Previous Year Questions: Economics- 4 - UPSC MCQ

• Stamp duties are levied by Union and collected and appropriated by States.
• Tax system between the States and the Union of India:
  • Generally, in a typical federation along with the distribution of legislative and administrative powers.
  • The financial resources of the country are also so distributed to ensure the financial independence of the units.
  • However, the Indian Constitution does not make a clear cut distribution of the financial resources and leaves much to be decided by the Central Government from time to time.
  • The financial resources which have been placed at the disposal of the state are so meagre that they have to look up to the Union Government for subsidies and contributions.

The correct option is B.
In economics, a transfer payment (or government transfer or simply transfer) is a redistribution of income in the market system. ... Government debt is the debt owed by a central government. In the budget, it is listed among the transfer payments by the government.

The government of India imposes an income tax on taxable income of individuals, Hindu Undivided Families (HUFs), companies, firms, co-operative societies and trusts (identified as body of individuals and association of persons) and any other artificial person. Levy of tax is separate on each of the persons. The levy is governed by the Indian Income Tax Act, 1961. It does not lead to increase in price as it is dependent of income of individuals.

As per Article 268-A of the Constitution of India, Service tax is levied by Union and collected and appropriated by the Union and States. Service tax is a part of Central Excise in India. It is a tax levied on services provided in India, except the State of Jammu and Kashmir. As per article 269, the taxes levied and collected by the union but assigned to the States are: duties in respect of succession to property other than agricultural land; estate duty in respect of property other than agricultural land; terminal taxes on goods or passengers carried by railway, sea or air; taxes on railway fares and freights; taxes on the sale or purchase of newspapers and on advertisements published therein; taxes on the consignment of goods (whether the consignment is to the person making it or to any other person), where such consignment takes place in the course of inter State trade or commerce, etc.

• The principal source of States own tax revenues is sales tax which accounts for about 60 per cent of the total.
• The other major components of States own tax revenues according to their revenue share are State excise, registration and stamp duty, motor vehicle and passenger tax, electricity duty, land revenues, profession tax, entertainment taxes and other sundry taxes.

In India, the proceeds from income tax are collected by the Central Government. It is a central subject under the Union List, meaning the central government has the sole authority to levy and administer this tax. While the central government collects income tax, it does share a portion of these proceeds with the states through various mechanisms as per the recommendations of the Finance Commission, but the tax itself is levied and collected exclusively by the central government.

Value Added Tax (VAT) benefits consumers primarily by removing the "tax on tax" effect, which occurs when a product is taxed at every stage of production without any credit for the tax paid at previous stages. VAT allows businesses to claim a credit for the tax paid on input goods and services, which means that the final consumer is taxed only on the value added at each stage, not on the tax paid at previous stages. This system helps prevent the cascading effect of taxes, potentially leading to less dramatic price rises for consumer goods.

The shareable central taxes include corporation tax, income tax, wealth tax, customs, excise duty and service tax. The taxes, which are not shared with states include some cesses like education and road. Income Tax in India includes all income except the agricultural income that is levied and collected by the central government.

Liquid assets is an asset that can be converted into cash quickly and with minimum impact to the price received. In a liquid Market, assets can be easily converted without considerable price fluctuation and with a minimal decline in worth.

A value added tax (VAT) is a form of consumption tax. From the perspective of the buyer, it is a tax on the purchase price. From that of the seller, it is a tax only on the value added to a product, material, or service, from an accounting point of view, by this stage of its manufacture or distribution. Being a consumption tax, VAT is usually used as a replacement for sales tax. Ultimately, it taxes the same people and businesses the same amounts of money, despite its internal mechanism being different. This means that, without special measures, goods that are imported from one country that does have VAT to another country that does not have VAT will be taxed twice. The exporting country will charge VAT and the importing country will charge sales tax.

Inflation

• ​It is a general rise in the price of goods in an economy.
• Demand-pull inflation causes upward pressure on prices due to shortages in supply, a condition that economists describe as "too many dollars chasing too few goods."
• An increase in aggregate demand can also lead to this type of inflation.
• It is a persistent rise in the general price level of goods and services.

The principle of equity includes both horizontal and vertical. Equity is determined by first assessing an individual’s ability-to-pay. The idea of the abilityto-pay principle considers whether or not it is fair to tax someone higher just because that person has the ability and resources to pay. If it is decided that they should be required to pay more, the question of how much more arises. These questions can be analyzed through horizontal and vertical equity which are subsets of the ability-to-pay principle. Horizontal equity suggests it is fair for people of equal ability to pay the same amount in taxes. Vertical equity is the idea that people who has a higher ability to pay more than those who have a lower ability to pay, as long as the increase in tax level is considered to be reasonable.

Finance Commission is a constitutional Body and it is constituted by the President. It is set up every five years or before. It lays down rules by which Centre should provide grants in aid to states out of consolidated fund of India and suggest measures to increase the resources of State.

Buoyancy of a tax refers to the responsiveness of the tax revenue to changes in the tax base. It is measured by the ratio of the percentage increase in tax revenue to the percentage increase in the tax base. This measurement helps in understanding how effectively a tax system generates revenue in response to economic growth or contraction, reflecting the ability of the tax to keep pace with changes in income or output levels without any change in tax rates.

Investment in economic terms typically refers to the creation of new capital assets, like buildings, machinery, and equipment, minus the depreciation or wear and tear of existing assets. This calculation is crucial because it reflects the actual addition to the capital stock of an economy, representing net investment after accounting for the loss in value of existing assets due to usage and age. This measure helps in understanding how much of the new capital formation actually contributes to the productive capacity of the economy.

An expenditure tax is a direct tax, as it is levied directly on the spending of individuals rather than on goods and services. Unlike indirect taxes such as sales tax, excise duty, and customs duty, which are imposed on transactions and are typically passed on to consumers, an expenditure tax is charged directly to the consumer based on the amount they spend. This form of tax targets the expenditure patterns of individuals directly, rather than being embedded in the price of goods and services.

• Non-insurable risks are those that cannot be measured or predicted with accuracy, making them unsuitable for insurance coverage.
• Changes in fashion are considered non-insurable because they are highly unpredictable and subjective.
• Unlike natural events like floods or fires, fashion trends are driven by consumer preferences, cultural shifts, and innovation, which cannot be quantified or controlled.
• Insurers avoid covering such risks due to their speculative nature and lack of historical data for risk assessment.

The 'Gold Bullion Standard' is a monetary system where the value of the circulating medium (money) is linked directly to gold, but the money itself does not consist of gold coins. Instead, gold bullion serves as the measure of value for the currency. Under this system, currency can be converted into gold bullion, but not necessarily into gold coins, and the gold serves as a standard for measuring and maintaining the value of the currency. This system is characterized by the use of paper money or other forms of currency that are backed by gold held by the government or central bank.

When the Central Bank buys securities, such as government bonds, it effectively injects money into the banking system. The purchase of these securities is usually conducted through open market operations, where the Central Bank pays for these securities by crediting the reserve accounts of banks. This increase in bank reserves allows banks to have more funds available to lend, which can stimulate borrowing and economic activity. Thus, the bank reserves expand as a result of the Central Bank's purchase of securities.

The correct answer is 1949.

• RBI was nationalized in the year 1949.
• ​Reserve Bank of India (RBI):
  • RBI was set up on the basis of the Hilton Young Commission recommendation in April 1935, with the enactment of the RBI Act, 1934.
  • It was nationalized on the basis of the Reserve Bank of India (Transfer to Public Ownership) Act, 1948.
  • Its first Governor was C.D. Deshmukh.
  • The headquarters of RBI is in Mumbai.
  • Current governor of RBI is Shaktikanta Das.

• The reserve held by commercial banks over and above the statutory minimum with the RBI is called Excess Reserve.
• Excess reserves are capital reserves held by a bank or financial institution in excess of what is required by regulators, creditors, or internal controls.
• For commercial banks, excess reserves are measured against standard reserve requirement amounts set by central banking authorities.
• For any calculation of RBI’s excess reserve, the key items of interest on the liability side are:
  • The contingency fund
  • Asset development fund
  • Currency and gold revaluation
  • Investment revaluation accounts for foreign and rupee securities.

Coins may be coined at the Mint for issue under the authority of the Central Government, (of such denominations not higher than one hundred rupees),of such dimensions and designs, and of such metals or of mixed metals of such composition as the Central Government may, by notification in the official Gazette, determine.) Paper Currency in India consists of notes of various denominations which are issued by the RBI and the Government of India. The one rupee note is issued by the Ministry of Finance and bears the signature of the secretary. All currency notes are legal tender.

The Central Bank in an economy typically does not control government spending; that is generally the role of the government's treasury or finance department. The Central Bank's functions typically include dealing with foreign exchange, controlling monetary policy through tools like interest rates and open market operations, and acting as a banker's bank by providing services to other banks in the country, such as facilitating the clearing system or serving as a lender of last resort. Controlling government spending, however, involves budgetary decisions made by the government itself, not the Central Bank.

The correct option is D.
Redistribution of wealth occurs because some asset prices increase more rapidly than the price level while other asset prices increase more slowly than the price level. ... One important redistribution of income and wealth that occurs during unanticipated inflation is the redistribution between debtors and creditors.

A revaluation is a calculated upward adjustment to a country's official exchange rate relative to a chosen baseline, such as wage rates, the price of gold, or a foreign currency. In a fixed exchange rate regime, only a country's government, such as its central bank, can change the official value of the currency.

Treasury Bills (T-bills) 1.3 Treasury bills or T-bills, which are money market instruments, are short term debt instruments issued by the Government of India and are presently issued in three tenors, namely, 91 day, 182 day and 364 day. Treasury bills are zero coupon securities and pay no interest.

Exchange rate can be defined as the value of one currency in terms of another. India follows floating exchange rate system for the determination of the exchange rate. Floating exchange rate system can be defined as a system where the exchange rate between currencies are not fixed but they keep fluctuating, as they are determined by the demand and supply for the domestic currency in the international market. India has been operating on a managed floating exchange rate regime from March 1993, marking the start of an era of a market-determined exchange rate regime of the rupee with provision for timely intervention by the central bank.

The industrial sector is typically the largest tax-paying sector in India. This sector encompasses a wide range of industries including manufacturing, mining, construction, and utilities, which contribute significantly to the country's GDP. Due to its extensive size and economic activities, the industrial sector generates substantial tax revenues for the government through various forms of taxes, including corporate taxes, excise duties, and other levies. This makes it a crucial component of the national economy, not only in terms of production and employment but also in terms of tax contributions.

The establishment of the first five Regional Rural Banks (RRBs) in India was in 1975, following the recommendations of the Working Group on Rural Banks, chaired by M. Narasimham. These banks were created to serve rural areas with basic banking and financial services, focusing primarily on helping small farmers, agricultural laborers, and rural artisans. The initiative was part of a broader strategy to include more rural populations in the banking sector and enhance financial inclusion.

• Cheap money means low rates of interest.
• Cheap money policy is that monetary policy of the RBI in which loans and advances are made available on a low-interest rate and on easy terms.
• It is used for controlling inflation.