Static Quiz 26 October 2024 (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: 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: d)

Justification: A carbon tax is a tax levied on the carbon content of fuels. It is a form of carbon pricing. Since GHG emissions caused by the combustion of fossil fuels are closely related to the carbon content of the respective fuels, a tax on these emissions can be levied by taxing the carbon content of fossil fuels at any point in the product cycle of the fuel.

Statement 1: A carbon tax is a revenue positive when it involves no adjustment to other tax rates in the economy. It is revenue neutral when other tax rates are adjusted so that the revenue Inflow from the carbon tax is exactly balanced by an equal reduction in yields from reduced taxes. So, a carbon tax does not have to lower the revenues.

Statement 2: Carbon taxes offer a potentially cost-effective means of reducing greenhouse gas emissions. It may actually help the economy in the long-run by promoting sustainable development by promoting environment friendly methods of growth. It does not have to hurt the GDP growth necessarily even in the short-run because the benefits from non-pollution may far exceed the economic benefits of an emission laden economy. From an economic perspective, carbon taxes are a type of Pigovian tax. They help to address the problem of emitters of greenhouse gases not facing the full social cost of their actions. Carbon taxes can be a regressive tax, in that they may directly or indirectly affect low-income groups disproportionately. The regressive impact of carbon taxes could be addressed by using tax revenues to favour low- income groups.

Solution: c)

Justification: Ecotax (short for Ecological taxation or Green taxation) refers to taxes intended to promote environmentally friendly activities via economic incentives. A Pigovian tax is a tax levied on any market activity that generates negative externalities (costs not internalized in the market price). The tax is intended to correct an inefficient market outcome, and does so by being set equal to the social cost of the negative externalities. For e.g. if a factory dumps polluted water in a local stream, it affects the water supply of the local community. But, this social cost is not included in the company’s cost-benefit analysis. By imposing this tax, the negative externalities are accounted for.