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Consider the following statements regarding Tax Buoyancy:
1) It is the responsiveness of tax revenue with a change in the tax rate.
2) Tax buoyancy for the financial year 2020 was lowest in the last decade.
3) In general, it is high for indirect taxes than direct taxes.
Which of the statements given above is/are correct?
1) It is the responsiveness of tax revenue with a change in the tax rate.
2) Tax buoyancy for the financial year 2020 was lowest in the last decade.
3) In general, it is high for indirect taxes than direct taxes.
Which of the statements given above is/are correct?
- a)1 only
- b)1 and 3 only
- c)2 and 3 only
- d)2 only
Correct answer is option 'D'. Can you explain this answer?
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Verified Answer
Consider the following statements regarding Tax Buoyancy:1) It is the ...
Tax Buoyancy simply measures the actual or observed change in tax revenue relative to GDP. Therefore, Tax Buoyancy=Proportionate change in tax revenue/Proportionate change in GDP. So, statement 1 is not correct.
A tax is buoyant when revenues increase by more than, say, 1 % for a 1 % increase in GDP. Tax elasticity is the responsiveness of tax revenue to changes in the tax rate. For example, how tax revenue changes if the government reduces corporate income tax from 25 % to 22 % indicate tax elasticity. The direct tax to GDP ratio touched a 3-year low in FY20. The tax buoyancy fell to an 18-year low on account of corporation tax rate cuts and slowdown. The Budget assumes a tax buoyancy of 1.2 for 2020-21 compared to 0.5 (FY20 RE) and 0.8 (FY19) over the last two years. So, statement 2 is correct.
Tax buoyancy will be highest for direct taxes. As the economy grows fast, the additional income generated may go to the rich group. A part of that they have to pay to the government in the form of taxes. So if the GDP growth rate registers high growth, say nine percent, direct income tax collection will accelerate. Generally, direct taxes are more sensitive to GDP growth rate. So, statement 3 is not correct.
Therefore, the correct answer is (d).
A tax is buoyant when revenues increase by more than, say, 1 % for a 1 % increase in GDP. Tax elasticity is the responsiveness of tax revenue to changes in the tax rate. For example, how tax revenue changes if the government reduces corporate income tax from 25 % to 22 % indicate tax elasticity. The direct tax to GDP ratio touched a 3-year low in FY20. The tax buoyancy fell to an 18-year low on account of corporation tax rate cuts and slowdown. The Budget assumes a tax buoyancy of 1.2 for 2020-21 compared to 0.5 (FY20 RE) and 0.8 (FY19) over the last two years. So, statement 2 is correct.
Tax buoyancy will be highest for direct taxes. As the economy grows fast, the additional income generated may go to the rich group. A part of that they have to pay to the government in the form of taxes. So if the GDP growth rate registers high growth, say nine percent, direct income tax collection will accelerate. Generally, direct taxes are more sensitive to GDP growth rate. So, statement 3 is not correct.
Therefore, the correct answer is (d).
Most Upvoted Answer
Consider the following statements regarding Tax Buoyancy:1) It is the ...
Tax Buoyancy
Tax buoyancy refers to the responsiveness of tax revenue to changes in the tax rate. It indicates how tax revenue changes in proportion to changes in the tax rate. A high tax buoyancy suggests that tax revenue increases significantly when the tax rate is increased, while a low tax buoyancy indicates that tax revenue does not increase much even with an increase in the tax rate.
Statement 1: It is the responsiveness of tax revenue with a change in the tax rate.
This statement is correct. Tax buoyancy measures the responsiveness of tax revenue with a change in the tax rate. It helps in understanding the impact of changes in tax policy on tax revenue.
Statement 2: Tax buoyancy for the financial year 2020 was lowest in the last decade.
This statement is incorrect. The question does not provide any information or data about the tax buoyancy for the financial year 2020 or any other year. Without specific data, it is not possible to determine the tax buoyancy for a particular year.
Statement 3: In general, it is high for indirect taxes than direct taxes.
This statement is incorrect. In general, tax buoyancy tends to be higher for direct taxes than indirect taxes. Direct taxes are levied on individuals or entities based on their income or wealth, such as income tax or wealth tax. Indirect taxes, on the other hand, are levied on the sale or consumption of goods and services, such as goods and services tax (GST) or customs duty.
Direct taxes are typically progressive in nature, meaning that the tax rate increases with higher income or wealth. As a result, when the tax rate is increased, the tax revenue increases significantly, leading to a higher tax buoyancy. Indirect taxes, on the other hand, are typically regressive in nature, as they are applied uniformly on all individuals or entities regardless of their income or wealth. Therefore, an increase in the tax rate for indirect taxes may not result in a significant increase in tax revenue, leading to a lower tax buoyancy.
Conclusion:
Based on the analysis, statement 1 is correct as tax buoyancy measures the responsiveness of tax revenue with a change in the tax rate. However, statement 2 is incorrect as there is no information provided about the tax buoyancy for the financial year 2020. Lastly, statement 3 is also incorrect as tax buoyancy tends to be higher for direct taxes than indirect taxes. Therefore, the correct answer is option D, which states that only statement 2 is correct.
Tax buoyancy refers to the responsiveness of tax revenue to changes in the tax rate. It indicates how tax revenue changes in proportion to changes in the tax rate. A high tax buoyancy suggests that tax revenue increases significantly when the tax rate is increased, while a low tax buoyancy indicates that tax revenue does not increase much even with an increase in the tax rate.
Statement 1: It is the responsiveness of tax revenue with a change in the tax rate.
This statement is correct. Tax buoyancy measures the responsiveness of tax revenue with a change in the tax rate. It helps in understanding the impact of changes in tax policy on tax revenue.
Statement 2: Tax buoyancy for the financial year 2020 was lowest in the last decade.
This statement is incorrect. The question does not provide any information or data about the tax buoyancy for the financial year 2020 or any other year. Without specific data, it is not possible to determine the tax buoyancy for a particular year.
Statement 3: In general, it is high for indirect taxes than direct taxes.
This statement is incorrect. In general, tax buoyancy tends to be higher for direct taxes than indirect taxes. Direct taxes are levied on individuals or entities based on their income or wealth, such as income tax or wealth tax. Indirect taxes, on the other hand, are levied on the sale or consumption of goods and services, such as goods and services tax (GST) or customs duty.
Direct taxes are typically progressive in nature, meaning that the tax rate increases with higher income or wealth. As a result, when the tax rate is increased, the tax revenue increases significantly, leading to a higher tax buoyancy. Indirect taxes, on the other hand, are typically regressive in nature, as they are applied uniformly on all individuals or entities regardless of their income or wealth. Therefore, an increase in the tax rate for indirect taxes may not result in a significant increase in tax revenue, leading to a lower tax buoyancy.
Conclusion:
Based on the analysis, statement 1 is correct as tax buoyancy measures the responsiveness of tax revenue with a change in the tax rate. However, statement 2 is incorrect as there is no information provided about the tax buoyancy for the financial year 2020. Lastly, statement 3 is also incorrect as tax buoyancy tends to be higher for direct taxes than indirect taxes. Therefore, the correct answer is option D, which states that only statement 2 is correct.
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Consider the following statements regarding Tax Buoyancy:1) It is the responsiveness of tax revenue with a change in the tax rate.2) Tax buoyancy for the financial year 2020 was lowest in the last decade.3) In general, it is high for indirect taxes than direct taxes.Which of the statements given above is/are correct?a)1 onlyb)1 and 3 onlyc)2 and 3 onlyd)2 onlyCorrect answer is option 'D'. Can you explain this answer?
Question Description
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