Social Welfare Programs and Fiscal Policy

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Questions and Answers

What is a main characteristic of indirect taxes that makes them regressive?

They are determined by regional economic factors.

They are only applied to luxury goods.

They remain constant regardless of the buyer's income level. (correct)

They vary according to the individual's taxable income.

How do indirect taxes influence consumer behavior?

They have no effect on consumer choices.

They encourage spending by reducing the price of goods.

They only affect the consumption of luxury items.

They create disincentives for purchasing certain goods with higher taxes. (correct)

What is a significant advantage of using indirect taxes for revenue generation?

They provide stability and a significant source of revenue. (correct)

They only apply to high-income individuals.

They are the fastest way to generate income for businesses.

They are solely based on individual wealth.

What makes the administration of indirect taxes more efficient than direct taxes?

The burden of collection is managed by businesses. Signup and view all the answers

What effect does a reduced GST rate on essential medicines have?

It makes essential medicines more affordable for the general population. Signup and view all the answers

What is one primary goal of government fiscal policy concerning price stability?

Reducing aggregate demand to control inflation Signup and view all the answers

Which of the following is an approach governments may take to combat deflation?

Increasing spending to stimulate demand Signup and view all the answers

How does the government typically support vulnerable populations through fiscal policy?

By implementing social welfare programs like direct cash transfers Signup and view all the answers

What is a key component of fiscal policy related to government revenue?

Funding expenditures through taxes and customs duties Signup and view all the answers

What fiscal action might a government take to address a trade deficit?

Impose tariffs to protect domestic industries Signup and view all the answers

What does the budgetary deficit component of fiscal policy indicate?

Expenditures exceeding government revenue Signup and view all the answers

Which of the following best explains the role of fiscal policy in external balance?

Using fiscal measures to influence trade and current account balances Signup and view all the answers

Which tax is considered a form of government revenue generation?

Capital gains tax Signup and view all the answers

What is the primary characteristic of indirect taxes?

They are imposed on production, distribution, or consumption of goods and services. Signup and view all the answers

Which tax is specifically levied at the point of consumption?

Goods and Services Tax (GST) Signup and view all the answers

Which of the following taxes was replaced by GST in India?

Service Tax Signup and view all the answers

Customs Duty is primarily aimed at which of the following?

Protecting domestic industries and regulating trade. Signup and view all the answers

Which of the following is a characteristic of Value Added Tax (VAT)?

It is placed on a product whenever value is added at each stage of production. Signup and view all the answers

Which indirect tax is primarily focused on services provided?

Service Tax Signup and view all the answers

What tax is applied specifically to goods imported into a country?

Customs Duty Signup and view all the answers

Which of the following is true about Sales Tax in India?

It still applies to certain products despite the introduction of GST. Signup and view all the answers

What is a primary characteristic of direct taxes?

They are paid directly by individuals or entities. Signup and view all the answers

Which of the following is an example of an indirect tax?

Customs Duty Signup and view all the answers

How is the burden of indirect taxes typically managed?

Intermediaries collect these taxes from consumers and pass them on. Signup and view all the answers

What defines the progressiveness of direct taxes?

Higher rates apply to individuals with higher incomes. Signup and view all the answers

In terms of compliance, how do direct and indirect taxes differ?

Indirect taxes are collected at the point of sale, making compliance simpler. Signup and view all the answers

What is a major advantage of indirect taxes?

Broad-based revenue generation across a range of goods and services. Signup and view all the answers

How does taxpayer visibility differ between direct and indirect taxes?

Direct taxes are more transparent to taxpayers regarding their amounts. Signup and view all the answers

What is the basis of taxation for indirect taxes?

Based on consumption of goods and services. Signup and view all the answers

What is one of the primary purposes of constitutional amendments regarding indirect taxes?

To establish a uniform basis for taxation across different states. Signup and view all the answers

How did the 88th Constitutional Amendment Act of 2003 impact the taxation of services?

It validated the constitutional basis for service taxes by empowering Parliament. Signup and view all the answers

Why is stability and predictability in tax regimes important for businesses?

It enables effective financial and investment planning. Signup and view all the answers

What issue can constitutional amendments help address in relation to taxation?

Regressive taxation that burden lower-income groups unfairly. Signup and view all the answers

How can constitutional amendments facilitate the ease of doing business?

By standardizing tax laws across all states. Signup and view all the answers

What led to the introduction of the Service Tax in India?

Recommendations from the Tax Reforms Committee chaired by Dr. Raja J.C. Chelliah. Signup and view all the answers

Which of the following is a benefit of amendments to the constitutional framework for indirect taxes?

They provide mechanisms for adapting to economic changes. Signup and view all the answers

What was a significant constitutional change introduced by the 88th Amendment?

It empowered Parliament to legislate on taxes on services. Signup and view all the answers

Study Notes

Implemented programs include the Public Distribution System for subsidized food and PM-KISAN for direct cash transfers.
Aimed at supporting vulnerable populations and reducing income disparities.

Price Stability

Fiscal policy regulates inflation and maintains price stability through tax adjustments and expenditure changes.
Governments moderate aggregate demand to stabilize prices, preventing hyperinflation or deflation.
Actions may include reducing discretionary spending or increasing taxes on luxury goods during inflation, or increasing spending during deflation.

External Balance

Fiscal policy influences trade and current account balances to maintain external balance.
Measures may involve supporting export-oriented industries or imposing tariffs to protect domestic markets.
Example: India adjusts customs duties to safeguard local industries and promote exports.

Components of Fiscal Policy

Government Revenue: Generated from taxes on income (personal and corporate), consumption (like GST), wealth, property, and customs duties, funding government expenses and public services.
Government Expenditure: Spending on goods and services, infrastructure, social welfare, defense, education, and healthcare to stimulate aggregate demand and achieve policy objectives.
Budgetary Deficit: Reflects the gap between government revenue and expenditure; highlights the importance of tax types and their impact on consumers.

Types of Indirect Tax

Goods and Services Tax (GST): A destination-based tax implemented on July 1, 2017, that replaced multiple taxes like VAT and service tax in India.
Customs Duty: Tax on imports and exports aimed at regulating trade and generating revenue, applied to goods like electronics and textiles.
Excise Duty: Levied on domestic production of specific goods like alcohol and tobacco.
Sales Tax: Prior to GST, this tax was added at the point of sale; still applicable in some states like Tamil Nadu.
Value Added Tax (VAT): Consumption tax applied at each supply chain stage; largely replaced by GST but still applies to certain products like petrol.
Service Tax: Imposed on specific service transactions prior to the introduction of GST.

Characteristics of Indirect Taxes

Indirect taxes are regressive, disproportionately affecting lower-income earners due to a uniform rate.
They can influence consumer behavior, with higher taxes discouraging consumption of certain goods.
Serve as a major revenue source for the government, supporting public services and infrastructure.
Easier to administer as collection is handled by businesses, simplifying government processes.

Direct Taxes vs Indirect Taxes

Direct Taxes: Levied on income or wealth, paid directly by individuals and entities (e.g., income tax).
Indirect Taxes: Charged on goods and services, ultimately paid by consumers but collected by businesses (e.g., GST, VAT).
Direct taxes are generally progressive, whereas indirect taxes are regressive.
Taxpayer visibility is higher for direct taxes; indirect taxes are embedded in prices and less transparent.

Advantages of Indirect Taxes

Broad-based revenue generation from a wide range of goods and services ensures stable government funding.
Finance Acts are passed to enact financial proposals, including amendments to indirect tax laws requiring constitutional changes.
Indirect taxes can introduce clarity, stability, and fairness to the taxation system across states, facilitating business operations.
Provisions can address equity issues and harmonize laws for reduced compliance costs and improved adaptability to economic changes.

Legislative Journey of Tax on Services in India

Initial Introduction (1994-2003): Service Tax was introduced in 1994 under the Finance Act, initiating taxation on various services.
Constitutional Amendment (2003): The 88th Amendment provided Parliament with the authority to legislate taxes on services, addressing previous legal challenges.

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Description

Explore the impact of government social welfare programs like the Public Distribution System and PM-KISAN on vulnerable populations. This quiz also covers the role of fiscal policy in controlling inflation and ensuring price stability through adjustments in taxes and expenditures.