All questions of Government Policies for Business Growth for CA Foundation Exam

Discretionary Fiscal Policy

Discretionary fiscal policy refers to the deliberate actions taken by the government to stabilize the economy. These actions are taken through changes in government spending, taxes, or transfer payments. The government uses discretionary fiscal policy to influence the economy by increasing or decreasing aggregate demand.

Forced Fiscal Policy and Automatic Fiscal Policy

Forced fiscal policy is not a correct term in economics. However, automatic fiscal policy refers to the inherent automatic stabilizing properties of the fiscal system. For instance, when the economy is in a recession, there is a decline in economic activity, which leads to a decrease in tax revenue and an increase in government spending on programs such as unemployment compensation. This, in turn, helps to stabilize the economy.

Manual Fiscal Policy

Manual fiscal policy is a vague term that does not apply in economics. The correct term for deliberate actions taken by the government to stabilize the economy is discretionary fiscal policy.

Conclusion

In conclusion, discretionary fiscal policy is the deliberate action taken by the government to stabilize the economy. This is done through changes in government spending, taxes, or transfer payments. Forced fiscal policy and manual fiscal policy are not correct terms in economics. Automatic fiscal policy refers to the inherent automatic stabilizing properties of the fiscal system.

Allocation Function of Government

The allocation function of the government refers to its role in distributing resources among individuals and groups in society. It involves making decisions about how resources are allocated and distributed in the economy. The government provides goods and services that cannot be provided efficiently by the market mechanism. The allocation function of the government includes:

1. Provision of Public Goods and Services: Public goods are those goods that are non-excludable and non-rivalrous in consumption. The government provides public goods such as national defense, law enforcement, public roads, and public education. These goods are necessary for the welfare of the society as a whole but cannot be provided efficiently by the private sector.

2. Redistributive Function: The government also plays a redistributive role in the economy. It taxes the rich and transfers income to the poor. This helps to reduce income inequality and provide a safety net for those who are unable to provide for themselves.

3. Regulation of Markets: The government regulates markets by enforcing laws and regulations that protect consumers and ensure fair competition. It also regulates industries that are natural monopolies such as utilities, telecommunications, and transportation.

4. Correcting Market Failures: The government corrects market failures such as externalities, public goods, and imperfect competition. For example, the government may impose taxes on polluting industries to reduce pollution or subsidies to encourage the development of new technologies.

Conclusion

The allocation function of the government is an important role in the economy. It ensures that resources are distributed efficiently and fairly among individuals and groups in society. The government provides goods and services that cannot be provided by the market mechanism and regulates markets to ensure fair competition.

Not an example of public goods

Cars are not an example of public goods

Public Goods

Public goods are goods or services that are non-excludable and non-rival. Non-excludable means that it is impossible to exclude people from using the good or service, while non-rival means that the consumption of the good or service by one person does not reduce the amount available to others. Examples of public goods include:

- National defense
- Roads
- National Forests

Explanation

Cars are not an example of public goods because they are both excludable and rival. Cars can be owned and used by individuals, and their use by one person reduces the availability of the car for others. Therefore, cars are considered a private good. The other options listed are examples of public goods because they are non-excludable and non-rival. National defense benefits everyone in a society and cannot be excluded from anyone. Roads and national forests can be used by anyone and their use by one person does not reduce the availability for others.

The primary deficit is a crucial concept in fiscal policy and budgeting. It is defined as the difference between the fiscal deficit and the interest payments made by the government during a specific period, usually a fiscal year.



The formula to calculate the primary deficit is:
Primary Deficit = Fiscal Deficit - Interest Payments



The primary deficit provides insight into the financial health of a government. It indicates how much of the fiscal deficit is being used to pay interest on past loans, rather than for current expenditures or investments. A high primary deficit may signal that a government is struggling to manage its debt obligations.



In summary, the primary deficit is a critical metric for assessing a government's fiscal position. By focusing on the primary deficit, policymakers can gauge the extent to which debt servicing is eating into the government's resources, potentially leading to unsustainable debt levels.

The correct answer is option 'C': Stabilization.

Government plays a crucial role in maintaining stability within the economy. It aims to achieve stability in terms of employment, demand-supply, and inflation. This function is known as stabilization.

Stabilization refers to the actions taken by the government to stabilize the economy and prevent extreme fluctuations or crises. It involves using various fiscal and monetary policies to influence aggregate demand, control inflation, and maintain a stable level of employment.

Let's explore each aspect of stabilization in more detail:

1. Employment: The government strives to achieve full employment in the economy, where everyone who is willing and able to work has a job. It promotes job creation through policies such as infrastructure development, subsidies for industries, and skill development programs. By maintaining a stable level of employment, the government ensures a higher standard of living and reduces social and economic inequalities.

2. Demand-Supply Balance: The government aims to maintain a balance between demand and supply in the economy. It does this by implementing policies that stimulate aggregate demand during periods of low economic activity and control demand during periods of overheating. For example, during a recession, the government may increase government spending or lower taxes to stimulate demand. Conversely, during periods of high inflation, the government may implement contractionary fiscal and monetary policies to reduce demand and control prices.

3. Inflation Control: Inflation refers to the sustained increase in the general price level of goods and services in an economy over time. The government uses various measures to control inflation and prevent it from spiraling out of control. These measures include monetary policies such as adjusting interest rates, open market operations, and reserve requirements. Additionally, the government may implement supply-side policies to address structural factors that contribute to inflation, such as improving productivity and reducing production costs.

Overall, the stabilization function of the government is crucial in maintaining a stable and healthy economy. By balancing employment, demand-supply, and inflation, the government aims to ensure sustainable economic growth and improve the well-being of its citizens.

i. The Accelerated Irrigation Benefit Programme has been initiated to provide assistance for completing incomplete irrigation projects.
The statement is correct. The Accelerated Irrigation Benefit Programme (AIBP) is a centrally sponsored scheme initiated by the Government of India to provide assistance for completing incomplete irrigation projects. The main objective of the AIBP is to improve water-use efficiency and increase agricultural productivity through the completion of irrigation projects. The program provides financial assistance to states for the completion of irrigation projects that were started but remained incomplete due to various reasons such as lack of funds, technical issues, or delays in implementation.

ii. They have to be approved by the Planning Commission to avail the benefit.
The statement is incorrect. The Planning Commission, which was a government body responsible for formulating Five-Year Plans and allocating funds for various development projects, was replaced by the NITI Aayog in 2015. Therefore, the approval for availing the benefits of the AIBP is not required from the Planning Commission. Instead, the AIBP is now administered by the Ministry of Water Resources, River Development, and Ganga Rejuvenation. The ministry is responsible for approving and monitoring the projects under the AIBP.

Since statement i is correct and statement ii is incorrect, the correct option is (c) both.

The correct answer is option 'C', which is effective revenue deficit.

Effective revenue deficit refers to the difference between revenue deficit and grants for creation of capital assets. In order to understand this concept better, let's break down the terms involved:

1. Revenue Deficit: Revenue deficit refers to the excess of revenue expenditure over revenue receipts. In simpler terms, it is the shortfall of the government's revenue income in meeting its expenses. Revenue expenditure includes items like salaries, pensions, subsidies, interest payments, etc., while revenue receipts include items like taxes, fees, fines, dividends, etc.

2. Grants for Creation of Capital Assets: Grants for creation of capital assets refer to the funds received by the government for investment in infrastructure and other capital projects. These grants are specifically meant for creating long-term assets such as roads, bridges, schools, hospitals, etc.

Now, let's understand the difference between these two concepts:

- Revenue Deficit: Revenue deficit indicates the extent to which the government is relying on borrowing or drawing from its capital reserves to meet its day-to-day expenses. It shows the deficit in the revenue account of the government.

- Grants for Creation of Capital Assets: Grants for creation of capital assets, on the other hand, represent the inflow of funds specifically designated for investment in long-term assets. These grants are not meant to cover the government's day-to-day expenses.

- Effective Revenue Deficit: Effective revenue deficit is calculated by subtracting grants for creation of capital assets from revenue deficit. Therefore, it represents the portion of revenue deficit that is not utilized for creating capital assets. In other words, it shows the extent to which the government is borrowing or using its capital reserves for non-productive purposes.

By focusing on effective revenue deficit, the government can ensure that the borrowed funds or capital reserves are utilized in a more productive manner for the creation of assets that will contribute to the economy's long-term growth. This helps in maintaining fiscal discipline and avoiding excessive reliance on borrowing.

**Explanation:**

All of the above-mentioned taxes, namely the interest tax, estate duty, and gift tax, have been withdrawn or abolished in various countries.

**Interest Tax:**
- An interest tax is a tax levied on the interest earned from savings accounts, fixed deposits, bonds, and other interest-bearing investments.
- In many countries, interest tax has been withdrawn or abolished to encourage savings and investment and to stimulate economic growth.
- The rationale behind this decision is to incentivize individuals and businesses to save and invest more, which in turn leads to increased capital formation and economic development.

**Estate Duty:**
- Estate duty, also known as inheritance tax or estate tax, is a tax levied on the transfer of property or assets from a deceased person to their heirs or beneficiaries.
- Estate duty is usually calculated based on the value of the estate and may vary depending on the relationship between the deceased and the recipient.
- Many countries have abolished estate duty due to various reasons, such as administrative burdens, economic implications, and concerns about double taxation.
- The abolition of estate duty aims to simplify the process of transferring assets and wealth to the next generation and reduce the tax burden on heirs and beneficiaries.

**Gift Tax:**
- Gift tax is a tax imposed on the transfer of assets or property from one person to another without receiving anything in return.
- The purpose of gift tax is to prevent tax evasion and ensure that individuals cannot avoid estate duty by gifting their assets before death.
- However, gift tax has been abolished in several countries as it was considered to be complex, difficult to enforce, and burdensome for individuals.
- The abolition of gift tax aims to simplify the tax system and remove the disincentive for individuals to make gifts or transfers of assets.

Overall, the withdrawal or abolition of the interest tax, estate duty, and gift tax is aimed at promoting economic growth, simplifying tax systems, and reducing the tax burden on individuals and businesses.

Private Goods and Military

Private goods are those goods that are excludable and rivalrous in consumption. Excludable means that the producer of the good can prevent non-payers from consuming it, while rivalrous means that the consumption of the good by one person reduces the availability of that good to others. Some examples of private goods are clothes, cars, and food items.

Military, on the other hand, is not an example of private goods because it is a public good. Public goods are non-excludable and non-rivalrous in consumption. Non-excludable means that it is impossible or difficult to prevent non-payers from consuming the good, while non-rivalrous means that the consumption of the good by one person does not reduce the availability of that good to others.

Why is Military a Public Good?

Military is a public good because of the following reasons:

1. Non-excludable: It is difficult to prevent non-payers from consuming the good. This is because the military is responsible for the protection and defense of the entire nation, and it is impossible to prevent non-payers from benefiting from this protection.

2. Non-rivalrous: The consumption of military protection by one person does not reduce the availability of that protection to others. This is because the military protection is available to everyone in the nation, regardless of whether they contribute to its funding or not.

Conclusion

In conclusion, military is not an example of private goods because it is a public good. Private goods are excludable and rivalrous in consumption, while public goods are non-excludable and non-rivalrous in consumption.

A

Taxes on railway freights and fares:
Taxes on railway freights and fares are a form of union tax. These taxes are levied by the central government on the transportation of goods and passengers by railways. The revenue generated from these taxes goes to the central government's coffers.

Stamp duties on financial documents:
Stamp duties on financial documents are also a type of union tax. These duties are imposed by the central government on various financial transactions such as share transfers, loan agreements, promissory notes, etc. The revenue collected from stamp duties contributes to the central government's revenue.

Tolls:
Tolls, on the other hand, are not a form of union tax. Tolls are charges levied by the government on the usage of certain infrastructure facilities such as roads, bridges, tunnels, etc. These charges are generally collected by the state or local government and are used for the maintenance and development of the infrastructure.

Explanation:
The correct answer is option 'D' - A and B only. This is because taxes on railway freights and fares (option A) and stamp duties on financial documents (option B) are both forms of union tax. These taxes are levied by the central government and the revenue generated from them goes to the central government's revenue pool.

Tolls (option C), on the other hand, are not a type of union tax. They are charges levied by the state or local government for the usage of specific infrastructure facilities. The revenue collected from tolls is typically used for the maintenance and development of the infrastructure.

In summary, taxes on railway freights and fares as well as stamp duties on financial documents are forms of union tax, while tolls are not.

Introduction: The tax levied on the interstate trade of goods is the Central Sales Tax (CST). It is a tax imposed by the central government of India on the sale of goods that occur in the course of interstate trade or commerce. The tax is collected by the state government but is regulated and administered by the central government.

Explanation: The Central Sales Tax is applicable when goods are sold from one state to another. It is imposed on the sale of goods during interstate trade and commerce. Let's understand the concept in more detail:

1. Sales Tax: Sales tax is a tax levied by the state government on the sale or purchase of goods within the state. It is not specific to interstate trade and commerce, so it is not the correct answer.

2. Excise Tax: Excise tax is a tax levied on the production, sale, or use of certain goods within the country. It is not related to interstate trade, so it is not the correct answer.

3. Service Tax: Service tax is a tax levied on the provision of certain services. It is not applicable to the sale of goods during interstate trade, so it is not the correct answer.

4. Central Sales Tax: Central Sales Tax (CST) is a tax levied by the central government on the sale of goods during interstate trade or commerce. It is imposed on the movement of goods from one state to another. The tax rate may vary from state to state, and the revenue is collected by the state government but regulated and administered by the central government. Therefore, the correct answer is option 'D', Central Sales Tax.

Conclusion: The tax levied on the interstate trade of goods is the Central Sales Tax (CST). It is imposed by the central government and collected by the state government. It is specifically applicable to the sale of goods during interstate trade or commerce.

Sales tax is the most important source of revenue for the states. Sales tax is a tax imposed on the sale or lease of goods and services. It is typically a percentage of the purchase price or a flat fee per unit sold.

Sales tax is an important source of revenue for states because it generates a significant amount of income. Here are some reasons why sales tax is the most important source of revenue for states:

1. High revenue potential: Sales tax has a high revenue potential because it is levied on a wide range of goods and services. This includes everything from everyday consumer products to big-ticket items like cars and appliances. As a result, sales tax can generate a substantial amount of revenue for the state.

2. Broad-based tax: Sales tax is a broad-based tax that is applicable to a large number of people. It is not limited to a specific group or income bracket. This means that almost everyone who makes a purchase in the state is subject to sales tax. As a result, the tax base for sales tax is extensive, which further enhances its revenue potential.

3. Stability and predictability: Sales tax is a stable and predictable source of revenue for states. Unlike other sources of revenue, such as income tax or corporate tax, sales tax is less sensitive to economic fluctuations. Even during periods of economic downturn, people still need to purchase essential goods and services, which ensures a steady stream of revenue for the state.

4. Ease of administration: Sales tax is relatively easy to administer compared to other taxes. The responsibility of collecting and remitting sales tax falls on the sellers rather than the consumers. This means that the state can rely on businesses to collect and remit the tax on their behalf. This simplifies the tax collection process and reduces administrative costs for the state.

In conclusion, sales tax is the most important source of revenue for states due to its high revenue potential, broad-based nature, stability and predictability, and ease of administration. Its ability to generate a significant amount of income makes it a crucial component of state finances.

The Correct Answer is "D" or "Budget Deficit" Reasons : -> When "Expenses > Revenue" then the situation of Budget Deficit occurs. In simple terms, when Government SPENDS MORE than WHAT THEY'VE EARNED.. this is called Budget Deficit. -> Suppose You (Government) spend 60,000 Crores and You (Government) had earned only 30,000 Crores. So, here you have spend more than what you've earned. 1. Revenue means "Income of Government" 2. Deficit means "Lack of something"

The tax on net income of companies is Corporation tax.

Explanation:
Corporation tax is a direct tax imposed on the net income of companies. It is one of the major sources of revenue for the government. This tax is levied on the profits earned by corporations or businesses during a financial year. Here is a detailed explanation of why corporation tax is the correct answer:

1. Definition of Corporation Tax:
Corporation tax is a tax levied on the net income of companies or corporations. It is imposed by the government to generate revenue and is calculated based on the profits earned by the company.

2. Applicability:
Corporation tax is applicable to all types of companies, including public limited companies, private limited companies, and foreign companies operating in a country. The tax rate may vary depending on the jurisdiction and the size of the company.

3. Calculation of Corporation Tax:
Corporation tax is calculated based on the net income or profits of a company. The net income is determined by deducting allowable expenses, such as salaries, rent, interest payments, and depreciation, from the gross income. The tax rate is applied to the net income to determine the amount of tax payable.

4. Importance of Corporation Tax:
Corporation tax is an essential source of revenue for the government. It helps fund public services, infrastructure development, and social welfare programs. The tax revenue generated from corporation tax contributes to the overall economic development of a country.

5. Tax Planning and Compliance:
Companies need to comply with tax laws and regulations related to corporation tax. They may engage in tax planning to minimize their tax liability by taking advantage of tax incentives, deductions, and exemptions provided by the government.

6. International Taxation:
Corporation tax also has implications for international taxation. Companies operating in multiple jurisdictions need to consider tax treaties, transfer pricing regulations, and other international tax rules to ensure compliance and avoid double taxation.

Overall, corporation tax is a significant component of the tax system and plays a crucial role in the economic development of a country by ensuring that companies contribute their fair share of taxes based on their profits.

Government Budget is the financial plan of the government that outlines its expected revenue and expenditure for a specific period, usually one year. It is an important tool for fiscal management and helps in allocating resources efficiently and effectively. The main components of the Government Budget are as follows:

Revenue Budget:
The revenue budget includes the estimated government revenue from various sources and the proposed expenditure on current or day-to-day expenses. It consists of the following components:

1. Tax Revenue: This includes the revenue collected through direct and indirect taxes such as income tax, corporate tax, goods and services tax (GST), excise duty, customs duty, etc.

2. Non-Tax Revenue: This includes revenue earned by the government through sources other than taxes, such as dividends from public sector enterprises, interest on loans, fees, fines, and penalties.

3. Grants-in-Aid: These are the funds received by the government from other governments or organizations for specific purposes. Grants-in-aid are usually provided to support various developmental projects or to address specific socio-economic needs.

4. Revenue Expenditure: This includes the government's expenditure on salaries, pensions, subsidies, interest payments, defense, education, healthcare, infrastructure development, etc.

Capital Budget:
The capital budget includes the estimated government revenue from capital receipts and the proposed expenditure on capital assets or long-term investments. It consists of the following components:

1. Capital Receipts: These are the funds raised by the government through the sale of assets, borrowings, and recovery of loans. Capital receipts are used to finance capital expenditure and do not create a liability for the government.

2. Capital Expenditure: This includes the government's expenditure on acquiring or creating long-term assets such as infrastructure, buildings, machinery, equipment, etc.

The Government Budget consists of both the Revenue Budget and the Capital Budget to ensure a comprehensive financial plan. The Revenue Budget focuses on the day-to-day functioning of the government, while the Capital Budget focuses on long-term investments and asset creation. Both components are essential for the overall development and functioning of the government.

In conclusion, the correct answer is option 'A' - Revenue Budget and Capital Budget.

The correct answer is option 'A', Distribution function.

The distribution function of a government refers to its role in ensuring a fair and equitable sharing of the public's resources. This involves the allocation of resources to various sectors and individuals in society, with the aim of promoting social welfare and reducing inequalities. The government plays a crucial role in managing and distributing resources such as income, wealth, and opportunities to ensure that they are accessible to all members of society.

The distribution function of a government can be further explained through the following points:

1. Promoting Social Justice: One of the primary objectives of a government is to promote social justice, which includes ensuring a fair distribution of resources. This involves taking into account factors such as need, equality, and merit when allocating resources.

2. Reducing Inequalities: Through its distribution function, the government aims to reduce inequalities and bridge the gap between different sections of society. It does this by providing various welfare schemes, subsidies, and social security programs targeted towards the marginalized and disadvantaged groups.

3. Wealth Redistribution: The government may implement policies and measures to redistribute wealth from the rich to the poor. This can be done through progressive taxation, where higher-income individuals are taxed at a higher rate, and the revenue generated is used to fund social welfare programs.

4. Access to Basic Services: The distribution function also involves ensuring that all members of society have access to basic services such as healthcare, education, housing, and infrastructure. The government may allocate resources to these sectors to ensure that they are accessible to all, regardless of their socio-economic background.

5. Balancing Regional Disparities: Governments may also play a role in addressing regional disparities by allocating resources to underdeveloped regions or sectors. This can help promote balanced regional development and reduce regional inequalities.

In conclusion, the distribution function of a government is aimed at ensuring a fair and equitable sharing of the public's resources. It involves promoting social justice, reducing inequalities, redistributing wealth, providing access to basic services, and balancing regional disparities. Through these measures, the government plays a crucial role in promoting social welfare and improving the overall well-being of society.

Explanation:




The correct answer is option 'B' - ii only. Let's understand why.




Statement i:


Central government does not have exclusive power to impose tax which is not mentioned in state or concurrent list.


This statement is incorrect. The central government in India does have the power to impose taxes that are not mentioned in the state or concurrent list. The Constitution of India provides for three lists - the Union List, the State List, and the Concurrent List. The Union List consists of subjects on which only the central government can make laws, and it includes taxes such as income tax, customs duty, and central excise duty. The State List consists of subjects on which only the state governments can make laws, and it includes taxes such as sales tax and stamp duty. The Concurrent List consists of subjects on which both the central and state governments can make laws, and it includes taxes such as service tax and value-added tax (VAT). Therefore, the central government has the power to impose taxes not mentioned in the state or concurrent list.




Statement ii:


The constitution also provides for transferring certain tax revenues from union list to states.


This statement is correct. The Constitution of India provides for the distribution of tax revenues between the central and state governments. Article 270 of the Constitution deals with the distribution of taxes between the Union and the States. It allows for the transfer of certain tax revenues from the Union List to the states. These tax revenues are referred to as "grants-in-aid" and are meant to supplement the resources of the states. The grants-in-aid are made by the central government to the states based on the recommendations of the Finance Commission. The Finance Commission is a constitutional body that is appointed every five years to make recommendations on the distribution of tax revenues between the Union and the states. Therefore, the constitution does provide for transferring certain tax revenues from the Union List to the states.




In conclusion, the correct statements are ii only.