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Chapter 20, Public Finance - Fiscal Policy and Budget, , , , 1. Define Tax. Explain four differences between direct, and Indirect tax . (6 marks), , Answer - Tax is a compulsory amount that need to be paid, by everyone to whom it is applicable without having, anything directly in return. Taxes can be direct or indirect, , Differences between Direct and Indirect Tax, , Tax in which burden of | Tax in which burden of, , tax and responsibility | tax and responsibility to, to deposit tax lies on | deposit tax does not lie, , the same person. on the same person., , Generally progressive | Generally regressive in, in nature nature, , | Burden cannot be| Burden can be shifted, shifted further further., , Income tax, corporate | VAT, sales tax, service, , | tax, wealth tax, etc. are | tax, GST, etc. are, direct taxes. indirect taxes.
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2. Explain Importance of Public Expenditure. (6 Marks), , Answer -(i) It helps in creating income for various, individuals and firms as a result of the purchase of goods, and services and factor services from them. Expenditure on, defence, development activities etc. creates demand for, various goods and services, creating income for those, , individuals and firms producing them, thus increasing the, purchasing power of the people., , (ii) It can help in increasing the production by increasing the, , efficiency of the people (by spending on education, medical, facilities, sanitation etc.)., , (iii) It can be used to create human skills through education, , and training thus increasing the ability to work and produce, more., , (iv) It can be used as a means of producing essential raw, materials and important inputs in the public sector, thus, , removing various shortages and ensuring smooth, production., , (v) It is helpful in promoting and developing the basic and, key industries such as capital goods industries., , (vi) Public expenditure incurred in providing social security, schemes increases the purchasing power of low-income, groups and hence their ability to work, thus increasing their, , willingness to work because of secured future assured by, these policies.
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3. Explain how public expenditure can be used as an, instrument of Fiscal policy to solve the problem of, (i) Income Inequality, , (ii) Inflation (3 marks), , Answer- (i) Public expenditure includes government, expenditure on public works, subsidies, relief works and, transfer payments. Such expenditures help in generating, income and creating employment, which helps in, reducing the income gap in society., , (ii) Inflation occurs when there is increased spending in, the economy. To control inflation, the government can, lower public expenditure. This results in a reduction in, aggregate demand which helps in controlling inflationary, pressures. Controlling aggregate demand leads to lower, growth and hence lower inflation., , 4. Discuss how the public expenditure can be used, as a tool to attain economic stability. (3 marks), , Answer - Public expenditure helps to attain economic, stability in following ways :, , Production and Employment:, , It depends on:, , i. The capability of the people to work, save and invest., ii. The will of the people to work, save and invest., , iii. Transfer the resources to different uses and regions., , Public Expenditure and Economic Growth: The, public expenditure can be used to remove unequal, income distribution. The facilities of health, education, and communication can be made available. All such, means that government expenditure can be used for, economic growth and development. Moreover, because, of government expenditure, the incomes of the people, through the multiplier process will increase. When, , income will increase, the saving will also increase, which, can be used for investment. This shows that an increase, in government expenditure can play a vital role in the, economic growth of the country.
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4. Explain merits and demerits of Direct tax., , Answers - Merits of direct tax, , (i) Equity: A direct tax is an equitable tax. Through it the, rich can be made to pay more than the poor. In case of, necessity, the poor people can be granted exemption from, payment of such taxes., , A direct tax is equitable in the sense that it is levied, according to the taxable capacity of the people., , (ii) Certainty: A direct tax satisfies the canon of certainty., For instance, a person liable to pay income tax knows how, much he will be required to pay; for that purpose he can, appropriate steps beforehand., , (iii) Elasticity: A direct tax has elasticity. It can be varied, according to the needs of the government and changes in, the income of the people. When the income of the people, goes up, the rate of income tax can also be increased. If the, income of the people falls, the rate of income tax can also, be lowered., , (iv) Economical: Direct taxes are economical in the sense, that the cost of collecting them is low. They are mostly, collected "at the source". For instance, the income tax is, deducted from officer's pay every month., , (v) Productivity: Direct taxes constitute an important, source of government revenue. Their collection charges are, also low. There fore, direct taxes are productive., , Demerits of direct tax, , (i) Evasion: The first disadvantages of a direct tax is that, itis liable to be evaded. By submitting false returns,, many people try to evade income tax., , (ii) Disincentive to Work and Save: Another disadvantage, , of direct taxes is that they reduce the desire to work and, save. The rate of direct taxes are usually high. Many, business ventures are not undertaken on the ground that a, large part of the income earned will have to be given to the, government in the form of taxes. Thus, direct taxes reduce, incen tives to work hard and save., , (ili) _Inconvenient : The greatest drawback of direct taxes, is that they put the tax payer to a lot of botheration and, inconvenience. Sometimes the taxpayer is called to pay the, entire tax in one installment. Besides, the taxpayers have to, maintain elaborate accounts for the satisfaction of the tax, Officials.
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5.Explain merits and demerits of indirect tax., , Answer - Merits of indirect tax:, , (i) Wide Coverage: The main merit of an indirect tax is, that it touches all income groups. Direct tax, like income tax,, is imposed on persons having a certain minimum level of, income.People having income below that level are, exempted from the payment of tax. But indirect taxes,, such as GST, are equally imposed on all consumers or, pur chase irrespective of their income., , (ii)Socially Desirable : By imposing an indirect tax, the, consumption of an undesir able thing can be discouraged., , For example, by imposing indirect on intoxicants ,like wine or, , opium, the government discourages the consumption of, such harmful products., , (iii) No possibility of Evasion : It is difficult to evade indirect, tax since such tax is included in the price of the commodity, even if the rate of tax is high., , (iv) Productive and Elastic : By increasing the rate of taxes, , the government can secure an adequate income from such, taxes. The income from such taxes goes on increasing with, the increase in population and production in the country., , Demerits of Indirect tax, , (i) Regressive _: Generally, the indirect taxes are, regressive in nature. The rich and the poor have to pay the, same rate of indirect taxes on certain commodities of mass, consumption. This may further increase income disparities, among the rich and the poor., , (ii) Lack of Social Consciousness : Indirect taxes do not, create any social consciousness as the taxpayers do not, feel the burden of the taxes they pay., , (iii) Uneconomical : Indirect taxes are collected from the, producers, wholesaler, shopkeepers, exporters, importers, , etc. So every source of tax yield has to be properly, guarded., , So, huge staff has to be maintained to check accounts, to, , detect smuggling, to prevent unlicensed production etc. So, the cost of collection of indirect tax is very high
