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ECONOMIC APPLICATIONS, Chapter -13, Instruments of State Intervention., , Important questions with answer, , 1.Define Fiscal Policy., , Answer- The revenue and expenditure policy of goverment, is called fiscal policy., , Fiscal policy is a policy under which the government uses, its expenditure and revenue programmes to produce, desirable effects and avoid undesirable effects on the, national income, production and Employment. It can also be, defined as a conscious policy of government so as to, achieve certain predetermined socio-economic objectives, with the help of public revenue, public expenditure and, public debt., , 2.Define, , i. Proportional Tax, ii. Progressive Tax, iii. Regressive Tax, iv. Degressive Tax, , Answer , i. Proportional Tax - A proportional tax is one in which the, rate of tax remains the same., , Under proportional tax system all incomes are taxed at

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uniform rate. For example, if the rate is set at 20%, a, taxpayer earning %10,000 pays tax @ 20% i.e %2,000 and a, taxpayer earning %50,000 also pays %10,000 i.e @ 20%., , ii. Progressive Tax - A tax is said to be progressive when the, rate of tax increases as the taxpayers income increases., , An example for progressive taxation is: 10% tax rate for, income of = 2 lakh, 20% for % 5 lakh and 30% for = 10 lakh, , iii. Regressive Tax- A tax will be regressive when the rates, of tax decreases as the income increases., , For example, suppose, there is 30% tax for = 2 lakh, 20% for, = 5 lakh and 10% for = 10 lakh. Here, the tax liability or the, amount of the income to be paid as tax decreases with, increase in income., , iv. Degressive tax - Taxes which are mildly progressive are, known as degressive. Under it, upto a certain limit the rate, of tax increases but after that it becomes constant. ., , For example in India Income Tax upto %2,50,000 a year is, exempted from Income tax. The rate of income tax is 10%, for the income between 2,50,001 to ¥%5,00,000 which, increases to 20% for the income between 5,00,001 to, %10,00,000 a year and all income above %10,00,000 a year, taxed at a flat rate of 30%., , 3. Explain merits and demerits of direct tax.

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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

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(i) Evasion: The first disadvantages of a direct tax is that it, is 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., , (iii) 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., , 4. 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- chasers

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irrespective of their incomes., , (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.