2013

1. Mention one way by which Government policy can ensure social justice. [2]

Answer:- In Fiscal Policy, social justice can be ensured through Progressive/higher rate to higher income
level group and subsidies to lower income level group taxation.

2. What are indirect taxes? Give an example. [2]

Answer:- Indirect tax is not directly levied on the taxpayers. This tax is often levied on goods and
services which results in their higher prices. A few examples of indirect taxes in India include service tax,
central excise and customs duty, and value added tax (VAT).

3. What are Public Sector Units? Mention one problem faced by Public Sector Units in India. [2]

Answer:- Public sector unit is an enterprise which is owned, controlled and managed by the
government. It may be Central Government, State Government or jointly by state and central
government.

Problem faced by Public Sector Units

PSUs in general face the shortage of skilled, experienced and competent workers because of relatively
lower salary and perquisites etc. This has led to the inefficient management of these enterprises.

4. Distinguish between the fiscal and monetary policy of the Government. [2]

Answer:-

Basis Monetary Policy Fiscal Policy

1. Meaning It refers to policy of the central bank of a It is a policy under which the government implements
country to control the supply of money to direct its revenue and expenditure programme to
and its cost i.e. rate of interest. produce desired results.

2. Its main instruments are: Its main instruments are:

Instrument
Bank Rate Taxation Policy

Open Market Operations Public Expenditure

Cash Reserve Ratio Deficit Financing

Selective Control Methods

5. Define Privatisation. Discuss two arguments each in favour and against privatization. [8]

Answer:- Privatization: “Refers to the sale of all or parts of a government’s equity in state owned
enterprises to the private sector.”

Privatization means the transfer of managerial control of any public sector units to any private
entrepreneur or to any private corporate body is called privatization.

Arguments in favour of privatization

i) Greater flexibility in making decisions:

Sometimes PSUs suffer losses just due to inadequate autonomy in the ‘decision making power’ of the
management. If the PSUs are privatised, then the production and investment decisions of the
management would be free from any Government intervention, and they would be purely guided by
profit motive.

ii) Improvement in Managerial Efficiency:

Privatization is a means of improvement in managerial efficiency because the private sector is almost
free from political interference.

When many areas of industial production are opened up for the private sector enterprises, then their
investment in the industrial sector is expected to increase to a large extent. Higher investment would
mean creation of greater employment and income opportunities within the economy.

Arguments against privatisation:

i) Social welfare aspect is neglected:

The private sector enterprises operate mainly for the maximisation of profit. Hence this measure does
not guarantee the social welfare of the common people.

ii) Imbalanced regional development:

Industries requiring huge investment but yielding low returns are not taken over by the private sector.

6. Read the following extract and answer the questions that follow:

Economic Times, September 4th, 2012

Terming payment of taxes as a ‘mark of civilisation’, Finance Minister P. Chidambaram has assured
that authorities will not “rashly” implement controversial retrospective tax rules while once again
promising a non-adversarial tax regime for all taxpayers. It is the second time in less than a week that
Chidambaram has given assurance of a stable and fair tax regime, after the tax department attracted
criticism for ushering in what some have called a “raid raj” and for introducing a series of measures
industry and investors have slammed as retrograde.

i) Define direct tax. Give two examples.

ii) State how a direct tax can foster social consciousness.

iii) What is meant by a progressive direct tax? How does its imposition bring about equity?

iv) State two demerits of direct tax. [7]

Answer:- The tax paid by the person on whom it is legally imposed is called direct tax. In other words,
Taxes imposed on receipt of income are called direct taxes.

Example: 1. Income Tax. 2. Capital Gain Tax.

Direct tax can foster social consciousness as person knows that he is paying a tax he feels conscious
towards his rights. He claims the right to know how the government uses his money. Civic sense is thus
developed. He behaves as a responsible citizen.

Taxes in which the rate of tax increases, with the increase in tax base are called progressive direct taxes.

Progressive tax: A tax is called progressive when the rate of taxation increases as the tax payer’s income
increases. Exaniple: Income tax.

A direct tax is equitable in the sense that it is levied according to the taxable capacity of the people. The
rate of direct taxes, like the income tax, can be fixed in such a way that the higher the income of a
person, the greater is the tax rate.

Two demerits of direct tax:

i) Inconvenient:

The greatest drawbacks of direct taxes is that they put the taxpayer to a lot of botheration and
inconvenience. Sometimes, the taxpayer is called to pay the entire tax in one installment.

ii) Evadable:

By submitting false return of income, some people evade the tax. That is why a direct tax is called as ‘A
Tax on Honesty’.

2014
1.State whether the following statements are true or false. Give reasons.

Rate of taxation depends upon the income groups in a progressive tax structure. [2]

Answer:- True

Rate of taxation depends upon the income groups in a progressive tax structure, where people with
more income pay a higher percentage of that income in tax than do those with less income. Progressive
taxes are imposed in an attempt to reduce the tax incidence of people with a lower ability-to-pay.

2. State two measures taken by the Government to reduce income inequality in an economy. [2]

Answer:- The two measures taken by the government to reduce the income inequality in the economy
are:

Progressive taxation reduces absolute income inequality when the higher rates on higher-income
individuals are imposed.

Luxuries items or those items which are consumed by the rich section of the society are heavily taxed in
comparison to necessity items.

3. An Indirect tax is not always equitable. Give two reasons to support your answer. [2]

Answer:- Indirect taxes are regressive. Every consumer of a taxed commodity rich or poor pays the tax
at the same rate. The real burden of the tax on the poor is greater than on the rich.

Large administrative staff is required to administer such taxes. It turns out to be a costly affair.

4. Define a tax. Explain the following with example:

Regressive tax

Proportional tax

Degressive tax. [8]

Answer:- Regressive Tax:

A regressive tax is one in which the rate of taxation decreases as the tax-payer’s income increases. In
this system the rate of tax falls with increase in income. Lower income is taxed at a higher rate, whereas
higher income is taxed at a lower rate.

For Ex: Income between Rs. 50,000 a year may be taxed at a rate of 20% & income between Rs. 50,000 –
Rs. 1,00,000 a year may be taxed at a rate of 15% & so on. However absolute tax liability may increase.

Proportional Tax:
A tax is called proportional when the rate of taxation remains constant as the income of the tax payer
increases. In this tax system, all incomes are taxed at a single uniform rate irrespective of whether tax-
payer’s income is high or low.

For Ex: If the rate of income tax is 10%, every person will be taxed at the same rate of 10%, whether he
earns Rs. 1,00,000 per year or Rs. 20,00,000 per year. In this case, tax liability increases in the same
proportion as the increase in income. The tax liability increases in absolute terms, but the proportion of
income taxed remains the same.

Degressive Tax:

A tax is called degressive when the rate of progression in taxation does not increase in the same
proportion as the increase in income. In this case, the rate of tax increases upto a certain limit after that
a uniform rate is charged.

2015
1. State any two drawbacks of State enterprises. [2]

Answer:- Two drawbacks of state enterprises are as follows:

i) Low efficiency:

Public sector enterprises are dubbed as inefficient as compared to private enterprises. Many public
sector undertakings are inefficiently managed by non-technical and inexperienced bureaucrats.

ii) Undue Delay:

Many a time, there has been uncalled delay in completing various projects. Many of the public sector
projects took much longer time to complete than was initially estimated.

2. Define Fiscal Policy. [2]

Answer:- Fiscal Policy: This refers to the revenue and expenditure policy of the Government of any
country. The instruments of fiscal policy are public expenditures, imposition of taxes (and changes in tax
rates), provision of subsidy, public debt etc.

3. What is meant by shifting of tax burden?

To which tax is this relevant? [2]

Answer:- Shifting of tax burden is possible in case of indirect tax. The tax is paid by some other person
and the final incidence is borne by some other person e.g. excise duty and sale tax etc.

4. ‘The role of the State is important in developing the economic infrastructure of a developing
economy’. Give two reasons to support your answer. [2]

Answer:- Two Roles of State in Economic Development:

It creates economic and social infrastructures wherein private sector does not come forward.

It establishes basic and heavy industries like iron and steel, heavy electricals, fertilisers, etc., which
require huge investments and have long gestation periods.

5. Classify the following types of tax into direct and indirect taxes:

Entertainment tax

Income tax

House tax

Sales tax. [2]

Answer:- Entertainment tax:- Indirect tax

Income tax - Direct tax

House tax - Direct tax

Sales tax- Indirect tax

6. With reference to the taxation policy:

Mention three differences between direct taxes and indirect taxes.

Differentiate between progressive and regressive taxes giving an example for each. [8]

Answer:- 1. Differences between a direct tax and an indirect tax:

Direct Tax Indirect Tax

1. They are directly paid to the Government by the 1.They are paid to the Government by one person but
people on whom they are imposed. their burden is borne by another person.

2. They cannot be shifted i.e. impact and incidence is on 2. They can be shifted i.e. impact is on one person and
the same person. incidence is on an another person.

3. Taxes imposed on production or income are direct 3. Taxes imposed on consumption are indirect taxes.
taxes.

4. These taxes are revised according to the ability of the 4. These are the taxes in which tax paying ability of the
tax payer. tax payer is assessed indirectly.

Progressive taxes Regressive taxes

1. The tax rate increases as income increases. This 1. The tax rate decreases as income increases. This
means that higher-income individuals pay a higher means that lower-income individuals pay a larger
percentage of their income in taxes. percentage of their income in taxes.

2. Examples of progressive taxes include investment 2. Examples of regressive taxes include sales taxes,
income taxes and estate taxes. excise taxes, and payroll taxes.

2016

1 Briefly explain why direct taxes foster civic consciousness among people. [2]

Answer:- Direct taxes inculcate a spirit of civic and social responsibility amongst the taxpayers in the
sense that the taxpayers feel that they have contributed to the cause of the society.

2 Give two reasons in favour of privatisation of Public Sector Enterprises [2]

Answer:- Arguments in favour of privatisation

i) Greater flexibility in making decisions:

Sometimes PSUs suffer losses just due to inadequate autonomy in the ‘decision making power’ of the
management. If the PSUs are privatised then the production and investment decisions of the
management would be free from any Government intervention, and they would be purely guided by
profit motive.

ii) Improvement in Managerial Efficiency:

Privatization is a means of improvement in managerial efficiency because the private sector is almost
free from political interference.

When many areas of industrial production are opened up for the private sector enterprises, then their
investment in the industrial sector is expected to increase to a large extent. Higher investment would
mean creation of greater employment and income opportunities within the economy.

3. State whether the following statements are true or false Give one reason for your answer.

During inflation the debtors gain and creditors lose. [2]

Answer:- True: Debtors benefit during inflation because they had borrowed money when the purchasing
power of money was high and they return it when its purchasing power has fallen due to price rise.
While creditors tend to lose during inflation since the loan repaid and interest received would have less
real value as a result of rise in prices.

4. What is meant by an indirect tax? Give two examples. Explain briefly two merits and two demerits
of Indirect tax. [8]

Answer:- The tax which is paid by some person but their burden or incidence is borne by some other
person, is called an Indirect tax. Taxes which are imposed on expenditure incurred on commodity are
regarded as indirect taxes.

For Example—Excise duty, Custom duty, Sales tax etc.

Two merits of indirect taxes:

i) Convenient:

They are mostly levied on commodities and are paid by consumers when they buy them in the market.
The amount of tax is included in the price of the commodity and the consumer pays the tax without
experiencing its pinch.

ii) Equitable:

Indirect taxes are equitable in the sense that they are paid by all the sections of the community at the
time Of making purchases of goods in the market, in the form of sales tax or custom duty.
Two demerits of indirect taxes:

i) Absence of Civic Consciousness:

Since the tax payer do not feel that they are paying a tax at the time of purchasing a commodity, these
taxes do not promote civic consciousness among the citizens.

ii) Uneconomical:

The cost of collection is quiet heavy. Every source of production has to be guarded. Large administrative
staff is required to administer such taxes. This turns out to be a costly affair.

5. Explain clearly four ways by which the State can promote economic growth and development. [8]

Answer:-i) Promoting Capital Formation:

Capital formation is a fundamental requirement for economic development. Private savings are very low
in the underdeveloped countries in view of the low income of the people. Therefore, there is a need for
generation of savings by the government. Developing countries have to depend primarily on
government to mobilise domestic resources during the early stages of economic development. The
government has a major role to play in promoting capital formation.

ii) Development of Economic Infrastructure:

Provision of economic infrastructure is mostly the responsibility of the government. Key economic
services, called infrastructure, like railways, road transport, communication network, roads, bridges,
irrigation works, gas, electricity, etc., are very essential for economic development. The absence of
infrastructure can retard economic development.

iii) Policies of the Welfare State:

The government is also required to undertake the responsibility of the welfare state. The welfare state is
a society in which the government protects the individuals against various contingencies so as to
guarantee people a minimum standard of living. The government provides various types of assistance to
the people as part of the policies of a welfare state, such as pensions, accident insurance, health
insurance etc.

iv) Population policy:

Population is growing rapidly in most of the underdeveloped countries. The government can evolve an
appropriate population policy to control population growth. All the development efforts will be futile if
the growth in number is not checked. To increase the per capital income and to improve the standard of
living of the people the rate of population growth must be checked. The state can evolve an appropriate
population policy by giving priority to family planning programme.
 2017

1. State two ways in which the government can promote economic development. [2]

Answer:- Ways in which the government can promote economic development are :

i) Increase in Public Expenditure :

If public expenditure increases, it will lead to an increase in money supply which will in turn increase the
per capita income over a period of time.

ii) Export Incentives :

If exports are encouraged, the net factor income earned from abroad rises which will lead to an increase
in Gross National Product (GNP).

iii) Infrastructure Development :

Public sector investment in the infrastructure sector like power, transport and communication, heavy
industries, education, etc. paves the way for agricultural and industrial development of a country.

(Any two)

2. What is meant by regressive taxation ? [2]

Answer:- Regressive Tax : A tax will be regressive when the rates of tax decrease as the tax base (i.e.,
income) increases. Thus, it is direct opposite of progressive tax.

Under regressive taxation, the total amount of tax increases on a higher income in the absolute sense,
but in the relative sense, the tax rate declines on a higher income. Hence, relatively, a heavier burden
falls upon the poor than on the rich. Ordinarily, taxes on necessaries are regressive in nature because
they take away a larger proportion of lower income as compared to higher income.

3. State whether the following statements are true ox false. Give reasons
An increase in the rate of tax with an increase in income is called proportional tax. [2]

Answer:- False. Because in case of proportional tax rate of tax remains constant, though income
increases.

2018

1. What are progressive taxes ? Give an example. [2]

Answer:- A type of tax under which rate of tax changes with change in income. For example, income
tax.

2. Which section of the society gains during inflation ? Why ?

Answer:- Inflation has a deep impact on the distribution of income and wealth in a country. It results in
the redistribution of income and wealth because prices of all the factors of production do not increase in
the same proportion. Generally, inflation always inflicts more injury on the fixed income groups like
workers, teachers, pensioners, interest and rent earners etc.

because their incomes do not increase as fast as the prices. On the other hand, flexible income groups
such as businessmen, traders merchants etc. suffer less injury due to windfall profits that arise because
prices rise faster than the cost of production.

3. Explain two ways by which the government can reduce income inequalities in a developing
economy.

Answer:- (i) By following progressive taxation system.

(ii) By increasing government expenditure in backward regions.

4. Define the following terms :

Proportional taxation [2]

Answer:- If the tax is imposed at the same rate on the persons of different income level, it is called
proportional tax.
5. Explain any four ways by which Public Sector Enterprises play a dominant role in an economy. [8]

Answer:- 1. Development of infrastructure :

Development of infrastructure comprising transport, power, communication, basic industries, etc. is a

precondition of growth. Expenditure on the development of infrastructure is known as Social Overhead
Costs. Pace of industrial development cannot be accelerated without their establishment. Their
development requires huge capital investment, which cannot be mobilised by the private sector.
Moreover, these projects do not promise high profits. The private entrepreneurs would therefore be
reluctant to undertake them.

2. Development of backward areas :

The goal of achieving a reduction in economic inequality between regions becomes easy to reach, if
industries are setup in the backward areas. But the profit seeking private industrialists often are not
enthusiastic enough to set up industry in the backward regions. The government, therefore, finds it
necessary to start industrial production in these areas on its own.

3. Basic facilities:

There are a large number of activities which are the primary responsibilities of the government. The
government must spend on these. Providing health and education facilities for all is one example.
Running proper schools and providing quality education, particularly elementary education, is the duty
of the government. India’s size of illiterate population is one of the largest in the world.

4. Other problems : There are many other problems like malnourishment, high infant mortality rate,
unsafe drinking water, lack of housing facilities, etc. which need special attention. These problems can
be solved only with the help of government.

6. What is privatization ? Explain the following arguments favouring privatization : [7]

(i) Greater flexibility in decision making.

(ii) Better utilization of resources.

(iii) Greater employment opportunities.

Answer:- Privatisation is the general process of involving the private sector in the ownership or
operation of a state owned enterprises.

(i) Greater Flexibility in decision making :

Private sector is owned and controlled by private individual or individuals. All the major economic
decision i.e. how to produce, what to produce, for whom to produce are taken by the individual keeping
in mind the profit factor.
(ii) Better utilisation of resources :

Under private sector resources are fully and efficiently utilised keeping in mind cost and profits.

(iii) Greater employment opportunities :

Private sector in most of the developing nations has grown at a very fast rate. In last few decades more
than 40% of the work force of developing nation is working for private sector.

7. Read the extract and answer the following :

Post : Gaurav Akrani

Indirect taxes have become an important source of development funds in developing countries. Many
developing economies that have adopted economic planning use indirect taxes as important source of
funds. These taxes are found to be better suited in developing countries because they have much
wider coverage as compared to direct taxes. Both rich and poor pay indirect taxes in the form of
commodity price.

(i) What are indirect taxes ? [2]

(ii) Mention three important differences between direct and indirect taxes. [3]

(iii) Classify the following into direct and indirect taxes. [2]

1. Custom duty

2. Professional tax

3 . Income tax .

4. Entertainment tax

(iv) Give two reasons why indirect taxes are important in developing countries. [4]

(v) Explain clearly how indirect taxes can be both regressive and progressive. [4]

Answers:

(i) Indirect taxes are the taxes which are imposed on goods and services. There taxes affect the income
and property of individuals and companies through their consumption expenditure.

(ii)

Direct Tax Indirect Tax

1. They are directly paid to the Government by the 1.They are paid to the Government by one person
people on whom they are imposed. but their burden is borne by another person.

2. They cannot be shifted i.e. impact and incidence 2. They can be shifted i.e. impact is on one person
is on the same person. and incidence is on an another person.

3. Taxes imposed on production or income are 3. Taxes imposed on consumption are indirect
direct taxes. taxes.

4. These taxes are revised according to the ability 4. These are the taxes in which tax paying ability of
of the tax payer. the tax payer is assessed indirectly.

(iii) 1. Indirect tax

2. Direct tax

3. Direct tax

4. Indirect tax

(iv) (i) Indirect taxes are important source of revenue for the government.

(ii) They have a broad coverage.

(v) 1. Progressive Tax: If the rate of tax changes with the change in income, it is called Progressive

tax. Hence, the rich should pay more and the poor should pay less.

The Progressive tax is very popular in developing countries.

Table below shows progressive tax.

As shown in table person with income of ₹ 1,000 pays 10 % tax and the persons with income of ₹ 2,000
and ₹ 3,000 pay 15 % and 25 % taxes respectively. Tax rate increases with the increase in income. The
progressive tax has the qualities of flexibility, economy, more income earning, reduce income inequality,
based on ability to pay. However, this tax has demerits like tendency of evasion, conceal income,
arbitrariness, adverse effects on saving and investment.

2. Regressive Tax : If high rate of tax is levied to the poor and low rate is levied to the rich it is called
regressive tax.

Table below shows regressive tax.

As shown in table tax rate decreases with increase in income. A person with income of ₹ 1,000 pay 10%
tax, and the persons with income of ₹ 2,000 and ₹ 3,000 pay 8% and 6% taxes respectively. This tax is
quite opposite of progressive tax. The tax rate decreases with increase in income.

Hence, this tax takes decreasing proportion of increasing income. For example, the tax levied on
necessary goods is regressive. It taxes more percentage of low income. This tax, therefore, increases
income inequality. This tax system makes injustice. So, this tax is impracticable and inappropriate in
poor countries.

2019

1. What do you understand by hyperinflation? [2]

Answer:- When prices rise very fast at double or triple digit rates from more than 20 to 100 per cent per
annum or more, it is usually called hyperinflation or galloping inflation.

2. Explain how an improper price policy results in the poor performance of public sector enterprises.
[2]

Answer:- (i) The basic aim of the Public Sector is public welfare and economic development.

(ii) Due to this Public Sector keep the prices of their products low. Some time lowers than the cost of
production.

(iii) This lowers the profit margin.

(iv) Lower profit margin leads to lower capital formation and ultimately still lower profits.

3. How does direct tax reduce income inequality? [2]

Answer:- Direct taxes reduce income inequality, because they are charged according to the income of
person. Higher incomes are charged at higher rates than lower incomes.

4. What are Public Sector Enterprises? Give two examples of Public Sector Enterprises in India. [2]

Answer:- Public sector enterprises are those enterprises which are owned and managed by the
government. Example : State Trading Corporation (S.T.C.), Hindustan Steel’Limited.

5. Name any two instruments of Fiscal Policy. [2]

Answer:- Taxes, subsidies, public debt etc.