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GS Economy Quiz for IAS Prelims – Tax Structure in India

Sep 26, 2016 15:43 IST

    From UPSC IAS Examination point of view, the Questions based on Indian Economy are very important. The UPSC IAS aspirants must be aware of the every perspective of Indian Economy either it is static or dynamic.

    1.    Consider the following statements regarding definition of the term ‘tax’:
    I.    Modern economics defines tax as a mode of income redistribution.
    II.    The usual meaning of tax people think is that a tax is imposed by the government to fulfil its important obligations on the expenditure front.

    Which of the following statement(s) is/are correct?
    a.    Only I
    b.    Only II
    c.    Both I and III
    d.    Neither I nor II

    Answer: c

    Explanation:


    According to the modern economists tax can be defined as a mode of income redistribution. There might be other ways also to look at it—the usual meaning of tax people think is that a tax is imposed by the government to fulfil its important obligations on the expenditure front.

    2.    Which of the following statements is correct regarding the types of taxes?
    a.    The tax which has incidence and impact both at the same point is the indirect tax.
    b.    The tax which has incidence and impact at the different points is the indirect tax.
    c.    Sales tax is an example of direct tax which is directly imposed on the consumers.
    d.    Interest Tax is an example of Indirect tax which indirectly affects the income of an individual.

    Answer: b

    Explanation:


    The tax which has incidence and impact both at the same point is the direct tax—the person who is hit, the same person bleeds. As for example income tax, interest tax, etc. Whereas the tax which has incidence and impact at the different points is the indirect tax—the person who is hit does not bleed someone else bleeds.

    As, for example, excise, sales tax, etc which are imposed on either producers or the traders, but it is the general consumers who bear the burden of tax.

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    3.    Consider the following statements regarding the ‘Progressive taxation’:
    I.    Progressive taxation method has increasing rates of tax for increasing value or volume on which the tax is being imposed.
    II.    Progressive taxation method has increasing rates of tax for decreasing value or volume on which the tax is being imposed.
    III.    The idea of Progressive taxation is less tax on the people who earn less and higher tax on the people who earn more.

    Which of the following statement(s) is/are correct?
    a.    Only I
    b.    I and II
    c.    I and III
    d.    All of the above

    Answer: c

    Explanation:


    Progressive taxation method has increasing rates of tax for increasing value or volume on which the tax is being imposed. Indian income tax is a typical example of it. The idea here is less tax on the people who earn less and higher tax on the people who earn more—classifying income earners into different slabs. This method is believed to discourage more earnings by the individual to support low growth and development unintentionally.

    Being poor is rewarded while richness is punished. Tax payers also start evading tax by showing lower unreal income. But from different angles this tax is pro-poor and taxes people according to their affordability/sustainability. This is the most popular taxation method in the world and a populist one, too.

    4.    Consider the following statements regarding the ‘Regressive taxation’:
    I.    Regressive taxation method has decreasing rates of tax for increasing value or volume on which the tax is being imposed.
    II.    For regressive taxation are not any permanent or specific sectors for such taxes.
    III.    The regressive taxation method while appreciated for rewarding the higher producers or income-earners is criticised for being more taxing on the poor and low-producers.

    Which of the following statement(s) is/are correct?
    a.    Only I
    b.    I and II
    c.    I and III
    d.    All of the above

    Answer: d

    Explanation:


    Regressive taxation is just opposite to the progressive method having decreasing rates of tax for increasing value or volume on which the tax is being imposed. There are not any permanent or specific sectors for such taxes. As a provision of promotion, some sectors might be imposed with regressive taxes. As for example, to promote the growth and development of the small scale industries, India at one time had regressive excise duty on their productions—with increasing slabs of volume they produced, the burden of tax used to go on decreasing.

    This method while appreciated for rewarding the higher producers or income-earners is criticised for being more taxing on the poor and low-producers. This is not a popular mode of taxation and not as per the spirit of the modern democracies.

    5.    Consider the following statements regarding the ‘Proportional taxation’:
    I.    Proportional taxation has fixed rates for every level of income or production; they are neutral from the poor or rich point view or from the levels of production point of view.
    II.    Generally, proportional taxation mode is used as a complementary method with either progressive or regressive taxation.
    III.    If not converted into proportional taxes, every regressive tax will go on increasing and similarly every progressive tax will decrease to zero, becoming completely a futile tax method.

    Which of the following statement(s) is/are correct?
    a.    Only I
    b.    I and II
    c.    I and III
    d.    All of the above

    Answer: d

    Explanation:


    In such taxation method, there is neither progression nor regression from the rate of taxes point of view. Such taxes have fixed rates for every level of income or production; they are neutral from the poor or rich point view or from the levels of production point of view. Usually, this is not used by the economies as an independent method of taxation.

    Generally, this mode is used as a complementary method with either progressive or regressive taxation. If not converted into proportional taxes, every progressive tax will go on increasing and similarly every regressive tax will decrease to zero, becoming completely a futile tax method. That is why every tax, be it progressive or regressive in nature, must be converted into proportional taxes after a certain level.

    6.    Which of the following statements is incorrect regarding a good tax system:
    a.    In a good tax system the individuals in identical or similar situations paying identical or similar taxes is known as horizontal equity.
    b.    In a good tax system the ‘better off’ people pay fewer taxes it is known as vertical equity.
    c.    A good tax system has the scope of desirable modifications in it if there is any such need.
    d.    As per the transparency factor of a good tax system-How much tax taxpayers are actually paying and what are they getting against it in the form of the public services should be ascertainable.

    Answer: b

    Explanation:


    The first criteria of a good tax system is fairness which is not always easy to define, economists suggest inclusion of two elements in the tax system to make it fair namely, horizontal equity and vertical equity. Individuals in identical or similar situations paying identical or similar taxes are known as horizontal equity. When ‘better off’ people pay more taxes it is known as vertical equity.

    How much tax taxpayers are actually paying and what are they getting against it in the form of the public services should be ascertainable i.e. the transparency factor.

    7.    Consider the following statements regarding efficiency of a good tax system:
    a.    A good tax system raises revenue with the least cost on the taxpayers and least interference on the allocation of resources in the economy.
    b.    A good tax system raises revenue with the most cost on the taxpayers and most interference on the allocation of resources in the economy.
    c.    The tax system does not affects the economic decisions of individuals and groups by either encouraging or discouraging them to save spend, invest, etc.
    d.    Taxes have no correlation in order to improve efficiency of an economy.

    Answer: a

    Explanation:


    Efficiency of a tax system is its potential to affect or interfere the efficiency of the economy. A good tax system raises revenue with the least cost on the taxpayers and least interference on the allocation of resources in the economy.

    The tax system affects the economic decisions of individuals and groups by either encouraging or discouraging them to save spend, invest, etc. Taxes can improve efficiency of economy—taxes on pollution or on smoking give revenue to the government and serves broader social purposes, too. This is known as the double dividend of a tax.

    8.    Consider the following statements regarding value added tax (VAT):
    I.    A tax collected at every stage of value addition, i.e., either by production or distribution is known as value added tax.
    II.    Production of goods or services is nothing but stages of value additions where production of goods is done by the industrialists or manufacturers.

    Which of the following statement(s) is/are correct?
    a.    Only I
    b.    Only II
    c.    Both I and III
    d.    Neither I nor II

    Answer: c

    Explanation:


    The value added tax (VAT) is a method of tax collection as well as name of a state level tax (at present) in India. A tax collected at every stage of value addition, i.e., either by production or distribution is known as value added tax. The name itself suggests that this tax is collected on the value addition (i.e., production).

    Production of goods or services is nothing but stages of value additions where production of goods is done by the industrialists or manufacturers. But these goods require value addition by different service providers/ producers (the agents, the wholesalers and the retailers) before they reach the consumers.

    9.    Which of the following statement is true about the VAT system of taxation:
    a.    VAT has a ‘cascading effect’ on the prices of goods it increases inflation—and is therefore not suitable for an economy like India.
    b.    Implementation of VAT will improve the purchasing capacity and so living standard of the poor people.
    c.    To bring in uniformity at the state-level taxes, VAT was a necessary step in India.
    d.    By implementing VAT method of indirect tax collection, it becomes almost impossible to go for large scale tax evasion.

    Answer: a

    Explanation:


    Due to single point tax collection, Indian indirect tax collection system was price-increasing (having cascading effect on the price) which was highly detrimental to the poor masses. Implementation of VAT will improve the purchasing capacity and so living standard of the poor people.

    India is having a federal political system where side by side the central government states have also been given power to impose taxes and collect them. At the central level, there had been uniformity of taxes for the economy. But there was no ‘uniformity’ at the state level taxes (i.e., state excise, sales tax, entertainment tax, etc.). This was detrimental to the development of a single market for Indian economy as a whole. India basically had many markets but no Indian market as such. To bring in uniformity at the state-level taxes, VAT was a necessary step in India.

    10.    Which of the following committees is concerned with the reform of Indirect tax reform in India?
    a.    Narasimham Committee
    b.    Chelliah Committee
    c.    Alagh Committee
    d.    Abid Hussain Committee

    Answer: b

    Explanation:


    With the aiming to reform the India’s tax system, the Government had appointed a Tax Reform Committee under the Raja Chelliah. The Tax reform committee came up with three reports respectively in the years 1991, 1992 and 1993.

    Raja Chelliah's recommendations provided the basis for the direct taxes emerging as the major component of tax revenues, and, as a consequence, the tax system becoming less regressive. By pushing for a slashing of the tax rates and the number of slabs in respect of corporate as well as personal incomes, he got the system modified to encourage tax payment rather than tax avoidance. He not only visualised and concretised VAT (Value Added Tax) but also negotiated with the State governments for adopting it.

    With the Goods and Services Tax (GST) expected to be effective shortly, India is all set to become a single market, with common tax rates across the States and on almost all goods and services. In the realm of fiscal federalism, Chelliah's contribution lay in switching to normative approach to the sharing of tax revenue, from what used to be a gap-filling exercise.

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