Static Quiz 30 June 2023 (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: Also popularly known as estate tax or estate duty, Inheritance tax was a tax that was levied against a particular asset during the time of its inheritance. For example, the inheritance of ancestral land. There are certain countries that practice this form of taxation. Countries like USA, UK, Netherlands, Spain and Belgium all follow inheritance tax and China had gone to the extent of introducing rules for inheritance tax back in 2002 but was met with heavy opposition to the idea and were not able to implement it.
Statement 4: Inheritance tax is no longer levied in India and was abolished during the time of the Rajiv Gandhi Government in 1985. Though its intentions were noble, the then finance minister, V.P. Singh was of the opinion that it had failed to bring about an equilibrium in society and reduce the wealth gap. During its stay, inheritance tax or estate duty was levied from the period between 1953 and 1985.

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.