B.Com Ist Year Fiscal Policy Long Short Question Answer Notes

(2) Lack of Flexible Tax System : The Indian tax structuur exhibits both inflexibility as well as low buoyancy. Therefore, it

becomes difficult to increase the tax rates. Due to this fact fiscal policy can not achieve the desired objectives.

(3) Huge Deficit Financing: The Indian tax system does not yield adequate financial resources to meet the requirements of the growing Indian economy. As a result, the government has to use deficit financing which is highly inflationary method of financing development.

(4) Pre-dominance of Indirect Taxes: More than 60% of the gross tax revenue is contributed by indirect taxes. The high ratio of indirect taxes increases burden of taxes on poor and low income groups, which is not justifiable.

(5) Lack of Administrative Efficiency : An efficient administrative system is essential for the effective formulation of fiscal policy. Unfortunately, India lacked administrative efficiency and tax competence. Due to this, tax evasion is made at large scale which increase black money in the country.

(6) Narrow Base of Direct Taxes : ‘One unsatisfactory feature of the Indian tax structure is that it affects only a narrow range of population to any appreciable extent. Though the tax base has widened since 1998-99 as the number of assessees has increased significantly yet, there is ample scope of widening it.

(7) Low Share of Gross Tax Revenue to National Income: Share of tax to national income is very small in India. The size of the budget of the government in undereveloped countries forms only a small part of the national income. Therefore, it does not make any significant impact upon the economy as in developed countries.

(8) Large Unproductive Revenue Expenditure : The government has to spend large amount on unproductive revenue expenditure. Interest payments, subsidies and defence expenditure absorb over 81% of net revenue receipts of the centre.

(9) Lack of Co-ordination between Central and State Government: Indian tax structure is based on fiscal federalism. he states get share in the divisible pool of tax proceeds comprising come tax and excise duties levied and collected by the Central vernment. In fact, too much dependence of States on the Centre is eakness of Indian tax structure. There found lack of dination between Central and State, which makes the success of fiscal policy doubtful.

(10) Lack of Statistical Informations : For the effective Bu policy, accurate and adequate statistical data are essential.But in India, data regarding income, expenditure, savings,

investment etc. are not available adequately. Under such circumstances, the desired objectives of fiscal policy cannot be attained.

Short Answer Questions

Q.1. Discuss the main objectives of fiscal policy in developing countries.

Ans. See Page 95 and 96.

Q.2. Write the main components of fiscal policy.

Ans. See Page 97 and 98.

Q.3. Discuss the limitations or drawback of fiscal policy of India.

Ans. See Page 98 and 99.

Q.4. Is Value Added Tax (VAT) considered a important step in the direction of tax reforms ? Explain.(Meerut, 2000

Ans. The Chelliah Committee has suggested a comprehensive Value Added TAX (VAT) to replace not only the excise but also the State sales taxes and even the municipal octroi, with the revenue being shared among the Centre, States and Local self governments.

What is a Value Added Tax:VAT is levied on the basis of the value added to the value of a product at every stage of its sale in the process of production and distribution. In simpe words, it is assessed at each stage only on the increase in the value of a commodity since the last taxable transaction. It can also be clarified with an example. Suppose a person buys cotton worth Rs. 2 lakh. After ginning, he sells it to a spinner for Rs. 3 lakh. He has added Rs. 1 lakh to value of cotton, and he will be called upon to pay Rs. 10,000 as a tax, if the rate of VAT is 10%. Now, the spinner turns the ginned cotton into a textile manufacture for Rs. 5 lakh. He has added to its value another Rs. 2 lakh and at 10%, he will be charged Rs. 20,000 tax. In this system, it is compulsory for a manufacturer or a trader to keep safe all the relevant documents, vouchers etc. to claim a rebate for taxes paid by him earlier on his inputs.

MERITS OF VAT SYSTEM NOTES

(1) Big Source of Revenue: Due to broadcast conceivable tax base, it provides a big source of revenue even at a low rate. It applies to all sorts of production and with every stage of production.

(2) Cross-checking : Under this system, no tax payer car claim refund unless he produces the necessary documentary proof that the tax has already been paid. It makes evasion of VAT difficult as cross checks can be devised.

(3) Increase Efficiency : It helps to improve the efficiency ere the more profitable firms pays as much tax as the less efficient nes. This encourage the less profitable firms to become more profitable.

(4) Encourage to Purchase from Registered Traders : VAT encourages the purchasers to purchase goods from the registered traders as they do not get rebate on buying goods from unregistered traders.

(5) Reduction in Prices of Goods: VAT also prove helpful to reduce the prices of goods as traders do not have to pay taxes many times on the same goods. It also increase healthy competition among the producers.

(6) Easy to Administer: VAT is easy to administer if the rate is uniform. The rate can also be readily adjusted to meet the changing fiscal requirements of the economy.

(7) Transparency in Sale-purchase : VAT brings transparency in sale-purchase transactions. Now the traders have no need to come influence under the tax authorities. It is beneficials for the honest traders.

Q.5. Give suggestions for reforms in Fiscal Policy of India.

Ans. Following suggestions are offered to bring about reforms in fiscal policy:

(1) Reduction in Non-developmental Expenditure : Non-developmental expenditure should be scaled down through appropriate fiscal policy. The objective of the fiscal policy should be to accord importance to rapid growth rate of the economy. If non-development expenditure is brought down then growth rate of economy will improve and inflation will come down.

(2) Reduction in Public Debt: Government should reduce Es dependence on public debt as it imposes interest burden on sovernment exchequer. 13th finance commission also suggested in Year 2010 to reduce public debt of the centre and states.

(3) Agricultural Taxation : Agricultural sector should be brought under tax net. Consequently, revenue of the government ncrease and there will be no need on the part of the government either to resort to deficit financing or to depend on public debts.

(4) Increase in Profitability of Public Sector Enterprises : Efficiency of public sector enterprises must be improved. As a result, fair return on capital worth billions of rupees invested in these enterprises would be generated.

(5) Wide Scope of Taxes : Taxation system should be broad-based so that large population is brought under tax net. It will not only increase government revenue but also enable it to increase expenditure on social welfare.

(6) More Direct Taxes : More importance should be given to direct taxes than indirect taxes. Government should expand the scope of direct taxes. As direct taxes have no effect on poor population, so a larger revenue should be collected through direct taxes instead of indirect taxes.

(7) Reduction in Tax Evasion : Strict measures should be taken to check tax evasion in the country. Checking tax evasion will also help us to solve the problem of black money. Moreover, corruption and political immorality should also be curbed.

(8) Progressive Tax Structure: The tax structure should be made more progressive so that their burden may fall more heavily on the rich than on the poor.

(9) Simple Taxation System: Taxation system of the country must be simple. It will check tax evasion and tax payers will have no inconvenience in paying the taxes.

(10) Disinvestment of Loss Making PSUs : Loss making public sector units should be privatised. It will reduce the financial burden of government.

(11) Reducing the Problem of Overstaffing in Government Departments: Some government departments are over-staffed. It is unnecessary financial burden on the government. So surplus staff should be downsized.

(12) Reduction in Subsidies : Various subsidies are being given by the government viz., food subsidy, fertilizer subsidy, petroleum subsidy, export subsidy, etc. These subsidies should be reduced as these put undue burden on government exchequer.

(13) Encouragement to Saving and Investment: Although in the past few years the saving and investment rates have increased, but still there is wide scope for its further improvement. More incentives should be given to promote savings and invest ments.

(14) Strict Implementation of Various Projects : Implementation of various projects should be strictly monitored so as to check leakage of funds and ensure control over government expenses.

B.Com Ist Year Monetary Policy Long Short Question Answer Notes