Static Quiz 13 January 2023 (Indian Economy)

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.

Solution: a)

Justification: Duties that are imposed in order to counter the negative impact of import subsidies to protect domestic producers are called countervailing duties. In cases foreign producers attempt to subsidize the goods being exported by them so that it causes domestic production to suffer because of a shift in domestic demand towards cheaper imported goods, the government makes mandatory the payment of a countervailing duty on the import of such goods to the domestic economy. This raises the price of these goods leading to domestic goods again being equally competitive and attractive. Thus, domestic businesses are cushioned. These duties can be imposed under the specifications given by the WTO (World Trade Organization) after the investigation finds that exporters are engaged in dumping. These are also known as anti- dumping duties.

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: d)
Justification:

Tax buoyancy is an indicator to measure efficiency and responsiveness of revenue mobilization in
response to growth in the Gross domestic product or National income. A tax is said to be buoyant if the tax revenues increase more than proportionately in response to a rise in national income or output. A tax is buoyant
when revenues increase by more than, say, 1 per cent for a 1 per cent increase in GDP. Usually, tax elasticity is
considered a better indicator to measure tax responsiveness.
Tax elasticity is a measure designed for this purpose since it measures the responsiveness of tax revenue to a
change in national income or output after controlling for exogenous influences such as discretionary changes in tax
policy. If a tax is elastic, a one percent increase in GNP or GDP results in a greater than one percent increase in
revenue from the tax holding constant for discretionary tax changes