Question

(i) Discuss briefly, causes and consequences of tax reforms taken by the Indian Government during economic reforms. (ii) Distinguish between…

Accepted Answer

(a) (i) The causes of the tax reforms initiated during economic reforms in India were to curb tax evasion, encourage savings and voluntary disclosure of income. Additionally, indirect tax reforms were necessitated to facilitate the establishment of a common national market for commodities. The tax rate rationalisation during the reform period, aimed at yielding larger tax revenue but did not result in an increase in the tax revenue. Moreover, tax incentives provided to foreign investors further reduced the scope for raising tax revenues which adversely impacted developmental and welfare expenditures. (ii) Multilateral trade is the trade by a country with more than two nations to exchange goods and services. Whereas; Bilateral trade refers to the exchange of goods or services between two countries. OR (b) (i) Yes. Import-substitution policy aimed at replacing imports with domestic production to protect domestic industries from foreign competition and to save foreign exchange. However, protection from foreign competition may do more harm than good. The domestic producers in the absence of a competitive market won’t have any incentive to improve the quality of their goods. In turn, consumers may have to purchase low quality items at a higher price. Hence, import substitution policy, if not applied carefully, can prove to be a double-edged sword for any economy. (ii) Stabilisation measures are short-term measures, intended to correct some of the weaknesses that have developed in the balance of payments and to bring inflation under control. Whereas; Structural measures are long-term measures, aimed at improving the efficiency of the economy and increasing its international competitiveness by removing the rigidities in various segments of the Indian economy.

(i)
Discuss briefly, causes and consequences of tax reforms taken by the Indian Government during economic reforms.
(ii)
Distinguish between Multilateral Trade and Bilateral Trade.

Marking-scheme solution

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