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Indian Economy for IAS Exam: Tax structure in India

Mar 6, 2017 19:19 IST

    Economy IAS QuestionsIndia Economy is one of the vital subjects of IAS Exam. The aspirants always have a better chance to score well in Indian Economy but it requires a better understanding of various terms of the subject. Here, we have provided Indian Economy IAS questions based on the topic- Tax structures in India.

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    1. Which of the following is incorrect regarding the tax?
    a. The point where tax looks being imposed is known as the incidence of Tax.
    b. The point where tax makes its effect felt is known as the impact of tax
    c. The tax which has incidence and impact both at the same point is the indirect tax
    d. The tax which has incidence and impact at the different points is the indirect tax

    Answer: c

    Explanation:

    The point where tax looks being imposed is known as the incidence of Tax—the event of tax imposition while the point where tax makes its effect felt is known as the impact of tax—the after effect of tax imposition.

    Direct Tax
    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.

    Indirect Tax
    The tax which has incidence and impact at the different points is the indirect tax—the person who is hit does not bleed6 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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    2. Consider the following statements regarding the progressive taxation structure:
    I. The method of progressive taxation has increasing rates of tax for increasing value or volume on which the tax is being imposed.
    II. The idea behind the progressive taxation is less tax on the people who earn less and higher tax on the people who earn more.
    III. This method is believed to discourage more earnings by the individual to support low growth and development unintentionally.

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

    Answer: d

    Explanation:

    Progressive Taxation is a method having 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.

    Complete study material of ECONOMIC SURVEY 2016-17

    3. Consider the following statements regarding the regressive taxation:
    I. The regressive taxation is just opposite of progressive taxation method having decreasing rates of tax for increasing value or volume on which the tax is being imposed.
    II. This 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. Only II
    c. Both I and II
    d. Neither I nor II

    Answer: b

    Explanation:

    This 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.

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    4. Which of the following is/are the characteristics of a good tax system?
    i.  Fairness
    ii. Efficiency
    iii. Administrative simplicity
    iv. Flexibility

    Codes:
    a. i, ii, and iv
    b. iii  and iv
    c. i, iii, and iv
    d. All of the above

    Answer: d

    Explanation:

    There has always been a debate among economists and policymakers on the issue of design of the tax system. Taxation in developing economies has been even more debated as the trade-off assessment generates enough controversy. Main debatable issues in the design of a tax system are whether progressive or regressive taxation, direct tax or indirect tax collections should be higher, whether revenue deficit is better, etc. The controversies set apart; there is a broad consensus on five principles of a good tax system, among economists and the policy making experts- Fairness, efficiency, administrative simplicity, flexibility and transparency.

    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. Though fairness (i.e., the first criteria of a good tax system) 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. A good tax system has the scope of desirable modifications in it if there is any such need.

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    5. VAT is a method of tax collection as well as name of a state level tax (at present) in India. Consider the following statements regarding the value added tax:
    I. A tax collected at every stage of value addition, i.e., either by production or distribution is known as value added tax.
    II. VAT method of tax collection is different from the non-VAT method in the sense that it is imposed and collected at different points of value addition chain, i.e., multi-point tax collection.
    III. Generally, the VAT have a ‘cascading effect’ on the prices of goods it does not increase inflation.

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

    Answer: d

    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. From production to the level of sale, there are many points where value is added in all goods. VAT method of tax collection is different from the non-VAT method in the sense that it is imposed and collected at different points of value addition chain, i.e., multi-point tax collection.

    That is why there is no chance of imposing tax upon tax which takes place in the non-VAT method—single point tax collection. This is why VAT does not have a ‘cascading effect’ on the prices of goods it does not increase inflation—and is therefore highly suitable for an economy like India where due to high level of poverty large number of people lack the market level purchasing capacity. It is a pro-poor tax system without being anti-rich because rich people do not suffer either.

    IAS Prelims 2017- GS Economy complete Study Material

    DISCLAIMER: JPL and its affiliates shall have no liability for any views, thoughts and comments expressed on this article.

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