Static Quiz 02 January 2023 (Indian Economy)

Solution: c)

Justification: Taxes directly affect the savings of individuals because high taxes erode income, and low taxes help the individual have more savings. If firms pay less taxes, they save more and invest more which affects the aggregate level of investment in the economy. As investment affects the output (GDP), taxes also have an influence over the per capita income and thus the attractiveness of the foreign investors who look for good returns in the economy. Taxes also affect the prices of goods and services as factor cost (production cost) is affected thereby affecting incentives and behaviour of the economic activities, etc. India recorded a government debt equivalent to 69.50 percent of the country’s Gross Domestic Product in 2016. Government Debt to GDP in India averaged 73.42 percent from 1991 until 2016, reaching an all-time high of 84.20 percent in 2003 and a record low of 66 percent in 1996.

Solution: d)

Justification: Statement 1 and 2: Agriculture in India is generally tax-exempt, and dealt largely by state taxes since agriculture in India is a state subject. However, the Income Tax Department has clarified that the cash sales of agricultural produce by a cultivator to a trader for less than 2 lakh rupees will not attract tax under the Income Tax Act.

A circular issued by the Department said the cultivator and the trader will also not have to provide their Permanent Account Number (PAN) or furnish Form 60. The clarification came following representations from stakeholders about the applicability of income tax provision to cash sale of farm produce by farmers to traders.

Solution: a)

Justification: Also popularly known as estate tax or estate duty, Inheritance tax was a tax that was levied against a particular asset during the time of its inheritance. For example, the inheritance of ancestral land. There are certain countries that practice this form of taxation. Countries like USA, UK, Netherlands, Spain and Belgium all follow inheritance tax and China had gone to the extent of introducing rules for inheritance tax back in 2002 but was met with heavy opposition to the idea and were not able to implement it.
Statement 4: Inheritance tax is no longer levied in India and was abolished during the time of the Rajiv Gandhi Government in 1985. Though its intentions were noble, the then finance minister, V.P. Singh was of the opinion that it had failed to bring about an equilibrium in society and reduce the wealth gap. During its stay, inheritance tax or estate duty was levied from the period between 1953 and 1985.

Solution: a)
Justification: The point where tax makes its effect felt is known as the impact of tax—the after effect of tax imposition. The tax which has incidence and impact at the different points is the indirect tax—the person who is hit does not bleed’ someone else bleeds. As, for example, excise, sales tax, etc., which are imposed on either the producers or the traders, but it is the general consumers who bear the burden of 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.

Solution: a)
Justification: Inverted duty structure is a situation where import duty on finished goods is low compared to the import duty on raw materials that are used in the production of such finished goods. For example, suppose the tariff (import tax) on the import of tires is 10% and the tariff on the imports of natural rubber which is used in the production of tires is 20%; this is a case of inverted duty structure.
Statement 1: When the import duty on raw materials is high, it will be more difficult to produce the concerned good domestically at a competitive price. Several industries depend on imported raw materials and components. High tax on the raw materials compels them to raise price. The disadvantage of the inverted duty structure increases with the increased use of imported raw materials. An inverted duty structure discourages domestic value addition.
Statement 2: On the other hand, foreign finished goods will be coming at a reduced price because of low tax advantage. In conclusion, manufactured goods by the domestic industry becomes uncompetitive against imported finished goods. In such a case, even foreign investors would not be interested in setting up a firm for production in the country.
Statement 3: It will be just the opposite.