capital Gains:
Short-Term Capital Gains (STCG): Gains from assets held for a short period (typically less
than 36 months, but 12 months for listed equity shares and equity-oriented mutual funds).
Long-Term Capital Gains (LTCG): Gains from assets held for a longer period (typically 36 months or more, but 12 months for listed equity shares and equity-oriented mutual funds).

44. The share of Income tax in Gross Domestic Product in the year 2013-14 was: [Chhattisgarh P.C.S. (Pre) 2015*]

Correct Answer: (a) 2.1%
Solution:As per the question year, option (a) was the correct answer. In the Interim Budget estimates 2024-25, revenue from Income tax is estimated at Rs. 1156000 crore, which is 3.53 percent of GDP while in revised estimates of 2023-24, it was at 3.45 percent of GDP. The collections from Income tax are expected to increase by 13.1% in 2024-25 over the previous year's revised estimates.

45. At present, share of direct taxes in Gross National Product (GNP) in India is about- [U.P. Lower Sub. (Pre) 2004*]

Correct Answer: (b) 5%
Solution:As per the question year, option (b) was the correct answer. As per the Interim Union Budget 2024-25, share of direct and indirect taxes as % of the GDP are as follows:
YearDirect TaxesIndirect Taxes
2022-23 (Actuals)6.1%5.1%
2023-24 (R.E.)6.6%5.0%
2024-25 (B.E.)6.7%4.9%

46. What was the Tax-GDP ratio in the financial year 2021- 22 in India? [B.P.S.C. (Pre) (Re. Exam) 2022]

Correct Answer: (c) 11.5%
Solution:As per the question year, tax-GDP Ratio of Integrated General Government (Centre + State) in India was about 15%. In the Interim Budget estimates 2024-25, gross tax-GDP ratio of Centre is estimated at about 11.7% in 2024-25, which is higher in comparison to B.E. of 11.1% in 2023-24. It stood at 11.6% in R.E. of 2023-24, 11.2% in 2022-23 and 11.5% in 2021-22.

47. Tax-GDP ratio in India in 2008-09 was estimated at: [U.P.P.C.S. (Mains) 2009]

Correct Answer: (d) 16.39 percent
Solution:In India, in the year 2008-09 tax-GDP ratio of Integrated General Government (Centre + State) was about 16.5%. For the latest data, As per the question year, tax-GDP Ratio of Integrated General Government (Centre + State) in India was about 15%.

In the Interim Budget estimates 2024-25, gross tax-GDP ratio of Centre is estimated at about 11.7% in 2024-25, which is higher in comparison to B.E. of 11.1% in 2023-24. It stood at 11.6% in R.E. of 2023-24, 11.2% in 2022-23 and 11.5% in 2021-22.

48. A decrease in tax to-GDP ratio of a country indicates which of the following? [I.A. S. (Pre) 2015]

1. Slowing economic growth rate

2. Less equitable distribution of National Income

Select the correct answer using the code given below:

Correct Answer: (d) Neither 1 nor 2
Solution:A tax-to-GDP ratio is a gauge of a nation's tax revenue relative to the size of its economy as measured by gross domes- tic product (GDP). Slowing economic growth rate may result in lower tax collection but it does not necessarily mean decrease in tax-GDP ratio. Whether the fall in tax collection is proportionate to the fall in GDP cannot be known without knowing the all indices.

Hence, statement 1 is incorrect. If the distribution of national income is not equitable, it may mean a perennial low tax-GDP ratio, but it could not mean a decrease in tax-GDP ratio over the years.

A decrease in tax-GDP ratio is a short-term phenomenon and it can be affected by a number of reasons including tax avoidance,tax evasion, less efficient methods of tax collection etc. as well as by structural reasons. Hence, statement 2 is also incorrect.

Note: UPSC had given option (a) as the correct answer of this question in its official answer key.

49. A redistribution of income in a country can be best brought about through: [I.A.S. (Pre) 1996]

Correct Answer: (a) progressive taxation combined with progressive expenditure
Solution:Redistribution of income and wealth are respectively the transfer of income and wealth (including physical property) from some individuals to others by means of taxation, monetary policies, welfare policies, public services, land reforms etc. This can be achieved with a combination of progressive taxation and progressive expenditure.

A progressive tax is one where the average tax burden increases with income. It applies higher tax rates to higher levels of income. High-income families pay a disproportionate high share of the tax burden, while low-and middle-income taxpayers shoulder a relatively small tax burden.

Regarding the distributive impact of public expenditure, the principle of maximum social welfare should be the underlying criteria of public spending. Therefore, progressive public expenditure (like free medical aid, free education, subsidized houses etc. to poors) is the best antidote to reduce income inequality existing in the society.

50. What kind of Tax System is found in India? [Uttarakhand P.C.S. (Pre) 2021]

Correct Answer: (b) Degressive
Solution:The tax system in India is progressive in nature but overall degressive. In the degressive tax system, the tax rate is increased firstly with the increase in income and then, the rate remains flat or constant with further increase in income.

There are six slabs of Income tax applicable in India i.e. nil 5%, 10%, 15%, 20% and 30% which is progressive in nature up to a certain limit, but later on, it becomes constant which makes it overall degressive.