taxes types, methods & budgeting process section 4 Practice Questions Answers Test with Solutions & More Shortcuts

Answer: (b)

A Pigovian tax is applied to a market activity that is generating negative externalities (costs for somebody else) like cigarette consumption, burning of fossil fuel.

Answer: (a)

Fiscal Consolidation policy is an effort by the Government to bring down the fiscal deficit.

It is an effort to reduce public debt, raise revenues and bring down wasteful expenses.

Answer: (a)

The price elasticity of demand for goods also depends on the proportion of the income the buyers spend on the goods.

Therefore, if the sales tax on a commodity is raised, but the revenue earned through its sale decrease sharply, the price elasticity of demand for the commodity would be high.

Answer: (d)

As of June 2019, India’s external debt to GDP ratio stood at approximately 20%. And out of it, Sovereign debt (Govt. of India’s external debt) was around 3.5%.

Total India’s External Debt as of the end of June 2019 stood at $557 billion (20% of GDP) and out of it around more than 200 billion USD was external commercial borrowing (ECB).

Answer: (c)

The tax liability of a person can be reduced through Tax Planning, Tax avoidance and Tax Evasion. Although in common parlance these terms are used interchangeably, these terms are technically different from each other and should not be used interchangeably. Although the objective of all three is to reduce the taxes, the method adopted by them is different.

Tax Planning is the art of reducing the tax liability of a person by making use of the various provisions of law. The government in many cases provides various deductions and exemptions which can be used by a person to reduce his tax liability. Tax planning is 100% legal and all taxpayers are advised to make use of the same to reduce their tax burden.

Tax Avoidance basically means the use of the loopholes in the tax law to one's own advantage to reduce the tax burden.

Although tax avoidance is legal, it is not advisable as the taxpayer has defeated the intention of the lawmaker and used this to his own advantage. Although both tax planning and tax avoidance are legal ways to reduce tax, there is only a thin line of difference between tax planning and tax avoidance. In tax planning, a taxpayer is doing what the government wants him to do whereas, in tax avoidance, a taxpayer is doing something which the government did not expect the taxpayer to do.

Tax evasion involves breaking the law, not paying one's taxes where the law clearly states that they must be paid. Tax evasion is the method by which a person illegally reduces his tax burden by either deflating their income or inflating their expenses.

General Anti Avoidance Rules (GAAR) refer to the rules that target any transaction or business arrangement that is entered into with the objective of avoiding tax.

Tax avoidance is legal; but now, large scale revenue loss is occurring due to aggressive tax planning by corporate using avoidance opportunities. Governments in many countries are introducing anti-avoidance rules to check this revenue loss from excessive avoidance. GAAR has come into effect from 1st April 2017.

After the implementation of GAAR, the Income-tax Department will have powers to deny tax benefits if a transaction was carried out exclusively for the purpose of avoiding tax.

For example, if an entity is set up in Mauritius with the sole intention of claiming exemption from the capital gains tax, the tax authorities will have the right to deny the claim for the exemption provided under the India-Mauritius tax treaty.