Tax Buoyancy

Tax Elasticity
 Tax Buoyancy
Responsiveness of tax revenue to changes in
(a) GDP
(b) Discretionary tax Changes such as Increase or Decrease in Tax Rate, Changes in Tax Base,
Changes in Tax Concessions.

Year GDP % Change in Tax revenue % Change in Tax Buoyancy

GDP Tax revenue
2020 100 N/A 10 N/A
2021 200 100% 15 50% 0.5
2022 250 25% 22.5 50% 2

Increase in Tax Revenue both on account of Increase in GDP
and tax change policies
• Higher the Tax buoyancy, higher the responsiveness of Tax
revenues in response to changes in GDP Calculation and
Changes in Tax policies.
• However, it does not tell us as to whether Tax revenues
have changed in response to Changes in GDP or Whether
Tax Revenues have changed in response to changes in Tax
rate
 Tax Elasticity
Responsiveness of tax revenue to changes in
(a) GDP
(b) Discretionary tax Changes not considered

Year GDP % Change in GDP Tax What would have been Tax % Change in Tax Tax Elasticity
revenue Revenue if Tax changes were revenue without
not introduced? accounting for tax
Changes
2020 100 N/A 10 10 N/A
2021 200 100% 15 12 20% 0.2
2022 250 25% 22.5 15 25% 1

• Higher the Tax elasticity, higher the responsiveness of Tax

Increase in Tax Revenue purely on account of Increase in revenues in response to changes in GDP without factoring
GDP tax changes.
 Criteria Tax Buoyancy Tax Elasticity
Response of tax revenue to changes in Response of tax revenue to change in
(a) GDP (a) GDP
Meaning (b) Discretionary tax Changes such as Increase (b) Discretionary changes discounted.
or Decrease in Tax Rate, Changes in Tax Base,
Changes in Tax Concessions.
Actual Tax Revenue considered. This Tax revenue Hypothetical value chosen. What would be the Tax Revenue if
How is Tax Revenue
is due to both change in GDP and Changes in Tax the Tax policies remain unchanged.
calculated
Policies
Percentage Change in Tax Revenue to Percentage Percentage Change in Tax Revenue to Percentage Change in GDP
Calculated as
Change in GDP
Higher Tax Buoyancy: Higher Responsiveness of Higher Tax Elasticity: Tax yields more revenue as GDP increases
Interpretation Tax to changes in GDP and discretionary tax without the need to change tax rate.
changes If taxes are elastic, there is no need to tinker with the tax rates.
 Tax Buoyancy and Tax Elasticity

Practice MCQ
Consider the following statements:
1. Tax Buoyancy is defined as change in Tax revenue in response to
change in GDP, assuming Tax rates remain constant.
2. Tax Elasticity is defined as change in Tax revenue in response to
change in tax rates, assuming GDP remains constant.

Which among the statements given above is/are correct?

(a) 1 only
(b) 2 only
(c) Both 1 and 2 only
(d) Neither 1 nor 2
 Tax Buoyancy and Tax Elasticity
Practice MCQ
If the Tax Buoyancy in a particular year is below 1,
then what does it necessarily denote?
(a) Low responsiveness of tax collection in
response to the GDP growth alone
(b) Low responsiveness of tax collection in
response to either the GDP growth or changes
in tax rate.
(c) Low responsiveness of tax collection in
response to changes in tax rate.
(d) Decrease in the tax revenue due to decrease
in the GDP growth rate in the current year.
Practice MCQ
If the Tax Elasticity in a particular year is above 1,
then what does it necessarily denote?
(a) Higher responsiveness of tax collection in
response to changes in tax rate.
(b) Higher responsiveness of tax collection in
response to the GDP growth alone
(c) Decrease in the tax revenue due to decrease
in the GDP growth rate in the current year.
(d) Higher responsiveness of tax collection in
response to either the GDP growth or changes
in tax rate.
 Bracket Creep and Fiscal Drag

Economic Boom

Higher rate of Inflation

Bracket Creep
Bracket Creep
Increase in Wages Situation where inflation pushes taxpayers into
higher tax brackets leading to Fiscal Drag
Increase in Income Levels

Progressive Taxation: People move

into higher Tax Brackets

Fiscal Drag
Fiscal Drag
Increase in Tax Collection • Slowdown in the Economic Growth due to
Decline in Aggregate Demand increase in Tax collection and decline in
demand
• Takes place due to Bracket Creep
Decline in Economic Growth
 Crowding-in Effect and Government Expenditure Multiplier

Increase in Government Expenditure

Crowding-in
Crowding-in Effect
Increase in Investment Expenditure
Effect of increase in GDP due to Increase in
Increase in Consumption Expenditure
Government Expenditure

Increase in GDP

Government Expenditure Multiplier (Keynesian Multiplier)

Ratio of Change in GDP in response to Change in Government’s Expenditure

Year Govt’s Expenditure GDP Keynesian Multiplier

2020 10 100 • Change in GDP = 100
2021 15 200 • Change in Expenditure = 5
• Multiplier = (100/5)= 20
 Crowding-out Vs Crowding-in effect

Increase in Government Expenditure

Crowding-in
Crowding-in Effect
Increase in Investment Expenditure
Effect of increase in GDP due to Increase in
Increase in Consumption Expenditure
Government Expenditure

Increase in GDP

Increase in Government Borrowings

Crowding-out
Crowding-out Effect
Less money available in Market
Effect of decrease in GDP due to Increase in
Increase in Interest Rates
Government Expenditure

Decrease in Investment and

Consumption Expenditure
 Economic Slowdown During Recession, Government should
increase Expenditure. However, to do
so, it should not increase tax rates.
Need to boost Aggregate Demand Rather, it should borrow more.

Options before Government

Increase Tax Rates Borrow More

No Borrowings Reduce Tax Rates

Higher revenue Mobilization Increase Govt Expenditure

Increase Govt Expenditure Crowd-in Effect and Keynesian Multiplier

Limited Impact on Demand Stimulate Economic Growth

 Even if the Government borrows more
to spend, demand will not increase.
Ricardian Equivalence This is so because people will save
money in anticipation of future
Economic Slowdown increase in tax rate

Need to boost Aggregate Demand

Borrow More
Reduce Tax Rates

Increase Govt Expenditure

People anticipate future increase in Tax rates

Save more money instead of spending

Demand for Goods and Services remain unchanged

Debt-financed Government
expenditure will not stimulate
Economy fails to get stimulated economy
 Scissors Effect

Economic Slowdown

Need to boost Aggregate Demand

What Government does?

Reduce Tax Rates Undertake higher Expenditure

Give more Tax Exemptions

Divergence between Income and Expenditure of Government

 Pigovian Tax

Tax on harmful/Sin Goods

 Tobin Tax

• Tax Proposed by Economist Tobin.

• To be imposed on inflow and outflow of FPIs to curb volatility.
• China imposed this tax on foreign exchange transactions to curb volatility in Yuan.
 Fiscal Glide and Fiscal Slippage

Fiscal Glide Path: Government setting Targets for Fiscal Deficit for next 2-3 years
Fiscal Slippage: Inability of the Government in sticking to its fiscal deficit target
Phantom Capital
Types of Fiscal Policies
 Types of Fiscal Policies
Types of Fiscal Policies Objective Recession
What Govt Should do?
Increase the Money Supply
Goes with the business
Pro-Cyclical Fiscal cycle What Govt Does?
Policy Increases the tax rates
Decreases the expenditure
What impact does it have?
Money Supply reduces
What Govt Should do?
Increase the Money Supply
Counter-Cyclical Fiscal Goes against the
Policy business cycle What Govt Does?
Decreases the tax rates
Increases the expenditure
What impact does it have?
Money Supply Increases
Inflation Effect
What Govt Should do? Prolongs the Recession
Decrease the Money Supply
or
What Govt does?
Increases the Expenditure Increases the rate of
Decreases tax rates Inflation
What impact does it have?
Money Supply increases
What Govt Should do? Promote Economic
Decrease the Money Supply Growth during
Recession
What Govt does?
Reduces the Expenditure Or
Increases tax rates
Reduce the rate of
What impact does it have? Inflation to Stable level
Money Supply reduces
 Practice MCQ Practice MCQ
Which among the following steps is the Which among the following is necessarily associated
Government not likely to take as part of Fiscal with Counter Cyclical Fiscal Policy?
Stimulus Policy?
1. Attempt to reverse the business Cycles.
1. Increase in Tax rates 2. Increase in Government’s Expenditure
2. Increase in Tax Expenditure 3. Decrease in Tax rates.
3. Higher borrowings from the market.
Select the correct answer using the code given below:
Select the correct answer using the code given
below: (a) 1 only
(a) 1 only (b) 1 and 2 only
(b) 1 and 2 only (c) 2 and 3 only
(c) 2 and 3 only (d) 1, 2 and 3
(d) 1, 2 and 3
Taxpayers’ Charter

• Announced in the Union Budget 2020-21

• Incorporated under Income Tax Act.
• India- not the first country to adopt Taxpayers’ charter

Practice MCQ
With reference to Taxpayers Charter, consider the following
statements:
1. The Taxpayers Charter highlights the roles and responsibilities
of Citizens and Tax authorities, obligations of the taxpayers and
provides a mechanism for Grievance redressal.
2. India has become the first country in the world to introduce
Taxpayers Charter.

Which of the statements given above is/are correct?

(a) 1 only
(b) 2 only
(c ) Both 1 and 2
(d) Neither 1 nor 2
Off Budget Financing
 Centrally Sponsored Schemes Vs Central Sector Schemes

Criteria CENTRAL SECTOR CENTRALLY SPONSORED

Financed by Central Government Both Centre and States in defined proportion
Implementation Central Government State Government
Mainly Union List. Some Schemes are Mainly State and Concurrent list
Subjects
also part of State and Concurrent list.
• PM-AASHA Categories Examples
• PM-KISAN
Core of the MGNREGA, NSAP, Umbrella Programme for
• Urea Subsidy/ Nutrient based Subsidy
Core SCs ; STs; Minorities; Vulnerable groups
• Regional Connectivity Scheme
(6
• Trade Infrastructure for Export
Schemes)
Scheme
• Pradhan Mantri Gramin Digital Core PMGSY; PMKSY; PMAY; SBM; ICDS; NEM;
Examples Saksharta Abhiyan (PMGDISHA) Schemes NHM; NRDWM; NLM; AMRUT and Smart
• Pradhan Mantri Jeevan Jyoti Bima (24 Cities; PM-JAY; BADP; Green Revolution, Blue
Yojna and Pradhan Mantri Suraksha Schemes) Revolution, White Revolution; MDM etc.
Bima Yojna etc.
Optional No Optional Schemes as per Budget 2022-23
Schemes
Types of Deficits in India
Types of Deficits in India
Types of Deficits in India
Types of Deficits in India
Types of Deficits in India
Types of Deficits in India
 Types of Deficits in India
Total Fiscal Deficit:
16 Lakh crores

Expenditure Heads Types of Deficits in India

A. Revenue Expenditure Gross Fiscal Deficit:
1. Interest Payments Total borrowings in a single year.
2. Subsidies Total money borrowed for (A) + (B)
3. Defence Net Fiscal Deficit:
4. Public Administration Gross Fiscal Deficit-Loans to States/UT/Sectors
5. Grants to the States for Asset Creation Total money borrowed for (A) + (B.1)
Revenue Deficit:
B. Capital Expenditure Revenue Expenditure- Revenue Receipts
1. Creation of new capital assets Total money borrowed for (A)
2. Loans to States/ UT Effective Revenue Deficit:
3. Loans to various sectors such as Revenue Deficit- Grants to States for Asset Creation
Agriculture, Industries etc. Total money borrowed for A.1+ A.2+A.3+ A.4
Primary Deficit
Fiscal Deficit- Interest payments
Total Money borrowed for B+ A.2+A.3+A.4+A.5
 Total Budget Snapshot of Government’s Finances
Size in 2021-22: Primary Deficit-
37.5 lakh crores Fiscal Deficit- Interest
Payments
Revenue Account 8 lakh crores (3.3% of GDP)
Capital Account

Receipts (20.5 lakh Expenditure( 31.5 lakh Receipts ( 17 lakh Expenditure (6 lakh
crores/ 8.8% of GDP) crores (13.5% of GDP) crores/ 7.3% of GDP) crores/2.5% of GDP)

Gross Tax Revenue ( 25 Lakh • Interest Payment ( 8 lakh Debt Receipts: Borrowings (16 • Creation of new assets
crores/10.8% of GDP)
Revenue Deficit: crores- Highest) Lakh crores) and infrastructure
• Direct Taxes: (5.4% • Major Subsidies Non-Debt Receipts • Loans and advances
Revenue Expenditure- Revenue
• Indirect Taxes: (5.4%) • Salaries and Pensions • Disinvestment
• DecreasingReceipts
order of Taxes: GST, • Defence Expenditure • Recoveries of loans and
11Corporate
lakh crores (4.7%Tax,
Tax, Income of Union
GDP) • Grants to States for Creation advances
Effective Capital Expenditure
Excise Duty, Customs Duty of Capital Assets (2.4 Lakh Money spent by Centre on
Net Tax Revenue (17.5 lakh crores) crores Creation of Assets + Grants to
Gross Tax Revenue- (State’s share of
Taxes+ Transfer to NDRF)
States for Creation of assets
Fiscal Deficit:
Effective Revenue Deficit: Total Expenditure- (Revenue
Non-Tax Revenue (3 Lakh crores)
• Interest Receipts
Revenue Deficit- Grants to States Receipts + Non-Debt Capital
• Dividends and profits of PSUs for Creation of Assets Receipts)
• User charges 8.6 lakh crores (3.7% of GDP)
• External Grant Assistance
16 lakh crores (6.9% of GDP)
• Non-tax revenue of UTs
 Total Budget
Size: 37.5 lakh Snapshot of Government’s Finances
crores
 Sources of financing Fiscal Deficit
Total Fiscal Deficit:
16 Lakh crores
 DEFICITS- MEANING AND TRENDS

Practice MCQ Practice MCQ

Which among the following is/are referred to as Twin A Consistent decline in Primary Deficit accompanied by
Deficits in an economy? constant level of Fiscal Deficit would denote which among
1. Fiscal Deficit the following?
2. Revenue Deficit
3. Current Account Deficit 1. Decrease in Interest Payments
4. Primary Deficit 2. Higher level of Outstanding Debt

Select the correct answer using the code given below:

Select the correct answer using the code given below:
(a) 1 only
(a) 1 and 2 only
(b) 2 only
(b) 2 and 3 only (c) Both 1 and 2
(c) 1 and 3 only (d) Neither 1 nor 2
(d) 2 and 4 only
 DEFICITS- MEANING AND TRENDS

Practice MCQ Practice MCQ

Which among the following is/are included in the Consider the following statements:
calculation of Effective Capital Expenditure? 1. The Fiscal Deficit has consistently increased in the last
1. Money spent by the Centre on creation of Assets decade.
2. Grants given by the Centre to States on asset creation. 2. The effective Revenue Deficit has been eliminated in
3. Entire Capital Expenditure of all the states. 2021-22
3. A higher share of Fiscal Deficit is used for financing
Select the correct answer using the code given below: Revenue Expenditure in India.
(a) 1 only
(b) 1 and 2 only Which of the statements given above is/are correct?
(c) 2 and 3 only (a) 1 and 3 only
(d) 1, 2 and 3 (b) 3 only
(c) 2 and 3 only
(d) 1, 2 and 3
 DEFICITS- MEANING AND TRENDS

Practice MCQ Practice MCQ

Which among the following best describes the concept of Which among the following highlights the deterioration in the
"Tax Expenditure"? quality of Fiscal Deficit in India?
(a) Expenditure incurred by the Government for the 1. Higher share of Revenue Expenditure in Fiscal Deficit.
collection of taxes 2. Increase in the Government’s borrowings from External
(b) Revenue forgone by the Government due to Tax sources
exemptions 3. Increase in the share of Short-term borrowings.
(c) Increase in the tax revenue of the Government due to
Select the correct answer using the code given below:
increase in its expenditure
(a) 1 only
(d) None of the above
(b) 1 and 2 only
(c) 2 and 3 only
(d) 1, 2 and 3
 DEBT- MEANING AND TRENDS

Practice MCQ
Which among the following steps is/are likely to be taken to reduce Fiscal
Deficit?
1. Rationalise Subsidies
2. Undertake Disinvestment of PSUs
3. End Off-Budget Financing
4. Introduce welfare schemes for poor

Select the correct answer using the code given below:

(a) 1 and 2 only
(b) 1, 2 and 3 only
(c) 1 and 4 only
(d) 1, 2,3 and 4
DEBT- MEANING AND TRENDS
DEBT- MEANING AND TRENDS
 Prelims 2022
With reference to the Indian economy, consider the following statements:
1. A share of the household financial savings goes towards
government borrowings.
2. Dated securities issued at market-related rates in auctions form a
large component of internal debt.
Which of the above statements is/are correct?
(a) 1 only
(b) 2 only
(c) Both 1 and 2
(d) Neither 1 nor 2
DEBT- MEANING AND TRENDS
DEBT- MEANING AND TRENDS
 Prelims Pointers on India’s External Debt
Categorisation of Duration of loan- Short-term (less than 1 year) and long-term (more than 1 year)
External Debt Sovereign Debt (Government) and Non-Sovereign Debt (Other than Government, including private sector)
Components of • Loans received by Government in the form of multilateral Debt and Bilateral debt.
Sovereign Debt • FPI Investment in G-Secs
Components of Non- External Commercial Borrowings (ECBs) + Trade Credits + NRI Deposits
Sovereign Debt
Multilateral Debt: Debt from the multilateral institutions such as World Bank, IMF, ADB etc.
Bilateral Debt: Debt from sovereign countries such as Japan, Germany etc.
Major Heads under Trade Credits: Loans and credits extended for imports directly by overseas supplier, bank and financial
External Debt institutions
External Commercial Borrowings: loans from commercial banks, other commercial financial institutions
Non-Resident Deposits in Banks and Financial Institutions
Cumulative External Debt: US$ 590 billion (20% of the GDP). Non-Sovereign Debt higher than Sovereign
Debt
Present status of
Components of Debt: ECBs followed by NRI Deposits
External Debt
Duration of Debt: Long term debt (83%); Short-term debt (17%).
Denomination of Debt: US dollar (51%); remaining in Rupee, Yen, SDR and Euro.
Rupee Denominated Rupee denominated NRI Deposits + FPI Investment in G-Secs + FPI Investment in Corporate Bonds + Masala
External Debt Bonds
Calculated as (Annual Principal Repayments + Interest Payments) divided by Current Account Receipts in
Debt Service Ratio
BoP. Measure of strain on BoP due to servicing of debt service obligations
 Concept of Interest Rate Growth Differential (IRGD)

Relationship between Public Debt and GDP Growth

First Approach: Higher Public Debt decreases GDP Growth rates

Crowd-out Private
Sector Investment Higher Inflation Higher Interest burden

Inter-generational
Lower GDP Growth Inequity
rates

Increase in rate
Decline in Imposition of higher Debt Trap
of Interest on
Investment and taxes on future
Loans
Consumption generations
Expenditure
External Sector

Downgrade
Higher Cost of Rupee Depreciation Imports become
Sovereign Credit
Borrowing due to Inflation costly
Ratings
 Concept of Interest Rate Growth Differential (IRGD)

Relationship between Public Debt and GDP Growth

Second Approach: Don’t worry about Quantity of Public Debt rather about Capacity to repay

Generate
Borrow Rs 100 Make Investment Rate of Returns
Debt Rs 1000 Revenues worth
Interest: 8% in Capital Assets
Rs 112
Maturity: 10 years
Rate of Interest
Repay existing
Rs 4 -Additional borrowings of Rs
Repay existing debt Returns 108

Asset Creation
For the debt to be sustainable, the rate of
returns (GDP Growth rate) should be higher
Boost Demand and Investment than the rate of interest on loans i.e.
Expenditure GDP Growth rate > Rate of Interest on Loans.

Interest Rate Growth Differential = Interest

Promote GDP Growth rates Rate- GDP Growth Rate.
Concept of Interest Rate Growth Differential (IRGD)
 SUSTAINABILITY OF DEBT

Practice MCQ Practice MCQ

A particular country has a very high value of Negative A consistent increase in Positive Interest rate growth
Interest rate growth differential (IRGD). What does it differential (IRGD) is not likely to be associated with
denote?
which among the following?
1. Higher capacity to repay loans.
(a) Decrease in GDP Growth rate
2. Lower Debt Sustainability
3. Enhanced capacity to provide Fiscal Stimulus
(b) Higher Debt Sustainability
(c) Lower capacity to provide fiscal stimulus
Select the correct answer using the code given below: (d) Increase in rate of Interest on borrowings
(a) 1 only. (b) 2 only. (c) 1 and 3 only. (d) 2 and 3 only
 FRBM Act, 2003

Prelims 2016 Prelims 2020

Consider the following statements :
1. The Fiscal Responsibility and Budget Management
(FRBM) Review Committee Report has
recommended a debt to GDP ratio of 60% for the
general (combined) government by 2023,
comprising 40% for the Central Government and
20% for the State Governments.
2. The Central Government has domestic liabilities of
21 % of GDP as compared to that of 49% of GDP of
the State Governments.
3. As per the Constitution of India, it is mandatory for
a State to take the Central Government's consent
for raising any loan if the former owes any
outstanding liabilities to the latter.
Along with the Budget, the Finance Minister also places other
documents before the Parliament which include "The Macro
Economic Framework Statement. The aforesaid document is
presented because this is mandated by
(a) Long standing parliamentary convention
(b) Article 112 and Article 110 (1) of the Constitution of India
(c) Article 113 of the Constitution of India
(d) Provisions of the Fiscal Responsibility and Budget Management
Act, 2003

Which of the statements given above is/ are correct ?

(a) 1 only (b) 2 and 3 only (c) 1 and 3 only (d) 1, 2 and 3
 FRBM Act, 2003

Targets under FRBM Act, 2003 Escape Clause Statements required

• Reduce FD to 3% of GDP by • Deviation of 0.5% FD allowed. • Medium Term Fiscal Policy

end of March 2021. Conditions: Statement
• Combined Debt of Centre • National Security, War, National • Fiscal Policy Strategy Statement
and State should less than Calamity, Collapse of • Macro-economic Framework
60% Agriculture, Structural Reforms, Statement
• (Centre- 40%, State-20%) Decline in the GDP growth • Medium-term Expenditure
by 31st March 2025. rates. Framework Statement
• Not to give additional
guarantees with respect to
any loan on security of the
Consolidated Fund of India
in excess of one-half per
cent of GDP
Medium Term Fiscal Policy Statement Cum Fiscal Policy Strategy Statement
FRBM Act, 2003
 FRBM Act, 2003

Practice MCQ Practice MCQ

Which among the following statements is/are presented along Which among the following objectives is/are sought to be
with the Budget documents under the FRBM Act,2003? achieved through the FRBM Act, 2003?
1. Medium term Fiscal Policy Statement 1. Limits on Fiscal Deficit
2. Fiscal Policy Strategy Statement 2. Keeping Public Debt under control
3. Macro-economic framework Statement 2. Restriction on Direct Monetisation
4. Medium Term expenditure Framework Statement.
Select the correct answer using the code given below:
Select the correct answer using the code given below: (a) 1 only (b) 1 and 2 only
(a) 1 and 2 only (b) 1, 2 and 3 only (c) 1 and 3 only (d) 1, 2 and 3
(c ) 1, 2 and 4 only (d) 1, 2, 3 and 4

Practice MCQ
Which among the following indicator/s is/are considered under the Medium-term fiscal policy statement presented under
FRBM Act?
1. Fiscal Deficit
2. Revenue Deficit
3. Primary Deficit

Select the correct answer using the code given below:

(a) 1 only (b) 1 and 2 only (c) 2 and 3 only (d) 1, 2 and 3
 FRBM Act, 2003

Practice MCQ Practice MCQ

With reference to FRBM Act, consider the following
statements:
1. Under this act, the Government can borrow from the
RBI for meeting its immediate and temporary cash
requirements.
2. The Government can borrow money from the RBI for
meeting its deficit under some exceptional circumstances.
Which of the statements given above is/are correct?
(a) 1 only
(b) 2 only
(c) Both 1 and 2
(d) Neither 1 nor 2
Which among the following statement is incorrect with
respect to Fiscal Responsibility and Budgetary
Management Act (FRBM), 2003?
(a) The FRBM Act, 2003 puts a limit on the centre from
giving guarantee on the loans on the security of
Consolidated Fund of India.
(b) The FRBM Act, 2003 enables the Government to
borrow short term loans from the RBI.
(c) The FRBM Act, 2003 completely prohibits direct
monetisation of Government’s deficit.
(d) The FRBM Act does not explicitly target Effective
Revenue Deficit and Primary Deficit.
 15th Finance Commission
Recommendations

Prelims 2015 Things to know: Prelims 2022

With reference to the Fourteenth Finance • Details about Finance Commission: Constitutional Provisions,
Commission, which of the following Mandate, Composition etc.
statements is/are correct? • Terms of reference of 15th Finance Commission
1. It has increased the share of States in • Concept of Central Divisible Pool of Taxes
the central divisible pool from 32 • Vertical Fiscal Gap and Trends in Vertical Distribution of Taxes between
percent to 42 percent. Centre and States
2. It has made recommendations
• Share of Central Transfers in States’ Revenues and Concept of Post-
concerning sector-specific grants.
Devolution Revenue Deficit Grant
• Criteria for horizontal distribution of Taxes
Select the correct answer using the code
given below. • Transfer of finances to Local bodies
(a) 1 only • Important Recommendations of 15th Finance Commission:
(b) 2 only • Modernization fund for Defence
(c) Both 1 and 2 • Funds for Disaster Management
(d) Neither 1 nor 2
 Prelims Pointers on Finance Commission
Art 280
Establishment: FC to be set up by President every 5 years or earlier.
Composition: Chairman and 4 Members ( Qualifications not mentioned in Constitution). Parliament to
formulate law to laydown the qualifications of members
Role:
• Distribution between the Union and the States of the net proceeds of taxes
Constitutional Provision
• Principles which should govern the grants-in-aid of the revenues of the States out of the
(Art 280 and Art 281)
Consolidated Fund of India;
• Measures needed to augment the Consolidated Fund of a State to supplement the resources of the
Panchayats and Municipalities in the State on the basis of the recommendations made by the
Finance Commission of the State
Art 281: Recommendation of FC along with the action taken report to be placed before each house of
the Parliament by President.
• Chairman ( Experience in Public Affairs)
Legal Provision • 4 members: Judge of HC + Special knowledge of Finances and accounts + Experience of Financial
FC Act, 1951 matters and administration + Special knowledge of Economics
• FC to have powers of Civil Court.
Terms of Reference of Vertical Distribution of Taxes + Horizontal distribution of Taxes + Need for Revenue deficit Grants +
15th Finance Modernisation of Defence + Review Disaster Financing architecture + Impact of GST on States
Commission
Vertical Fiscal Gap and Trends in Vertical Distribution of Taxes between Centre and States
Central Divisible Pool
Share of Central Transfers in States’ Revenues and Concept of Post-Devolution Revenue Deficit Grant
Transfer of finances to Local bodies
 15th Finance Commission
Details about Finance Commission: Constitutional Provisions, Mandate, Composition etc.

Practice MCQ Practice MCQ

With respect to Finance Commission, consider the Which among the following is/are the Terms of Reference of 15th
following statements: Finance Commission?
1. The Finance Commission is constituted by the 1. Review Disaster Financing architecture
Parliament under article 280 of the Constitution. 2. Doing away with Centrally Sponsored Schemes (CSS)
2. The Indian Constitution provides for the composition 3. Defence Modernisation
and qualification of the members of Finance
4. Impact of GST on States
Commission.
3. The recommendations of the Finance Commission are
Select the correct answer using the code given below:
implemented through a law passed by the Parliament.
(a) 1 and 2 only
Which among the statements given above is/are incorrect? (b) 1 and 3 only
(a) 1 only (c) 1, 3 and 4
(b) 2 only (d) 2 and 4 only
(c) 2 and 3 only
(d) 1, 2 and 3
 15th Finance Commission
Concept of Central Divisible Pool of Taxes

Practice MCQ Practice MCQ

Which among the following is/are excluded from the
Gross Tax Revenue (GTR) of the Centre to arrive at the
Central Divisible pool of Taxes of the Finance
Commission?
1. Surcharge and Cess collected by Centre
2. Tax Revenue of Union Territories
3. Cost of collection of Taxes
Which among the following Union Taxes is/are included in the Central
Divisible pool of taxes of the Finance Commission?
1. Surcharge on Corporate Tax
2. Central GST (CGST)
3. Union Territory GST (UTGST)
4. Integrated GST (IGST)
5. GST Compensation Cess

Select the correct answer using the code given below: Select the correct answer using the code given below:
(a) 1 only (a) 1 and 2 only
(b) 1 and 2 only (b) 2 only
(c) 1 and 3 only (c) 2, 3 and 4 only
(d) 1, 2 and 3 (d) 4 and 5 only
 15th Finance Commission
Vertical Fiscal Gap and Trends in Vertical Distribution of Taxes between Centre and States

Practice MCQ Practice MCQ

Which among the following best describes the concept
of Vertical Fiscal Gap?
(a) Gap between Revenue and Expenditure of the
Centre
(b) Mismatch between Revenue mobilization and
expenditure obligations at different levels of
Government
(c) Mismatch between Revenue mobilization and
expenditure obligations of different state
Governments
(d) Gap between Revenue and Expenditure of the
States.
Consider the following statements about Finance Commission:
1. The Finance Commission recommendation for vertical
distribution of taxes between Centre and States is based upon a
well-defined formula.
2. In terms of vertical distribution of taxes between centre and
states, the percentage share of states’ taxes has consistently
increased.
Which among the statements given above is/are correct?
(a) 1 only
(b) 2 only
(c) Both 1 and 2
(d) Neither 1 nor 2