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

Answer: (d)

When government incurs a fiscal deficit, then it spends more on the economy resulting in an increase in total/aggregate demand. But if total supply also increases, then inflation may not increase. So, the government’s fiscal deficit will necessarily increase aggregate demand but may not increase effective demand. So, (i) the statement is true.

When the economic capacity is fully (100%) utilized and the government spends more than demand increases in the economy but supply may not immediately increase and the companies will have to set up new capacity which may increase cost, resulting in inflation.

But if the economic capacity is underutilized, because of less demand and then the government spends more then the increase in aggregate demand will be met by increased supply, and there may not be inflation.

So, fiscal deficit may or may not cause inflation.

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: (b)

Progressive tax means a higher income tax rate is high. Now in personal income tax (PIT), we have different slabs.

For example, for an Income Slab of less than Rs. 2.5 lakh 0% tax rate. For Rs. 2.5 to 5 lakhs income slab the tax rate is 5% etc.

For income of above Rs. 10 lakh the rate is 30%, which means who earn Rs. 15 lakhs, he also pays 30% and those who earn 30 lakhs, they also pay 30%.

But if we create another slab that income is above Rs. 20 lakhs the rate will be 35%, then it will be more progressive.

Redistribution of income means taking money from the rich and giving it to the poor.

When money is with rich people it may not increase their consumption much because they are already consuming everything but when it reaches the poor, they will be able to consume more with the same money, which increases the demand for goods and services in the economy.

So, income redistribution helps in stimulating the economy.