(a) (i) Distinguish between direct tax and indirect tax with the help of examples. (ii) Explain the ‘reallocation of resources’ objective of…

Direct taxes are those taxes whose impact and incidence lies on the same entity. In other words, the liability of paying direct taxes can’t be shifted. For example: income tax.

Whereas;

Indirect taxes are those taxes whose impact and incidence may lie on different entities. In other words, the liability of paying indirect taxes can be shifted. For example: GST.

Reallocation of resources - Government through its budgetary policies tries to reallocate resources to ensure fulfillment of various socio-economic objectives.

The government may influence the allocation of resources through:

• Taxation policy - Heavy taxes may be imposed on harmful products to discourage their production and subsidies may be provided on the production of socially useful products to encourage their production.

• Government may directly undertake production of certain goods and services in the areas where private sector may not be willing to participate in production activities.

Revenue Deficit = (ii) – {(i) + (iii)}

= $\displaystyle 3,700$ – $\displaystyle 1,200$ – $\displaystyle 2,000$

= ₹ $\displaystyle 500$ crore

Fiscal Deficit = {(ii) + (v)} – {(i) + (iii) + (iv) + (vi)}

= $\displaystyle 3,700$ + $\displaystyle 500$ – $\displaystyle 1,200$ – $\displaystyle 2,000$ – $\displaystyle 145$ – $\displaystyle 120$

= ₹ $\displaystyle 735$ crore

Public provision refers to those goods that are financed through the government budget and can be used without any direct payment by public.

Whereas;

Public production relates to those goods which are directly produced by the government.