taxes types, methods & budgeting process section 4 MCQ Questions & Answers Detailed Explanation

Answer: (b)

If the price of a product increased from Rs. 30 to Rs. 40 i.e. an increase of Rs. 10. For a poor person earning Rs. 1000, it is 1% tax, but for a rich person earning Rs. 1,00,000, it is 0.01% tax.

So, as a percentage of his income, a poor person is paying tax 1% but the rich person is paying tax only 0.01%. Hence its regressive (tax % is less for rich people and more for poor people)

Answer: (c)

Answer: (a)

As per Article 275 of the Constitution, the Finance Commission should recommend ‘Grants-in-Aid’ for the states out of the Consolidated Fund of India. The Fifteenth Finance Commission (FFC) has recommended the following six types of grants in aid:

Revenue deficit grants: Post vertical devolution from centre to states, fourteen states faced revenue deficit and they have been recommended for revenue deficit grants (also called post-tax devolution revenue deficit grants)

Grants to local bodies: The FFC has recommended Rs. 90,000 crores of grants for local bodies in 28 States for the period 2020-21. The inter-state distribution for local bodies among the States will be based on population and area in the ratio of 90:10

Disaster management grants: The coverage of funds recommended by FFC goes beyond the disaster response funds that already exist at national (NDRF) and state (State Disaster Response Funds, SDRF) levels.

FFC has recommended the creation of funds for disaster mitigation along with disaster response which will now together be called as National Disaster Risk Management Fund (NDRMF) and State Disaster Risk Management Fund (SDRMF).

Sector-specific grants: The FFC is considering recommending, in the final report (for 2021-22 to 2025-26), sector-specific grants for nutrition, health, pre-primary education, judiciary, rural connectivity, railways, statistics and police training and housing.

However, to augment the efforts of the States towards reducing and ultimately eliminating malnutrition, FFC has recommended grants for nutrition even in 2020-21.

Performance grants: FFC will be recommending performance-based incentives to States for the period 2021-22 to 2025-26 in their final report (and before that it wants that States should do the groundwork to implement these reforms), in six areas if they implement reforms.

These are Agriculture reforms, Development of Aspirational Districts and Aspirational Blocks, Power sector reforms, enhancing trade including exports, Education, Promotion of domestic and international tourism.

State-specific grants: FFC believed that because of its recommendations for 2020-21, no State should, in absolute terms, get less than the total amount of devolution and revenue deficit grants estimated to be received in 2019-20.

Since, tax devolution and revenue deficit grants are projected to decline from 2019-20 to 2020-21 for three states, namely, Karnataka, Mizoram and Telangana, so FFC has recommended State-specific grants (special grants) to these three states.

Answer: (a)

The central government gives grants to States to implement Centrally Sponsored Schemes (CSCs). And for Central Government (almost) all the expenditure as revenue expenditure

For example, the budgeted amount for the CSC (the core of the core) MGNREGA for the year 2020-21 is Rs. 61,500 crores and is revenue expenditure for Govt. of India. And since it is a GRANT from Govt. of India side to States, so it must be Revenue exp for Govt. of India.

But States can spend this as revenue or capital expenditure in the creation of assets. If States spend this on capital expenditure, then Centres "Effective Revenue Deficit" will get reduced by that amount.

Effective Revenue Deficit = Revenue Deficit - Grants given to States for capital expenditure

Till 2013-14, Funds for CSS were routed through two channels, the consolidated fund of the States and directly to the State/ District Level Autonomous Bodies/Implementing Agencies. (CSSs are a part of funds transfer to States/UTs).

In 2014-15, direct transfers to State implementing agencies were discontinued and all transfers to States including for the CSS are now routed through the Consolidated Funds of the States.

Answer: (d)

Answer: (c)

When government incurs a fiscal deficit, the expenditure leads to an increase in total demand in the economy.

RBI is not allowed to lend to Government for the long term fiscal deficit bonds as per the FRBM Act 2003.