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HPAS MAINS HPAS PRELIMS MAINS UPSC

RELEVENCE
PRELIMS UPSC

TOPIC

LECTURE NO. 2019-

2020

LECTURE NO. 2021-

3→2:08, 4 ,5, 6, 7
2022

RELATIONSHIP
WITH GS 3

SOURCES

VAJIRAM FACULTY BIJENDER SINGH

Topic: Macro-Economy-Public finance, Government Budgeting, Taxation

2019 The public expenditure management is a challenge to the Government of India
in context of budget making during the post liberalization period. Clarify it. 250 15
2019 Enumerate the indirect taxes which have been subsumed in the goods and
services tax (GST) in India. Also, comment on the revenue
implications of the GST introduced in India since July 2017. 150 10

2018 Comment on the important changes introduced in respect of the Long term
Capital Gains Tax (LCGT) and Dividend Distribution Tax (DDT) in the Union
Budget for 2018-2019. 150 10

2013 Discuss the rationale for introducing the Goods and Services Tax (GST) in India.
Bring out critically the reasons for the delay in roll out for its regime. 200 12.5

2013 What is the meaning of the term ‘tax expenditure’? Taking housing sector as an
example, discuss how it influences the budgetary policies of the 200 12.5 government.

2001 What are the hurdles faced by the Finance Ministers of India in keeping the fiscal
deficit below 3 − 4 percent of the GDP? Suggest steps to lower the fiscal deficit. 150
10

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 1995 Do you agree with the view that, in a country like India, a tax on wealth would be
a useful supplement to the income tax? Argue the case in the light of Raja Chelliah Tax
Reform Committee Report. 250 15

1995 Do you think that income tax reduces economic incentives? Give your reasons.
150 10

1995 Does reduction in fiscal deficit necessarily assure reduction in inflation? 150 10

1994 Indicate briefly the tax reforms that have been introduced in India after the coming
in of the New Economic Policy. 150 10

1993 In a developing country like ours what according to you, should be the basis of
taxation income or consumption? Spell out your arguments clearly. 150 10

1988 State the distinctive features of the national budget for 1979 − 80. To what extent
are the present inflationary trends derived from the budget provisions (About 200
are the present inflationary trends derived from the budget provisions. 200 12.5

1982 Examine the pros and cons of increasing the level of taxation on agriculture
sector 150 10

PYQ PRELIMS OF ECONOMY-2020 CHAPTER 6 FISCAL POLICY

Q A

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 PRELIMS

FINANCE COMMISSION
1. Vijay Kelkar was the head of the 13th finance commission (2010-2015).

2. It gives the sharing model between state and center

3. With the advent of GST council there is considerable change in the position of FC

4.

BUDGET
1. Article - 112 of the Indian constitution mention that every year government has to
present annual financial statements

2. before 2016-2017 there was expenditure which have 2 parts

a. PLAN Expenditure → 30% of the total expenditure

i. Revenue →

ii. Capital →

b. NON PLAN Expenditure → 70% of the total expenditure

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 i. Revenue → account for 63% of the total expenditure , very high because
of populist policy of the government because government has realise that if
we have to maintain political stability then we have to appease the masses
by short term lollypops and also we have very High ICOR so government
known it is better to make economy efficient enough first , so when ever
decide to increase the capital expenditure it result in maximum growth and
output ( so there is balance between the political stability and economic
growth(development) which depend upon the efficiency of investment →
reforms is the ultimate need/oiling and greasing of the economy )

ii. Capital →

TAXES
1. Income tax has highest share among the direct taxes

2. excise has highest share among indirect

3.

ISSUES and CHALLENGES IN TAXATION /RVENUE

EXCISE → VAT→ GST

ISSUES and CHALLENGES IN EXPENDITURE(REVENUE OR CAPITAL

DEBATE)
In India we have very high revenue expenditure which creates no asset at all

SOLUTION

QUESTION

Explain what is fiscal policy in India? Fiscal policy and it’s relationship with
monetary policy Discuss its objectives while differentiating it with monetary
policy. (250 words)

Reference:  Indian economy by Dutta and Sundaram

Why the question:

The question is from the static portions of GS paper IV, part

Indian economy.

Key Demand of the question:

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 Discuss what fiscal policy is and its relationship with monetary
policy and draw the differences and comparison.

Directive:
Explain – Clarify the topic by giving a detailed account as to
how and why it occurred, or what is the particular context. You
must be defining key terms where ever appropriate, and
substantiate with relevant associated facts.
Structure of the answer:

Introduction:
Fiscal policy is the guiding force that helps the government
decide how much money it should spend to support the
economic activity, and how much revenue it must earn from the
system, to keep the wheels of the economy running smoothly.

Body:
Discuss the concept of fiscal policy in detail.
Discuss its objectives.

Draw a comparison of it with that of monetary policy.  Suggest

in detail its relationship.
Conclusion:

Conclude with its importance.

Introduction:
Fiscal policy refers to the use of government spending and tax policies to influence
economic conditions, especially macroeconomic conditions, including aggregate
demand for goods and services, employment, inflation, and economic growth. In
simple terms, it is an estimate of taxation and government spending that impacts
the economy. It is the guiding force that helps the government decide how much
money it should spend to support the economic activity, and how much revenue it
must earn from the system, to keep the wheels of the economy running smoothly.

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 In India, the Union finance minister formulates the fiscal policy. Expansionary
fiscal policy & Contractionary fiscal policy are the 2 types of fiscal policy.
Body:

Objectives of Fiscal Policy:

Some of the key objectives of fiscal policy are

economic growth and stability: Fiscal policy helps maintain the economy’s

growth rate so that certain economic goals can be achieved.

price stability: It controls the price level of the country so that when the
inflation is too high, prices can be regulated.

full employment: It aims to achieve full employment, or near full employment,

as a tool to recover from low economic activity.

optimum allocation of resources: The objective of economic growth and

development can be achieved by Mobilisation of Financial Resources. The
central and state governments in India have used fiscal policy to mobilise
resources.

Balanced Regional Development: there are various projects like building up

dams on rivers, electricity, schools, roads, industrial projects etc run by the
government to mitigate the regional imbalances in the country. This is done
with the help of public expenditure.

Reducing the Deficit in the Balance of Payment: some time government

gives export incentives to the exporters to boost up the export from the country.
In the same way import curbing measures are also adopted to check import.
Hence the combine impact of these measures is improvement in the balance of
payment of the country.

accelerating the rate of economic development

encouraging investment

capital formation and growth.

Fiscal policy tools are used by governments that influence the economy. These
primarily include changes to levels of taxation and government spending. To
stimulate growth, taxes are lowered and spending is increased, often involving
borrowing through issuing government debt. To put the dampers on an overheating
economy, the opposite measures would be taken.
Importance of fiscal policy:

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 Fiscal policy is a crucial part of the economic framework. In India, it plays a
key role in elevating the rate of capital formation, both in the public and private
sectors.

The fiscal policy helps mobilise resources for financing projects. The central
theme of fiscal policy includes development activities like expenditure on
railways, infrastructure, etc. Non-development activities include spending on
subsidies, salaries, pensions, etc. It gives incentives to the private sector to
expand its activities.

Fiscal policy aims to minimise income and wealth inequalities. Income tax is
charged on all salaried persons directly proportioned to their income. Likely
indirect taxes are also more in the case of semi-luxury and luxury items than
that of necessary consumable items. In this way, the government generates a
good amount of revenue and that also leads to a reduction in wealth inequalities.

A prudent fiscal policy stabilises price and helps control inflation.

Fiscal policy planning gives the larger chunk of funds for regional development
so as to achieve a balanced regional development. It aims to reduce the deficit
in the balance of payment.

Relationship of Fiscal policy with Monetary policy and the differences:

Fiscal policy, along with monetary policy, plays a crucial role in managing a
country’s economy.

The government uses both monetary and fiscal policy as macroeconomic tools
to meet the county’s economic objectives and manage or stimulate the economy.

Monetary policy is concerned with the management of interest rates and the
total supply of money in circulation. It is generally carried out by the RBI.

Fiscal policy, on the other hand, estimates taxation and government spending. It
should ideally be in line with the monetary policy, but since it is created by
lawmakers, people’s interest often takes precedence over growth.

Monetary policy seeks to spark economic activity, while fiscal policy seeks to
address either total spending, the total composition of spending, or both.

Monetary policy is more of a blunt tool in terms of expanding and contracting

the money supply to influence inflation and growth and it has less impact on the
real economy.

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 Both fiscal and monetary policy play a large role in managing the economy and
both have direct and indirect impacts on personal and household finances.

Conclusion:
Fiscal policy is an important constituent of the overall economic framework of a
country and is therefore intimately linked with its general economic policy strategy.
Monetary policy and fiscal policy together have great influence over a nation’s
economy, its businesses, and its consumers. Thus, they must complement each other
for a stable and growing economy of a country.

IMAGE

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 RBI’s monetary policy which is based on inflation targeting needs reform.
Comment. (250 words)

Introduction

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 RBI is the main decision maker for the country’s financial system and is
mandated with ensuring its stability. RBI currently uses inflation targeting as
key to monetary policy. Monetary Policy Framework Agreement 2015 between
RBI and the central government mandates RBI to contain Consumer Price
Inflation (CPI) within 4% with a band of (+/-) 2%.

However, in the era of globalization, the role of the central bank in the economy
must be kept in sync with the changing domestic and global economy.

Limitations of dependence on monetary policy based on inflation

targeting
Easy money policy is needed to increase economic activity during slowdown.
This is done by keeping the interest rates low. Thus, RBI needs to balance
inflation targeting and accelerated economic growth.

For example, even though the current inflation rate is at around 3%, there is
a slowdown in the economy and GDP growth was at 6 year low of 5% in
the April-June 2019 quarter.

Inflation targeting cannot ensure stability in the economy.

For ex: It failed to detect financial crisis situations like IL&FS default and
the NPA (Non Performing Assets) crisis in the banking industry.

Inflation targeting in India has coincided with a substantial rise in the real
policy rate. This has been accompanied by declining borrowing in the formal
sector likely affecting investment and thereby growth.

Inflation targeted policy cannot ensure enough employment creation in the

country.

For ex: even though current inflation rates are stable, unemployment in
India has been highest in the last 45 years as per NSSO data.

There is a conflict of interest in RBI managing the monetary

policy and selling bonds for the government which require keeping interest
rates low and thus is inflationary.

Inflation in emerging markets such as India is very sensitive to exogenous

shocks like global oil prices, a weaker rupee and a poor monsoon.

Global Financial crisis of 2008 showed that monetary policy defined by

inflation targeting can no longer be treated as the centerpiece of
macroeconomic policy.

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 Thus, RBI needs to follow a pragmatic monetary policy and its current policy that
largely focuses on inflation targeting must be reviewed.

Way Forward
Fiscal policy should be the primary tool to stabilize the economy. Better
policies targeted at efficient taxation and government spending should be
used to influence the economy in the long run.

RBI not only needs functional independence, but it needs to follow a more

pragmatic financial policy. In this scenario, RBI’s role must now be redefined
through a recalibrated monetary policy, which is in sync with changing
economic conditions.

Also, the Public Debt Management Agency (PDMA), proposed in Finance

Bill, 2015 should be formed at the earliest to avoid any conflict of interest in
RBI’s role in monetary policy formulation and managing government debt.

Enactment of Fiscal Responsibility and Budget Management (FRBM) Act has

brought the Indian economy on the path of fiscal prudence only in letter but not in
spirit. Critically analyse. (250 words)

Approach
Briefly discuss the Fiscal Responsibility and Budget Management (FRBM) Act.

Enumerate the achievements and failures of the FRBM Act.

Give suggestions for effective implementation of the Act.

Introduction
Fiscal Responsibility and Budget Management (FRBM) Act was enacted in 2003.
The objective of the Act is to ensure inter-generational equity in fiscal management,
long-run macroeconomic stability, better coordination between fiscal and monetary
policy, and transparency in the fiscal operations of the Government.
It provides a legal and institutional framework for fiscal consolidation. It is now
mandatory for the Central government to take measures to reduce the fiscal deficit,
to eliminate revenue deficit and to generate revenue surplus in the subsequent years.
The Act binds not only the present government but also the future Government to
adhere to the path of fiscal consolidation.

Body

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 Implementation of the FRBM Act has significantly improved India’s quantitative
fiscal situation such as:

The implementation of the FRBM Act has improved the fiscal performance of
both the centre and states. The States have achieved the targets much ahead of
the prescribed timeline.

The Act has helped in the issues relating to fiscal consolidation due to the
mandatory medium-term and strategy statements which are required to be
presented annually before Parliament.

The Act has helped in strict adherence to the path of fiscal consolidation
during the pre-subprime crisis period created enough fiscal space for
pursuing the countercyclical fiscal policy. Implementing the Act, the
government had managed to cut the fiscal deficit to 2.7% of GDP and
revenue deficit to 1.1% of GDP in 2007-08.

However, due to the global financial crisis of 2008, the deadline for the
implementation of the targets in the Act was suspended. The fiscal deficit rose
to 6.2% of GDP in 2008–09 against the target of 3% set by the Act for 2008–09.

However, the qualitative aspects of fiscally consolidating the economy have

remained largely elusive:

While there is a drastic fall in deficits, it has largely been on account of

reductions in expenditure in critical sectors of the economy such as education,
health etc. The Union government’s development expenditure as a proportion of
GDP has declined over time.

An analysis of revenue account of the development expenditure by states shows

that in almost all sectors of development, there has been a decline in the FRBM
era.

Also, at times it has been seen that the government has achieved the deficit
targets by manipulating the revenue and expenditure accounts such as curtailing
the capital expenditure; demanding interim dividend from Public Sector
Undertakings (PSUs) in advance etc.

Further, the FRBM Act ignores the possible inverse link between fiscal deficit
(fiscal expansion) and bank credit (monetary expansion). That is, if credit
growth falls, fiscal deficit may need to rise and if credit rises, fiscal deficit
ought to fall — to ensure adequate money supply to the economy.

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 Data on money supply growth, bank credit and GDP establishes that both
money supply growth and credit expansion have significantly reduced in
relation to GDP growth. Thus, the FRBM Act has not only reduced the fiscal
deficit but also starved the growing economy from much-needed investment.

Conclusion
To ensure effective and efficient operation of the FRBM Act, few steps can be
followed such as:

The Government should consider a medium-term framework for fiscal policy

and ensure that over the medium-term targets are met.

On the basis of international developments, there is a need to build capacity in

managing the fiscal policy of the government, and effective and efficient debt
management of the government.

Interest payments pre-empt a substantial part of revenue receipts. Given the

limitations of enhancing tax collection, the Government increasingly resorts to
borrowing. Therefore, there is a need to rationalize the interest expenditure of
the Central Government.

There is a need to be more specific on ‘exceptional circumstances’ when the

‘pause’ button can be used to stall the targets provided by the FRBM Act.

Recommendations of the N.K. Singh Committee should be implemented in a

time-bound manner so that the developmental needs of the economy are not
unduly compromised while being on the path of fiscal prudence.

Difference Between Fiscal Policy and Monetary Policy Explained in easy language

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 The economic position of a country can be monitored, controlled and regulated by
the sound economic policies. The fiscal and monetary policies of the nation are the
two measures, which can help in bringing stability and developing smoothly.Fiscal
policy is the policy relating to government revenues from taxes and expenditure on
various projects. Monetary Policy, on the other hand, is mainly concerned with the
flow of money in the economy.
Fiscal policy alludes to the government’s scheme of taxation, expenditure and
various financial operations, to attain the objectives of the economy. On the other
hand, monetary policy, scheme carried out by the financial institutions like the
Central Bank, to manage the flow of credit in the country’s economy. Here, in this
article, we provide you all the differences between the fiscal policy and monetary
policy, in tabular form.

Comparison Chart

BASIS
FOR FISCAL POLICY MONETARY POLICY
COMPARISON

The tool used by the government in The tool used by the central
which it uses its tax revenue and bank to regulate the money
Meaning
expenditure policies to affect the supply in the economy is
economy is known as Fiscal Policy. known as Monetary Policy.

Administered
Ministry of Finance Central Bank
by

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 BASIS
FOR FISCAL POLICY MONETARY POLICY
COMPARISON

The change in monetary policy

Nature The fiscal policy changes every year. depends on the economic status
of the nation.

Related to Government Revenue & Expenditure Banks & Credit Control

Focuses on Economic Growth Economic Stability

Policy
Tax rates and government spending Interest rates and credit ratios
instruments

Political
Yes No
influence

Definition of Fiscal Policy

When the government of a country employs its tax revenue and expenditure policies
to influence the overall demand and supply for commodities and services in the
nation’s economy is known as Fiscal Policy. It is a strategy used by the government
to maintain the equilibrium between government receipts through various sources
and spending over different projects. The fiscal policy of a country is announced by
the finance minister through budget every year.

If the revenue exceeds expenditure, then this situation is known as fiscal surplus,
whereas if the expenditure is greater than the revenue, it is known as the fiscal
deficit. The main objective of the fiscal policy is to bring stability, reduce
unemployment and growth of the economy. The instruments used in the Fiscal
Policy are the level of taxation & its composition and expenditure on various
projects. There are two types of fiscal policy, they are:

Expansionary Fiscal Policy: The policy in which the government minimises

taxes and increase public spending.

Contractionary Fiscal Policy: The policy in which the government increases

taxes and reduce public expenditure.

Definition of Monetary Policy

Monetary Policy is a strategy used by the Central Bank to control and regulate the
money supply in an economy. It is also known as credit policy. In India, the Reserve
Bank of India looks after the circulation of money in the economy.

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 There are two types of monetary policies, i.e. expansionary and contractionary. The
policy in which the money supply is increased along with minimization of interest
rates is known as Expansionary Monetary Policy. On the other hand, if there is a
decrease in money supply and rise in interest rates, that policy is regarded as
Contractionary Monetary Policy.

The primary purposes of the monetary policy include bringing price stability,
controlling inflation, strengthening the banking system, economic growth, etc. The
monetary policy focuses on all the matters which have an influence on the
composition of money, circulation of credit, interest rate structure. The measures
adopted by the apex bank to control credit in the economy are broadly classified into
two categories:

General Measures (Quantitative Measures):

Bank Rate

Reserve Requirements i.e. CRR, SLR, etc.

Repo Rate Reverse Repo Rate

Open market operations

Selective Measures (Qualitative Measures):

Credit Regulation

Moral persuasion

Direct Action

Issue of directives

Key Differences Between Fiscal Policy and Monetary

Policy
The following are the major differences between fiscal policy and monetary policy.

1. The policy of the government in which it utilises its tax revenue and
expenditure policy to influence the aggregate demand and supply for products
and services the economy is known as Fiscal Policy. The policy through which
the central bank controls and regulates the supply of money in the economy is
known as Monetary Policy.

2. Fiscal Policy is carried out by the Ministry of Finance whereas the Monetary
Policy is administered by the Central Bank of the country.

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 3. Fiscal Policy is made for a short duration, normally one year, while the
Monetary Policy lasts longer.

4. Fiscal Policy gives direction to the economy. On the other hand, Monetary
Policy brings price stability.

5. Fiscal Policy is concerned with government revenue and expenditure, but

Monetary Policy is concerned with borrowing and financial arrangement.

6. The major instrument of fiscal policy is tax rates and government spending.
Conversely, interest rates and credit ratios are the tools of Monetary Policy.

7. Political influence is there in fiscal policy. However, this is not in the case of
monetary policy.

Conclusion

The main reason of confusion and bewilderment between fiscal policy and monetary
policy is that the aim of both the policies is same. The policies are formulated and
implemented to bring stability and growth in the economy. The most significant
difference between the two is that fiscal policy is made by the government of the
respective country whereas the central bank creates the monetary policy.

1. LECTURE 3,4,5,6,7

a. FISCAL POLICY

i. BUDGET

1. Expeniture= REVENUE AND CAPITAL

2. Revenue = REVENUE AND CAPITAL

ii. DEFICIT

1. Revenue deficit

2. Budget deficit

3. Fiscal deficit

4. Primary deficit

5. Effective revenue deficit

6. PSBR- Public sector borrowing requirements

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 iii. FRBM act 2003 and 2016

iv. 14 th and 15th Finance commission

v. Laffer curve , Fiscal drag , Equalization tax , Faceless assessment, Digital

sevice tax

b. DIRECT TAX

i. Features

ii. Merits

iii. Demerits

iv. Example

v. Discuss in detail

1. Income tax

2. Corporate tax

3. Minimum alternate tax

4. Securities transaction tax

5. Capital gain tax

6. Round tripping

c. DTAA→Double tax avoidance agreement

i. DTC→ Direct tax code

1. GAAR

ii. OLD TAX CODE 2009 and 2020

d. INDIRECT TAX

i. Features

ii. Merits

iii. Demerits

iv. Example

1. GST

2. VAT

3. Excise duty

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 4. Custom duty

5. Entertainment tax

e. Why GST is called as biggest tax reformsince independence

f. Why GST replaced by VAT

g. CINVAT is called as custom duty

h. PYQ - pre and mains

(4→00:00)
FISCAL POLICY DISCUSSES about the revenue of the government and expenditure of the
government
It also discusses about the deficits (means when expenditure exceeds revenue )

It is called as RAJKOSHIYA → money of the ruler (CG at central level)

FP also talk about Budgetary proposal means where government is going to do expenditure ,
from where government is going to increase its revenue,

FP is policy of the ruler (CG), These entire things are mentioned in the budget

BUDGET
RECIETS EXPENDITURES
REVENUE RECIEPTS REVENUE EXPENDITURE

1. TAX REVENUE ⇒Revenue from 1. Wages by the government

all kinds of taxes,
2. salary
2. NON TAX REVENUE fees , ⇒ 3. Profits
fines, dividend, escheats, special
assessment, etc. 4. Subsidies

CAPITAL RECIEPTS 5. Interest payment

1. Recovery of the loans CAPITAL EXPENDITURE

2. Borrowings 1. Creation of National asset like

construction of NH , Airports,
3. Other receipts
Metros, Payments of loans.
4. Disinvestments

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 RECEIPTS
REVENUE RECIEPTS ⇒ Do not create liabilities and not obtain through selling of
government properties.
TAXES REVENUE

DIRECT TAXES→ Levy on the individuals and businessman like income tax,
corporate tax

INDIRECT TAXES→ Levy on goods and services and indirectly paid by the
individuals like GST,

NON TAX REVENUE

Paying fees in government university , fines, penalties, Grants by the other nations
,dividends/profits by the PSUs, Railways, RBI
⇒(surplus transfer/profit by the RBI to the government because GOI is the owner of
the RBI) eg. in 2019 RBI pay 1.76 lakhs crore rupee to the GOI , 2021 → 99000
crore rupee

Dividends→ part of the profits to the shareholders

ESCHEATS→ It is the money charged by the government for the caretaking activities
done on a minor's property . so other would not capture that property un till minor

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 become 18 year old
SPECIAL ASSESMENT→ Rise in the property prices of the citizen due to some
kind of government developmental work and then the amount charged by the
government for further developmental activities done in a particular area is called as
special assesment .

⇒
CAPITAL RECEIPTS They may creates liabilities and they may be obtained through
selling of government properties/assets.

BORROWING → Government have to gave principal + interest in future to lenders. eg

government bonds (G-sec)

DISINVETMENT → LIC , IBDI, asset loss by the government or laying of is asset to

private sector to receive receipts → Deliberate(like monetization of asset) or some time
not .

RECOVERY OF LOANS → Exception , recovered principal amount become part of

capital receipts(recovery of loans) and recovered interest become part of non tax
revenue(interest receipts)

EXPENDITURE
REVENUE EXPENDITURE ⇒ Do not creates asset and do not reduce liabilities
SALARIES→ No creation of asset but getting the salaries

PAYMENT OF INTEREST ON LOANS → Do not reduce liabilities, its a services

charge

WAGES→
SUSBIDIES→ PMKISSAN, LPG, product subsidies, irrigation subsidies are
unproductive they do not create any asset
CAPITAL EXPENDITURE ⇒ May creates asset and may reduce liabilities
CONTRUCTION → of new railway line, new airport

PAYMENT OF PRICIPAL AMOUNT OF LOANS → Reduce liabilities

investment subsidies

When there is mismatch in the expenditure and revenue there is deficit

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 💡 Why there is always discussion that government should recuse REVEX and
increase CAPEX ?

Classification of Taxes (4→ 00:40)

Three ways of classifying taxes

1. DIRECT and INDIRECT tax

2. SPECIFIC and ADVALOREM tax

3. PROGRESSIVE and REGRESSIVE tax

1. Direct and Indirect tax

Features of DIRECT tax

1. Imposed on individual and businessman.

2. It is non transferable in nature , it is paid by the same person on whom it is imposed .

3. It is compulsory by nature .

4. example → Income tax, corporate tax , minimum alternative tax(MAT) , security

transaction tax(STT) , capital gains tax (CGT)

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 Merits of Direct tax →

1. It curbs Inflation (how→ increase in taxes reduce availability of money with

people(disposable income reduce) hence decrease demand which makes the producer to
lower the prices )

2. Equitable in distribution (how→ because it is progressive in nature— less on poor and

more on rich) increase with increase in salary .

3. It reduces Inequality (how→ Collect additional from rich in the form of higher tax slab,
cess and surcharge and distribute it among the poor in the form of welfare scheme to
reduce gap among them )

Demerits of Direct tax→

1. It is considered as burden (how→ because people have to pay in lump sump amount,
have to pay in one go )

2. Tax evasion is possible (how→

a. Tax evasion→ Receiving and expending in cash makes the transaction invisible to
the authority, Transaction in cash to avoid taxes, under it person does not show his
income by making transaction in cash.

b. Tax avoidance→ People avoid taxes through by taking help of various rebates and
concession, The money is visible to authority but by using legal loopholes or rebate
and concession to avoid the tax payment eg. if a person is getting 2.4 lakh rental
income then he is not oblize to pay tax , income from the agriculture is tax less, —
people use these kind of loopholes to avoid to avoid tax, government announce these
kind of rebates and concession to calculate the data and to make part of formal
economy or any other thing but .....

both are illegal if get caught

3. Restrain investment through various taxes like STT, CGT (how→ During buying and
selling the shares a holder of the shares have to pay STT whether he gains profit or not
like when buying 2% and when selling then again 2% so 4% tax in share now assume
profit is 0% then 4% is loss, suppose i have purchase jewellry worth 1 lakh and there is
4% CGT means buying at 1.02 lakh and next I am selling it at 1.03 lakh but the tax is 4%
again in selling ) otherwise I will so transaction through other illegal means purchasing
the jewellary in cash.

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 Features of INDIRECT taxes

1. It is imposed on the goods and services but paid by end consumer

2. It is transferable in nature

3. It is not compulsory by nature (you consume , you pay )

4. example VAT, GST, Custom duty, Excise duty , Entertainment tax , Octroi duty, etc.

Merits of Indirect tax

1. Provide more revenue to the government (because paid by all the people

2. It is convenient to pay (because it is attach with prices of goods and services

3. Appears less burdensome because paid in small amounts

Demerits of Indirect tax

1. Regressive in nature(because burden is more on poor then rich ).

2. Makes the item more expensive ( 28% GST on goods , 18% GST on fees,

3. Most of the people are unaware about it so it might be unprecedented increment to it to

fulfill revenue shortage

4. It is invisible in most of the cases so government can increase it in unprecedented way to

compensate tax revenue loss.(eg. government may decrease direct tax which is visible in
nature to appease the people which may lead to shortage of revenue and government
may increase the indirect tax to balance it with decrease in direct tax which is invisible
in nature )

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 2. SPECIFIC and ADVALOREM tax (4→1:54)
SPECIFIC TAX / PER UNIT TAX ⇒ It is levied according to weight , size and unit of the
commodity eg. 500 rs thali in restuarent and 5% GST on it, then it is according to per unit to
it but with thali you consume different then complete bill is 1200 then tax on that 1200 is
advalorem . Tax on each and every unit.

⇒
ADVALOREM TAX It is the tax according to entire value of the product like land
revenue tax, sales tax, GST.

3. PROGRESSIVE and REGRESSIVE tax

⇒
PROGRESSIVE TAX It increase as the income increases eg. Indian Direct tax , income
tax of India( more tax evasion )

⇒
REGRESSIVE TAX Its burden decreases with the increase in income eg. Indian Indirect
tax , income tax of America (people show their income and almost no tax evasion )

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 ANTI DUMPING DUTY AND COUTER WIELING DUTY
⇒
ANTI DUMPING DUTY It is tax on excessively produced imported items to rescue
Indian producers eg. If Chinese producer produce excessively and export at very cheap rate
to India than Indian government can impose antidumping duty to Chinese imported goods to
make it less competitive in Indian market. It is allowed by the WTO for the developing
nation under Special safeguard mechanism , but developed nation also imposed it→ why
because it is not legal binding .
COUTER WIELING DUTY ⇒ It is a tax on excessively subsidised imported items to
rescue Indian producers eg. if excessive export subsidy is given by china to its producer to
export its product to India then Indian government has to give tax those excessively
subsidised item

INCOME TAX SLABS

OLD SLAB NEW SLAB (2018-2019)

SLAB RATE% SLAB RATE

UP TO 2.5 Lakh NO TAX UP TO 2.5 Lakh NO TAX

More Than2.5 Lakh—5 More Than 2.5 Lakh—5

5% 5%
Lakh Lakh

More Than 5 Lakh—10 More Than 5 Lakh—7.5

20% 10%
Lakh Lakh

More Than 10 Lakh—30 More Than 7.5 Lakh—10

30% 15%
Lakh Lakh
More Than 10 Lakh—
20%
12.5 Lakh

More Than 12.5 Lakh—

25%
15 Lakh

More Than 15 Lakh 30%

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 Once a Slab is selected then it cannot be changed .

If someone has done various investment like life insurance , pension fund , provident fund ,
mediclaim policy then Old slab are good because there are more rebate and concession into it
If someone has not done investment in the above mentioned tool then New slab are good

DIFFERENT TYPES OF DIRECT TAX

(5→00:00)

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 CORPORATE TAX
1. Levy at the rate of 22% and for old manufacturers and 15 % on new manufacturers and
this is according to global minimum corporate tax (BEPS action plan). Used in
development of country, Tax revenue= tax rate into quantity of payers .

2. It comes under IT act—1961. means corporate do not have pay income tax

3. it is also called as corporate income tax or corporate profit tax or company gains tax

4. It stands at 3- in terms of tax revenue collection.

5. In 2019-2020 financial year , corporate tax was jointly at number 1 with GST with 18%
contribution.

TAX CONTRIBUTION

GST 15%

INCOME TAX 14%

CORPORATE TAX 13%

EXCISE DUTY 8%

SECURITY TRANSACTION TAX

It is tax levied on the transactions(purchasing & selling) of each securities.

It is generally levied at the rate of 0.1% .

CAPITAL GAINS TAX

Comes under IT act 1961

Equity — short term (less then 12 months) and long term(12 months or more)

Immovable property — short term(les then 24 months) and long term(24 months or more)

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 Jewellary — short term(less then 36 months) and long term(36 months or more)

All Gains would be taxed according to income tax slabs except gains from the equity
there are some different rate (for short term less then 15 months — rate is 15% and for
long term more then 12 months — rate is 10%) .

In 2018-19 budget it was introduces if investment in equities of 1 lakh rupees or more and
for the period of 12 months or more than on the gains there will be LTCG (long term
capital gains tax) with the rate of 10% → question in mains 2018

ROUND TRIPPING

Suppose we gave exemption to the investment from Marituius, Cyprus, UAE, Singapore
in the shares, Immovable property, Jewellary then CGT would not be levied . So to avoid
CGT Indians were invest in India via these country to avoid CGT (taking a round to trip
the tax payment) all these practices devoiding India its source of revenue , and these thing
also developing source of money laundering to India from these countries so that why
GoI removed these exemption to these countries

Round tripping refers to money that leaves the country through various channels and
makes its way back into the country often as foriegn investment

share market get manipulated by these practices by the investor from these countries they
have clear cut idea about the small rise and fall and they frequently buy and sell the
shares to earn small profit where as investor in India avoid small rise and fall because
they have to pay STT, CGT on profits earns by the small rise and fall.(most of the
investor avoid small rise and fall)
These money involves black money and is often used for stock prices manipulation, it
occurs due to tax concession allowed in the foreign country encourages park money
there and reroute it . from 1-4-2019 gains from the capital made by the investor from
Muaritius, Cyprus, UAE would be fully taxed with capital gains tax.

TOBIN TAX

This tax work like deterrence to frequent selling and purchasing of shares. Due to
manipulation done by the foreign investor which led to sudden rise and fall, share market
get crashed.

so there was a suggestion by economist to introduced Tobin tax on conversion of

domestic currency into foreign currency and vice versa . when ever a foreign investor
investing in Indian companies he first convert foreign currency into Indian currency —>
then he purchases a shares — >then STT, CGT on profit on selling — >then again Tobin
tax on conversion of India currency in foreign currency .

BS→2 FISCAL POLICY 36

 this infuse stability in the share market by making foreigner weight for substantial rise in
the share prices

It is a tax imposed on conversion of currency .

It may deter the FPI,FII, others.

yes, that is why GoI has not levied this tax. Singapore implemented this and resulted
bad for FIs.

DIVIDEND DISTRIBUTION TAX(5→00:43)

Comes under IT act 1961 .

Since dividend is considered as the part of receivers income so it should be taxed in the
hands of receivers .

From 1-4-2020 DDT is being taxed in the hands of receivers but before that it was in the
hands of distributors .

TDS (Tax Deducted at Source)(5→00:51)

Indian companies shall deduct tax at the rate 10% from the dividend declare to the
resident share holders exceeds rupees 5000 except life insuarance companies and general
insuarance .

10% to the residents share holders comes section 194 of IT act 1961.

20% for NRIs comes under section 195 of IT act 1961.

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