Fiscal Policy & Revenue

Who among the following is the Chairman of the Fourteenth Finance Commission?

[amp_mcq option1=”C. Rangarajan” option2=”Vijay Kelkar” option3=”Y. V. Reddy” option4=”Rakesh Mohan” correct=”option3″]

Y. V. Reddy is the Chairman of the Fourteenth Finance Commission.

Dr. Y. V. Reddy, former Governor of the Reserve Bank of India, was appointed as the Chairman of the 14th Finance Commission. The Commission was constituted in January 2013 and submitted its report in December 2014, covering the period from April 1, 2015 to March 31, 2020.

C. Rangarajan chaired the 12th Finance Commission (2005-2010), and Vijay Kelkar chaired the 13th Finance Commission (2010-2015). Finance Commissions are constitutional bodies in India that make recommendations on the distribution of tax revenues between the Union and the States, as well as between the States themselves. N. K. Singh is the Chairman of the 15th Finance Commission (2020-2025).

Which one of the following statements is not correct?

[amp_mcq option1=”Creation of National Investment and Infrastructure Fund (NIIF) was announced in the Union Budget, 2015-16.” option2=”NIIF is a fund for enhancing infrastructure facility in the country.” option3=”NIIF and NIF (National Investment Fund) are the names of the same organization.” option4=”NIIF can have more than one alternative investment fund.” correct=”option3″]

The correct answer is C, as NIIF and NIF are different entities.

National Investment and Infrastructure Fund (NIIF) was announced in the Union Budget 2015-16 as a fund to attract investment into the country’s infrastructure sector. National Investment Fund (NIF) was created in 2005 with the proceeds from disinvestment of central public sector enterprises. These two funds serve different purposes and are distinct entities.

NIIF is registered as an Alternative Investment Fund (AIF) under SEBI regulations. It manages various funds (like the Master Fund, Fund of Funds, Strategic Opportunities Fund) which can attract different types of investors and focus on various infrastructure sub-sectors. The NIF was primarily used for investment in social sector schemes and capital expenditure requirements of profitable PSUs.

Which of the following components of Central Government taxes on petroleum products is/are not shareable with the States?

• 1. Basic Excise Duty
• 2. Additional Excise Duty
• 3. Special Additional Excise Duty

Select the correct answer using the code given below.

[amp_mcq option1=”1 and 2 only” option2=”1, 2 and 3″ option3=”3 only” option4=”2 and 3 only” correct=”option3″]

D) 2 and 3 only

– Under the constitutional framework (Article 270) and Finance Commission recommendations, certain Union taxes are shareable with states (part of the divisible pool), while others are not (like surcharges and cesses levied for specific purposes).
– Basic Excise Duty (BED), now often termed Union Excise Duty, levied on petroleum products by the Central Government, is typically shareable with the states as part of the divisible pool as per the recommendations of the Finance Commission. Thus, statement 1 is shareable.
– Additional Excise Duty (AED) and Special Additional Excise Duty (SAED) levied by the Central Government on petroleum products fall outside the divisible pool and are not shareable with the states. These often take the form of cesses or surcharges meant for specific purposes (like infrastructure development). Thus, statements 2 and 3 are not shareable.

– States levy their own taxes on petroleum products, primarily Value Added Tax (VAT) or Sales Tax, which are a significant source of revenue for them. The debate about fuel prices often involves the respective shares of the Centre (through excise duties, cesses) and States (through VAT).

Which one of the following statements regarding GST is not correct?

[amp_mcq option1=”Amendment 115 to the Constitution of India kept alcohol for human use and five petroleum products outside the ambit of GST.” option2=”Amendment 122 to the Constitution of India kept only alcohol for human use outside the ambit of GST.” option3=”Precious metals are taxed at a rate of 1% under GST.” option4=”Unworked diamond is taxed at a rate of 0.25%.” correct=”option3″]

C) Precious metals are taxed at a rate of 1% under GST.

– Statement C is incorrect. Under the Goods and Services Tax (GST) regime in India, precious metals like gold, silver, and platinum are taxed at a rate of 3% on the value of the metal. There is an additional GST of 5% on the making charges of jewellery.
– Statement A refers to the 115th Constitution Amendment Bill, which was a previous attempt at introducing GST but did not pass. While it proposed keeping alcohol and certain petroleum products outside GST, referring to it as an enacted amendment is incorrect.
– Statement B refers to the 122nd Constitution Amendment Bill, which became the 101st Constitution Amendment Act, 2016, enabling GST. This Act explicitly kept alcohol for human consumption outside the ambit of GST. It also provided for five petroleum products (petrol, diesel, natural gas, ATF, crude oil) to be included in GST at a future date decided by the GST Council, effectively keeping them outside for the time being. So, stating *only* alcohol was kept out is incorrect.
– Statement D is correct. Unworked diamonds (rough diamonds) are taxed at a low rate of 0.25% under GST.

– The 101st Constitutional Amendment Act, 2016 introduced the GST framework in India. Alcohol for human consumption remains outside GST, subject to state excise duties. The five petroleum products are currently outside GST but can be brought in upon recommendation by the GST Council.

The contraction of private investment spending due to deficit spending by the Government is called

[amp_mcq option1=”crowding out” option2=”crowding in” option3=”pump priming” option4=”dumping” correct=”option1″]

The correct answer is A) crowding out. Crowding out is an economic phenomenon where increased government spending, financed through borrowing, leads to a decrease in private sector investment. This happens because increased government demand for loanable funds pushes up interest rates, making it more expensive for private businesses to borrow money for investment projects.

– Deficit spending by the government means the government is spending more than it collects in revenue, requiring it to borrow money.
– Increased government borrowing increases the demand for funds in the financial markets.
– Increased demand for funds, with a given supply, leads to higher interest rates.
– Higher interest rates increase the cost of borrowing for private firms and individuals.
– This higher cost discourages private investment spending (e.g., on new factories, equipment, or housing), hence ‘crowding out’ private investment.

Crowding in is the opposite effect, where government spending stimulates private investment. Pump priming refers to government spending to stimulate a depressed economy. Dumping is an international trade practice.

Recently, the term ‘two-pillar solution/two-pillar package’ often seen in the news, refers to

[amp_mcq option1=”Global energy security in near future” option2=”International cyber crime reporting” option3=”Minimum global corporate tax” option4=”Prevention of international money laundering” correct=”option3″]

The term ‘two-pillar solution/two-pillar package’ refers to the international agreement being negotiated under the OECD/G20 framework to address tax challenges arising from the digitalization of the economy, specifically focusing on a global minimum corporate tax.

– Pillar One is about reallocating a portion of the profits of large multinational enterprises (MNEs) from their home countries to the market jurisdictions where their consumers are located, regardless of physical presence.
– Pillar Two introduces a global minimum corporate tax rate, primarily set at 15%, to ensure that MNEs pay a minimum level of tax on their profits, regardless of where they are headquartered or operate.

– The aim of the two-pillar solution is to make the international corporate tax system fairer, more stable, and better suited to the modern globalized and digitalized economy.
– It seeks to prevent tax base erosion and profit shifting by MNEs and reduce tax competition among countries.

Which one of the following items is not covered under GST ?

[amp_mcq option1=”Cosmetics” option2=”Medical grade oxygen” option3=”Jewellery” option4=”Petrol” correct=”option4″]

Option D is correct because Petrol (motor spirit) is one of the few items that are currently kept outside the purview of the Goods and Services Tax (GST) in India.

Certain petroleum products (like petrol, diesel, natural gas, ATF, crude oil) and alcohol for human consumption were excluded from GST at its inception and remain outside the GST framework, attracting old taxes like excise duty and VAT.

Cosmetics, medical grade oxygen, and jewellery are all taxable under the GST regime. Including petroleum products and alcohol under GST requires a decision by the GST Council and possibly legislative changes.

The excess of total expenditure of Government over its total receipts, excluding borrowings, is known as

[amp_mcq option1=”Primary deficit” option2=”Fiscal deficit” option3=”Current deficit” option4=”Capital deficit” correct=”option2″]

The correct answer is B) Fiscal deficit.

Fiscal deficit is defined as the difference between the government’s total expenditure and its total receipts, excluding borrowings. It indicates the total borrowing requirement of the government.

Primary deficit is calculated as fiscal deficit minus interest payments. Current deficit and Capital deficit are not standard terms for the overall deficit measure described; government finances are typically divided into Revenue account (leading to Revenue deficit) and Capital account (leading to Capital deficit), and Fiscal deficit combines these, representing the total gap covered by borrowing.

Which one of the following canons of taxation was not advocated by Adam Smith?

[amp_mcq option1=”Canon of equality” option2=”Canon of certainty” option3=”Canon of convenience” option4=”Canon of fiscal adequacy” correct=”option4″]

Adam Smith, in his seminal work ‘The Wealth of Nations’ (1776), laid down four main canons (or principles) of taxation. These were: 1. Canon of Equality (Ability to Pay), 2. Canon of Certainty, 3. Canon of Convenience, and 4. Canon of Economy. The concept of ‘Fiscal Adequacy’, which refers to the tax system being able to generate sufficient revenue to meet government expenditure, is an important principle of public finance but was not explicitly listed as one of the canons of taxation *by Adam Smith* in the same manner as the other four.

– Adam Smith’s four canons of taxation are Equality, Certainty, Convenience, and Economy.
– Fiscal adequacy is a principle of taxation related to revenue generation, but not one of Smith’s original four canons.

– Canon of Equality: Taxes should be proportionate to the respective abilities of the contributors.
– Canon of Certainty: The tax amount, time, and manner of payment should be clear and certain to the taxpayer.
– Canon of Convenience: Taxes should be levied at a time or in a manner most convenient for the contributor.
– Canon of Economy: The cost of collecting the tax should be as low as possible compared to the revenue generated.

Consider the following statements about impact of tax :

• A tax is shifted forward to consumers if the demand is inelastic relative to supply.
• A tax is shifted backward to producers if the supply is relatively more inelastic than demand.

Which of the statements given above is/are correct?

[amp_mcq option1=”1 only” option2=”2 only” option3=”Both 1 and 2″ option4=”Neither 1 nor 2″ correct=”option3″]

Statement 1: If demand is inelastic relative to supply, consumers are less responsive to price changes. When a tax is imposed, producers can pass on a larger portion of the tax burden to consumers in the form of higher prices without losing many buyers. Thus, the tax is shifted forward to consumers. This statement is correct.
Statement 2: If supply is relatively more inelastic than demand, producers are less able to reduce the quantity supplied in response to a lower price received after tax. When a tax is imposed, producers bear a larger portion of the tax burden because they cannot easily adjust output. The price received by producers falls significantly. Thus, the tax is shifted backward to producers. This statement is correct.
Both statements accurately describe how the relative elasticity of demand and supply determines the incidence (burden) of a tax.

Tax incidence is determined by the relative elasticity of demand and supply; the burden falls more on the less elastic side of the market.

Elasticity measures the responsiveness of quantity demanded or supplied to changes in price. Inelastic means less responsive, while elastic means more responsive. When a tax is imposed, the market price changes, and the tax wedge is split between consumers and producers. The side with lower elasticity faces a greater change in their price (price paid by consumers or price received by producers).