Question

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

Accepted Answer

(a) (i) 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. (ii) 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. OR (b) (i) Revenue Deficit = (ii) – {(i) + (iii)} = 3,700 – 1,200 – 2,000 = ₹ 500 crore Fiscal Deficit = {(ii) + (v)} – {(i) + (iii) + (iv) + (vi)} = 3,700 + 500 – 1,200 – 2,000 – 145 – 120 = ₹ 735 crore (ii) 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.

S.No.	Items	Amount (in ₹ Crore)
(i)	Tax Receipts	$\displaystyle 1,200$
(ii)	Revenue Expenditure	$\displaystyle 3,700$
(iii)	Non-Tax Receipts	$\displaystyle 2,000$
(iv)	Recovery of Loans	$\displaystyle 145$
(v)	Capital Expenditure	$\displaystyle 500$
(vi)	Disinvestment	$\displaystyle 120$
(vii)	Interest Payments	$\displaystyle 1,070$

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

Marking-scheme solution

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