Economics_RS Class 06

 

Economics_RS Class 06

A BRIEF OVERVIEW OF THE PREVIOUS CLASS (05:02 PM)

TAXATION-RELATED KEYWORDS (05:05 PM)

  • Tax base-  It is the reference for which we are calculating the tax. For excise duty, the reference is the production of goods. And for the income tax, the base is the income of the individual. 
  • Excise duty- it is levied on production or manufacturing. Excise duty was levied by the centre as it falls under the union list.
  • Sales tax - It falls under List II of the constitution. So the state will levy the tax. When the sales are happening within the state then sales tax is applied. 
  • Progressive taxation- As the income is increasing more tax is collected
  • Tax exemption- When exempted from paying tax. If there is an exemption of up to 3 lakhs then this exemption will be applied to all slabs. [* If income is 10 lakh also then also up to 3 lakhs the tax will be exempted]
  • Tax rebate- The rebate is not across all the slabs. [* If the government is giving tax rebates up to 7 lakhs and one has a salary of 7.1 lakhs then up to 3 lahks the exemption will be applied and for the remaining amount the tax needs to be paid.]
  • Customs duty-
  • It is levied on imports and exports. If the government is leaving customs duty on imports then the product will become costly and will become non-competitive. In the 1960s and 1970s, India used to impose very high customs duties. 
  • In the recent past, there was a huge amount of inflation, the raw materials like Iron and oil became costly, and thus the government decreased the custom duty so that the product became cheaper. 
  • When customs duty is increased then it will lead to cost-push inflation.
  • In India, customs duties were very high in the 1960s and 1970s. Both excise and customs duties are indirect taxes.  
  • Indirect taxes-
  • Indirect taxes are those taxes where the burden of the tax can be shifted i.e. the impact and incidence of the tax are at different points. 
  • [* Impact- It means the first point of contact and Incidence means ultimately who is paying the tax]. 
  • High indirect tax rates will affect the poor man
  • Direct taxes
  • Direct taxes are those taxes where the burden of the tax can not be shifted. It should be paid by the person or entity on whom it is levied. 
  • The impact and incidence of tax are at the same point.  
  • Methodology of taxing (05:30 PM)
  • The taxing system can be based on the principle of equity i.e. it can be divided into progressive taxes, Regressive taxes, Proportional tax
  • A Progressive taxing mechanism is used to reduce the disparity between rich and poor i.e. as the income/ profit increases the tax rate also increases. Example- Income tax. 
  • Progressive, Proportional and Regressive Taxes
  • Regressive tax Regressive taxing is generally seen as the opposite of progressive taxing where people with lesser income end up paying a higher proportion of their income as tax. Indirect taxes are seen as regressive in nature. 
  • Proportional tax - Irrespective of profit or income, there is a standard tax rate that is levied by the government. Example- corporate tax. 
  • Cascading effect
  • It is called Tax on Tax. It leads to an increase in product prices and it is also an indicator of an inefficient taxing system. 
  • Laffer curve
  • It makes a comparison between tax rate and tax revenue.
  • The optimum tax rate is the rate at which government collects the maximum amount of revenue and if the tax rate is increased beyond the optimum tax rate there will be a fall in tax revenues due to tax evasion and tax avoidance. 
  • Laffer Curve - Indian Economy Notes
  • Tax evasion- Escaping from paying taxes and is illegal. 
  • Tax avoidance-
  • It is done by bigger corporates. It is legal. It is using tax loopholes and manipulating the tax rates. For example- Google India generated a 100 cr profit but it showed in its balance sheet that it is paying 98 cr to its parent company in the USA. Thus they shifted 98 cr and now India can levy taxes on 2 cr only. For example- The Vodafone case.  
  • It is a mechanism of avoiding tax by using tax loopholes. Companies shift their profit from countries with high tax rates to countries with low tax rates.  
  • Tax havens-
  • Tax havens are destinations for routing black money.  
  • Tax rules are liberal and they will not question the source of income. Examples- cayman islands, Cyprus, Mauritius, etc
  • Shell company-
  • Their intention is not to do business. These are established in Tax haven countries. 
  • Shell companies are companies used for avoiding tax or converting black money into white money.

TAXATION IN INDIA (06:21 PM)

  • In the 1960s and 1970s, there was high taxation and inefficient taxation. 
  • Government tax collection was less and this impacted government revenues. But at this time government was spending more on subsidies and giving fiscal stimulus. 
  • Thus Government deficit was high. 
  • Immediately after 1991, India took first-generation reforms such as FOREX, Industry reforms, Banking reforms, etc. Also in 1999-2000, Government came up with second-generation reforms. 
  • After 2000, There was a discussion to focus on the Agriculture sector. 
  • During the LPG period, Government also had to focus on welfare and Inclusive growth (Governance aspect). For inclusive growth, governance is required. 
  • Along with the fiscal policy, Monetary policy is also required to enhance the business environment.  
  • Monetary Policy-
  • Policy taken by RBI. It deals with the Money supply in the economy. 
  • Monetary policy decides the availability of credit or loans in the economy. 
  • Who decides the interest rate of banks?- It is decided by Bank based on the policy provided by RBI. 
  • Monetary policy by RBI affects the interest rate and money supply in the economy. 
  • If RBI decides to increase growth it uses some tools to increase economic growth. 
  • In order to increase GDP growth, interest rates should be decreased. Loans will become cheap i.e easy availability of credit or loans. It increases consumption and it has a positive impact on GDP. It leads to demand-pull inflation. In any growing economy, It will be associated with inflation.   
  • GDP and inflation both are increasing. 
  • Interest rate= Interest rate getting on deposits OR, is the interest paid by the borrower. 
  • Tussle between Government and RBI 
  • Government is interested in GDP growth so it will always ask RBI to take such policies which reduce the interest rate and push Growth. 
  • But this increased Growth will also lead to inflation which hurts the poor more. 
  • When RBI tries to decrease Inflation, then GDP is also decreasing but the gap is not reducing. [* Both are either growing or both are decreasing]. 
  • RBI was not able to focus on both GDPs as well as Inflation. 
  • This was called a Dual dilemma.  

INDIA's SOCIALISM (07:07 PM)

  • India adopted a mixed economy model. India focussed on capital-intensive industries
  • Labour laws were stringent, so companies started using contract labour to bypass the complexity of the labour laws. Contract labour had no safety, social security, etc
  • India wanted to implement Land reforms to ensure the principle of Social Justice. 
  • Land reforms
  • Redistribution of land from the landed class to landless farmers. 
  • British tenure system (Zamindari, Mahalwari, and Ryotwari system)- By 1953, 57% of the land was under the control of Zamindars. So India implemented land reforms. 
  • The primary function of Land reforms was the zamindari abolition and it focussed on Tenancy reforms. It also focused on ownership rights.
  • It was also focused on the Reorganization of agriculture. [* Reorganization means coming up with cooperative farming and consolidation of land]
  • [ * Crisis Faced in India – Moral or Economic? UPSC 2015 essay ]
  • Farmers were exploited and forced to do distress selling. To discourage this distress selling, the government came up with the Agricultural Mandis. 
  • Farmers were asked to sell their produce in the government-registered Mandis. 
  • In this Mandis there was a formation of illegal cartels of traders. Traders used to decide the price. Traders used to get the license with much difficulty. 
  • [* Land Reforms, Benefits of farmers in Mandis, Efficiency of FCI, Allotment of licenses during license raj, Crony socialism which became Crony Capitalism after 1991, 2G scam- All these are MORAL crises and not the solely Economic crisis ]  
  • Dual dilemma [07:33 PM]
  • A dual dilemma is a dilemma with respect to framing monetary policy. After 2011, RBI encountered this dilemma due to a huge gap between the GDP and Inflation. 
  • RBI appointed the Urjit Patel committee and it recommended that the primary focus of monetary policy should be inflation. 
  • Regulated market (Agriculture)
  • Regulated markets with respect to agriculture were introduced during the 1940s to protect the farmer or to enhance transparency with respect to agricultural sales. 
  • Government-appointed APMC Mandis (Agriculture produce marketing committees) were facilitating the regulated market. 

CHAPTER 1- MONETARY POLICY (07:49 PM)

  • Monetary policy deals with the money supply in the economy. In India, RBI handles monetary policy by taking into consideration several factors like economic growth, Inflation, exchange rate policy, and also a few developmental aspects like unemployment, poverty, etc 
  • Monetary policy as an important macro-economic tool can be used to inject liquidity (Expansionary monetary policy) or to reduce the money supply in the economy (Contractionary monetary policy) 
  • Expansionary monetary policy
  • It focuses on increasing the money supply thereby boosting economic growth. It involves reducing interest rates of the banking system through different monetary tools (Quantitative and Qualitative tools). 
  • Contractionary monetary policy
  • It focuses on reducing the money supply by increasing the interest rates of the banking system with the primary intention of reducing inflation.
  • Multiprong approach/ Multiple indicator approach- RBI was taking multiple factors such as Inflation, GDP, Ruppe-dollar value, Poverty & unemployment-related approach. After this RBI moved to the two-factor approach which means the RBI has now to focus on two factors- GDP and Inflation. 
  • After 2011, there was a dual dilemma i.e. whether to focus on GDP or inflation. Then a committee was appointed named the Urjit Patel committee and it recommended to use single anchor function i.e. Inflation by keeping growth in mind.
  • Recently, across the globe, the inflation rate has been high so the central banks tightened the interest rates. Across the world, loans became costly, and the money supply was tightened. This affected the growth. 

The topic for the next class:-Monetary policy continuation.

Questions for practice

1)

The following statements are made with respect to monetary policy.


It is released monthly by the RBI in consultation with Central Government

It deals with keeping more money with the bank and does not target inflation.

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


2)

Consider the following taxes:


Corporation tax

Customs duty

Wealth tax

Excise duty

Which of these is/are direct taxes?


(a)1 only


(b)1 and 3 only


(c)2 and 3 only


(d)2 and 4 only


3)

Consider the following statements:


Monetary Policy deals with the taxation and expenditure decisions of the government.

Fiscal Policy deals with the supply of money in the economy and the rate of interest.

Which of the statements given above is/are not correct?


(a)1 only


(b)2 only


(c)Both 1 and 2


(d)Neither 1 nor 2


4)

The primary objective of Monetary Policy is to maintain


Price stability

Interest rate determination

Exchange rate stability

Select the correct answer using the code given below.


(a)1 only


(b)2 and 3 only


(c)1 and 2 only


(d)1 and 3 only


5)

With regard to taxation, consider the following statements:


Progressive taxes reduce the incidence of taxes on people with lower incomes.

In the case of proportional taxation, the tax rate increases with income.

Sales tax on food items is an example of a regressive tax.

Which of the statements given above is/are correct?


(a)1 only


(b)1 and 2 only


(c)2 and 3 only


(d)1 and 3 only


6)

Consider the following statements with respect to taxation based on Distributive Features:


A progressive taxation system is one when your income increases, you pay more proportion of your income as tax

The regressive taxation system is one in which the marginal rate of taxation decreases with the increase in income

A proportional taxation system is one in which the rate of taxation remains the same irrespective of income

Which of the statements given above is/are correct?


(a)1 and 2 Only 


(b)2 and 3 Only 


(c)1 and 3 Only 


(d)All of the Above 


7)

Consider the following statements with respect to Tax Avoidance: 


It can be done through the creation of shell companies to reduce tax liability  

It includes using tax havens and double taxation avoidance agreements for tax evasion  

Which of the statements given above is/are correct?


(a)1 Only 


(b)2 Only 


(c)Both 1 and 2 


(d)None of the Above 


8)

Tax havens as sometimes seen in news refer to


(a)Tax havens refer to those countries which due to favorable taxation system


(b)Tax havens offer tax liability in the friendly business enviroment


(c)Tax authorities have access to the accounts and information of the money invested by the investor of that particular country in the tax haven


(d)It exploits gaps and mismatches between different countries" tax systems that affects all countries


9)

Interest rates of the bank on which it lends to the borrowers are decided by


(a)Reserve Bank of India


(b)Respective Banks


(c)Central Government


(d)A committee consisting of RBI and Government


10)

Differentiate between Direct and indirect taxes. Also, mention the methodology of taxation (10 marks/ 150 words)


11)

Write a short note on the following (75 words each/ 10 marks)


Tax evasion and Tax avoidance

Taxing methodology

12)

The crisis faced by India after the independence was more of a Moral crisis rather than an Economic crisis. Comment (10 marks/ 150 marks)




Answers

1) d

2) b

3) c

4) c

5) d

6) d

7) c

8) a

9) b

Q1.

Differentiate between fiscal policy and monetary policy. By discussing the types of monetary policy, trace its evolution in India. (10 marks/ 150 words)  


(10 marks)

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