Banking Awareness Study Material – Tax and Budget

Banking Awareness Study Material – Tax and Budget

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Tax

Tax is the main source of state income, which is compulsorily paid to the state. Government obtains tax from citizen and spends it on their welfare and common good.

Aims of Taxation

At present, the main aim of taxation is not to secure finances for the expenditure, but to reduce the economic inequalities of the income.

Following are the main aims of taxation

• To secure money for expenditure
• Regulation of economy
• Equitable distribution of income

Different Types of Tax Policy

At global level, these are many different types of tax policy.

Following are the popular types

• Progressive Tax Structure: Under this type of tax structure with increasing income, the tax liability of a tax payer increases not only in absolute terms but also as a proportion of his income.
• Regressive Tax Structure: When with the increasing income, percentage of tax decreases, it is termed a regressive tax of the tax liability of the tax payer.
• Proportional Tax Structure: The tax structure of an economy is termed as proportional, if the tax liability of a tax payer increases in the same proportion as the increases in his income.
• Digressive Tax System: Under this type of tax structure, rate of taxation increases with the increase in income upto a limit but the rate of tax remains the same after that limit.

e.g. Upto a income of ₹ 10 lakh the rate of taxation may be different according to varying incomes, but it may remain 30% for income above ₹ 10 lakh.

Tax Revenue in India

Tax is a compulsory payment by the citizens to the government to meet the public expenditure. It is legally imposed by the government.On the tax payer and in no case tiix payer can deny to pay taxes to government, can be direct, indirect tax, wealth tax, gift tax etc., are example of direct tax and sales tax, excise duty, custom duty etc., are example of indirect tax.

Generally, tax is divided into two parts which are as follows

1. Direct tax
2. Indirect tax

Principal Direct and Indirect Tax in India

Direct Tax Personal income tax Corporation tax	Indirect Tax Excise duty Custom duty
Wealth tax	Sales tax
Gift tax	Service tax
Land revenue	Value added tax
Professional tax	Passenger tax
Stamp duty and registration charges	Entertainment tax
Securities trade tax	Electricity duty
Banking cash transaction tax	Motor vehicle tax

Direct Tax

The direct tax is that, which is borne by the person on whom it is levied. A direct tax cannot be shifted to other person. Direct as well as indirect money burden of the direct tax is on the person on whom the tax is imposed. Impact of the tax as well as incidence of the tax is on the same person.

Some of the central direct taxes are as follows

• Income Tax: It is the tax levied directly on the income of the people by the Central Government. This tax is recovered by Income tax department under Central Board of Direct Taxes (CBDT).
• Gift Tax: The tax is imposed by the Central Government on all donations and gifts over and above the prescribed limits to the family members. However, donation given by the charitable institutions and companies is not covered under gift tax. Cash or gifts from non-relatives is non-taxable upto a value of ₹50000 in a year.
• Corporate Tax: It is levied on the profit of the companies or corporations. It is the latest source of revenue of the government.
• Wealth Tax: This tax is levied on the net wealth of the individuals. Hindu Undivided family and joint stock companies. It is minor source of revenue of the government, primarily imposed to reduce concentration of wealth in the society.
• Interest Tax: This tax is imposed on the interest income of the commercial bank on their gross loans and advances. Now, it is not in force in India.
• Minimum Alternative Tax: To check the theft of Corporate Tax, MAT at a rate of 2.5% was introduced for the first time in year 1997-98. It is applied to that part of company’s profit which is not covered under Corporate Tax.
• Securities Transaction Tax: It is a tax payable in India on the value of securities transacted through a recognised stock exchange. STT was originally introduced in 2004.

Indirect Tax

These are those taxes, which have their primary burden or impact on one person, but that person succeeds in shifting his burden on others. Consequently, the final or the real burden of the taxes or the incidence has to be borne by a third person. Some of the central indirect taxes are as follows

• Excise Duty: These duties are imposed by Central Government on the goods produced within the country except certain goods, on which State Government are empowered to impose tax. These goods includes liquor, drugs, etc.
• Custom Duty: These duties are imposed on commodities, which are imported or exported from India. In other words, when goods cross the political boundary of country or come from other countries, custom duties are imposed. Like excise duty, custom duty also contribute the government revenue.
• Service Tax: Comparatively a new concept in India, services tax is a tax imposed on the person, who avails any specified service. Its importance as a sources of revenue has been increasing in recent years. The government is receiving more and more revenue from the service tax.
• Value Added Tax (VAT): It is an indirect tax, which is imposed on value added at the various stages of production or value adding. Value added refers to the difference between value of output and value of intermediate consumption. VAT, in fact is the multi-stage sales tax. It is imposed at each stage of production or value adding.

Value added tax = Total sales – Cost of intermediate consumption

In one of the most large scale reforms of the country’s public finances in over past 50 years, India finally agreed to the launch of its much-delayed Value Added Tax (VAT) from 1st April, 2005. Haryana was the first state to introduce VAT in India from 1st April, 2003 out of 35 States/UTs, 33 have introduced VAT.

The Goods and Services Tax (GST): Goods and Services Tax (GST) is an indirect tax levied when a consumer buys a good or service. India’s current tax scenario is riddled with various indirect taxes which the GST aims to subsume with a single pan India comprehensive tax, by bringing all such taxes under a single umbrella. The aims of bill to eliminate the cascading effect of taxes on production and distribution prices on goods and services. Cascading effect of taxes is caused due to levy of different charges by State and union governments separately.

This tax structure raise the tax-burden on Indian products,affectir their prices, and as a result, sales in the international marker. The new tax regime will therefore, help boost exports.

• Central Taxes replaced by GST Bill:  Central Excise Duty, Additional Duties of Excise and Customs, Special Additional Duty of Customs (SAD), Service Tax and Cesses and Surcharges on supply of goods and services.
• State Taxes Subsumed in the GST Bill:  VAT, Central Sales Tax, Purchase Tax, Luxury Tax Entry Tax, Entertainment Tax, Taxes on advertisements, lotteries, betting, gambling and State Cesses and Surcharges.

The union Government has set the ambitious target rollout of the GST from 1st April, 2017.

Central Value Added Tax (CENVAT)

It is popularly known as central excise duty. It is duty on the manufacture production of goods in India. The regulatory body is the Central Board to Excise and Customs (CBSE), on agency of the department of revenue, Ministry of Finance in India. It was introduced in year of 2000.

Government evolved a new scheme, ‘MODVAT’ (Modified Value Added Tax). MODVAT scheme which essentially follow VAT Scheme of taxation.

Non-Tax Revenue

Non-tax revenue are those receipts, which are received from sources other than taxes like fees, fines, etc.

Some of the non-tax receipts are as follows

• Fee, License and Permit: Fee is changed for government services like land registration fee, birth and death registration fee, passport fee, court fee, etc. License and permit are the amount that the government charges for allowing the people perform a given job.
• Escheat: It refers to income of state from property, which has no claimant heir. In the case, state has the right over such properly.
• Special Assessment: It assessment is that payment which is made by the owners of those properties, whose value has appreciated due to development activities of the government.
• Fines and Penalties: Payment, which government receive by the law brakers.
• Income from Public Expenditure: Profits earned by the government from public sector enterprises.

Contribution of Tax in Public Revenue

Tax	Percentage Contribution
Corporate tax	21 %
Income tax	14%
Central excise duty	11 %
Custom duty	10 %
Service tax and other taxes	7%

DTC (Direct Tax Code) has been bought in place of income tax Act, 1961. Under DTC the three tax rate prevailing has been kept as it is (10%, 20%, 30%) but tax exemption limit has been raised. Further there is a provision of higher exemption limit for women and the maturity income received from various saving schemes has seen kept out of ambit of tax. The DTC has been already in place and was implemented in mid of financial year 2012-13.Direct Tax Code

Important Tax Related Terms

• Tax Shifting: Transferring some or all of a tax burden of an entity (such as a subsidiary) to another (such as the parent firm). Tax shift or tax swap is a change in taxation that eliminates or reduces one or several taxes and establishes or increases others while keeping the overall revenue the same.
• Tax Havens: It is a country or territory, where certain taxes are levied at a low rate or not at all. Individual and/or corporate entities can find it attractive to move themselves to areas with reduced or nil taxation level. This creates a situation of tax competition among government different jurisdiction tend to be havens for different type of taxes and for different categories of people and/or companies, e.g. income tax, wealth tax and corporate tax etc.
• Tobin Tax: A means of taxing spot currency conversions that was originally suggested by American economist James Tobin (1918-2002). As described by him, the tax involves applying a small charge, of as little or less than 0.1%, on foreign currency transactions to protest countries from exchange-rate volatility caused by short term currency speculation.
• Tobin Effect: It suggest that nominal interest rates would rise less than one-for-one with inflation because in response to inflation, the public would hold less in money balances and more in other assets, which would drive interest rates down. In other words, an increases in the exogenous growth rate of money increases the nominal interest rate and velocity of money, but decreases the reed interest rate.
• Tax Evasion: It is the illegal evasion of taxes by individuals, corporations and trusts. Tax evasion often entails taxpayers deliberately misrepresenting the true state of their affairs to the tax authorities to reduce their tax liability and includes dishonest tax reporting, such as declaring less income, profits or gains than the amounts actually earned or overstating deductions.
• Tax Avoidance: It is the legal usage of tax regime to one’s own advantage, to reduce the amount of tax that is payable by means that cure within the law. Tax shattering is very similar and tax havens are jurisdictions which facilitate reduced taxes.The term tax mitigation is sometimes used, its original use was by tax advisers as an alternative to the prejovrative term tax avoidance.

Committees on Tax Reforms

Following are the committees

• Chelliah Committee It was setup in 1991 under Chairmanship of Prof. Raja Chelliah. The committee submitted its report in 1993 and most of the recommendations were included in Budget 1993-94.
• Kelkar Committee It was setup in 2002 by the Central Government, which submitted its report in same year. The committee was headed by Prof. Vijay Kelkar. Its most of the recommendation has been accepted in last decade.
• MK Gupta Committee It was setup in 2012 with the purpose of internalisation of common tax code, under goods and service tax.

Other Committees of Tax Reforms

Wanchu Committee	Direct tax
LK Jha Committee	Indirect tax
Rekha Committee	Indirect tax

‘Sahaj’ and ‘Sugam’ It Forms

The Finance Ministry has introduced simpler income tax return forms Sahaj and Sugam aimed at reducing \ compliance burden on salaried persons and small ) businessmen. Sahaj is for salaried people, Sugam return form is 5 applicable for small businessmen and professionals covered under presumptive taxation.

General Anti Avoidance Rules (GAAR)

GAAR was introduced by previous Finance Minister Mr Pranab Mukherjee in his budget speech. GAAR sparked controversy for months. The possibility of tax authority scrutinising transactions aiming at tax avoidance left FU’s Jittery.

Further GAAR was in controversies again when Vodafone acquiring of Hutchisian came into light tax authorities claimed a loss of? 11000 crore and due on Vodafone. GAAR will help in bringing transparency and efficiency in economic policy making and taxation.

Tit-Bits

• Octrol: is an indirect tax which is levied by local institutions.
• VAT (Value Added Tax): was first implemented in Germany.
• The relations between tax and its rate is shown by Laffer Curve
• Tax on agricultural income was first charged in Bihar.
• E-stamping devotes replacing stamp duty required for payment of registration of properties and documents.

Public Finance

The study of government’s revenue and expenditure is called as public finance. The boundaries of public finance in modern times is not limited to ways and means of government income and expenditure only, but it also studies public debt, financial administration and Fiscal Policy of the economy.

Public finance can be divided into five sections which are as follows

• Public Revenue/Income: Under the theory of public revenue, we study alternative sources of state income. It discusses and analysis comparative advantages and disadvantages of various forms of revenue and the principles which should govern the choice between them.
• Public Expenditure: Under the theory of public expenditure, we deed with various principles, on the basis of which the direction of government expenditure is governed. Theory of public expenditure is a major tool for implementing welfare, growth stabilisation and other policies of the government.
• Public Debt: Theory of public debt deals with all the loans and other liabilities of the government and all the principles related with debt.
• Financial Administration: All financial activities involving issues of financial administration including public budget, its passing, auditing and similar other matters.
• Economic Stability: Under the theory of economic stability, we study various policies and principles of finance to bring economic stability in the country. Fiscal policy of the government is studied under the theory of economic stability.

Fiscal Policy

The part of the government policy, which is concerned with raising revenue through taxation and with deciding on the amount and purpose of government spending. Fiscal policy is the means, by which a government adjusts its level of revenue and spending in order to monitor and influence and nation’s economy in a mixed economy, a part from the private sector, then is the government, which plays a very important role. The role of the government in promoting economic development came into vogue after ‘The great depression’ and is essentially a Keynesian prescription. Later Dr

Parthsarthi Scheme Committee: was appointed in this regard to form various guidelines and recommendations for GAAR Policy. Fiscal policy, essentially has a multi-dimensional role. However, in India, in the centre of indicative planning.

It has two major objectives

• Improving the growth performance of economy.
• Ensuring social justice to the people.

It influences growth performance of economy mainly by influencing the resource mobilisation and influencing efficiency of resources allocation.

Assessment of Government Deficits

Assessment of Government deficits can be done on following basis

• Fiscal Deficit: It is the difference between what the government earns and its total expenditure.
  • Fiscal deficit = Revenue receipts (Net tax revenue + Non-tax revenue) + Capital receipts — Total expenditure (Plan and Non-plan)
• Revenue Deficit: It is the difference between the revenue receipt on tax and non-tax side and the revenue expenditure. Revenue expenditure is synonymous with consumption and non-development.
  • Revenue deficit = Revenue expenditure – Revenue receipts
• Budgetary Deficit: It considers only the difference between the total budgeted receipt and the expenditure. It is abolished in 1997.
• Primary Deficit: It is the difference between the fiscal deficit and the interest payment. The concept helps in assessing the progress of the government in its fiscal control efforts.
  • Primary deficit = Fiscal deficit – Interest payments
• Monetary Deficit: It is the borrowing made from the RBI, through printing fresh currency. It is restored, when government cannot borrow from market.

Fiscal Responsibility and Budget Management (FRBM) Act, 2003

FRBM Act was passed by the Union Government to provide a legislative control over the fiscal situation of the country, which had deteriorated earlier. The Fiscal Responsibility and Budget Management Act, 2003 (FRBM Act) has been amended as part of the Finance Bill, 2012. It has introduced the concepts to reform the expenditure aspect of the fiscal policy.

Effective Revenue Deficit: It excludes from the conventional revenue deficit, grants for the creation of capital assets. This is an important development for the reason that while the revenue deficit of the consolidated general government fully reflects total capital expenditure incurred, in the accounts of the centre, these transfers are shown as reserve expenditure.Therefore, the mandate of eliminating the conventional revenue deficit of the centre becomes problematic. With this amendment, the endeavour of the government under the FRBM Act would be to i eliminate the effective revenue deficit.

Budget

The budget is an extensive account of the government’s finances, in which revenues from all sources and expenses of all activities undertaken are aggregated. The Finance Minister presents the union budget every year in last week of February in the Parliament that contains the Government of India’s revenue and expenditure for one fiscal year, which runs from 1st April to 31st March.

Types of Budget

Following are the types of budget

• Traditional Budget: It is a type of budget which uses the income and expenses from the previous year or month to predict the next month or year’s budget. A traditional budget is easy to create since it is meant to predict a future period of finances in relation to the previous period. In most cases though, the traditional budget usually ends up being too rigid.
• Performance Budget: A budget that reflects the input of resources and the output of services for each unit of an organisation. This type of budget is commonly used by the government to show the link between the funds provided to the public and the outcome of these services.
• Zero-Based Budgeting: It is a method of budgeting in which all budgetary allocations are set to nil at the beginning of a financial year.
• Outcome Budgeting: This type of budgeting tries to ensure that budget outlays translate into concrete outcomes.
• Gender Budgeting: It came into being in 2004-05. To contribute towards the women empowerment and removal of inequality based on gender, role of budgeting has been accepted through this step.

Other Types of Budget

Following are other types of budget .

• Budget Deficit: A status of financial health in which expenditures exceed revenue. The term ‘budget deficit’ is most commonly used to refer to government spending rather than business or individual spending. When referring to accured federal government deficits, the term ‘national debt’ is used.
• Single Budget: When a single budget is made for all departments and programmes it is called a single budget. All items of income and expenditure are included. Single budget is used in UK and USA.
• Polymer Budget: When different budgets are made for different departments, it is known as polymer budget. This system is prevalent in France, Switzerland, Germany and other countries.
• Item Based Budget: In this type of budget department wise allocation is not done. This facilitates funds to be used in any head, but prior permission is to be taken.
• Supplementary Budget: It is prepared for emergency situations like natural calamities, decrease in revenue etc.
• Interim Budget: It is prepared in case of special situations like elections, wars, natural calamities, etc. This is valid only for 6 months. Revenues are not specified and only expenditures are specified for financial year.
• Documents of Union Budget: Mainly there are seven documents
  • Budget Receipts
  • Demand for Grants
  • Budget Expenditure
  • Budget Summary
  • Finance Bill
  • Speech of Finance Minister

Budget Fact File

• John Mathai proposed the first Budget of Republic of India in 1950 and also the creation of Planning Commission. (Now, NITI Aayog)Finance Minister Morarji Desai has given Budget for the maximum number of times (10), followed by P Chidambaram, who has given 8 budgets.
• CD Deshmukh was the first Indian Governor of RBI to have presented the Interim Budget for the year 1951-52.
• Mrs Indira Gandhi is the only woman to hold the post of the Finance Minister and to have presented the budget in her capacity as the Prime Minister of India in 1978.
• The first such mini-budget was presented by TT Krishna machari on 30th Nov, 1956, in form of fresh taxation proposals through Finance Bills, demanded by the prevailing domestic and international economic situation.

Rail budget has been merged with union budget in 2017-18.

Finance Commission

According to Article 280(1) of Constitution, the President appoints a Finance Commission after every 5 yr.

The Finance Commission was appointed 2 yr after the implementation of the Constitution and every 5 yr thereafter.

The President has the power to appoint a new Finance Commission even before the expiry of five years, if he deems it necessary.

The Finance Commission advise the President on following matters

• To determine the basis for the allocation of funds collected from the taxes, which are divisible between the centre and the states.
• To formulate the principles regarding the grants to the states from the centre.
• To continue the agreements made between the Government of India and the states or to recommend changes in them.
• To consider any other financial matter, in the interest of the country, on being notified by the President to do so.

On the basis of this arrangement, fourteen Finance Commissions have been setup so for

Finance Commission	Chairman	Finance Chairman	Chairman
1st (1951)	MrKC Niyogi	8th (1983)	Mr YB Chavan
2nd (1956)	Mr KA Santhanam	9th (1987)	Mr NKP Salve
3rd (1960)	Mr AK Chanda	10th (1992)	Shri KC Pant
4 th (1964)	Mr PV Rajamannar	11th (1998)	Professor AM Khusro
5 th (1968)	Mr MahaveerTyagi	12th (2002)	DrC Rangarajan
6th (1972)	Mr Brahmanan da Reddy	13th (2007)	Dr Vijay LKelkar
7th (1977)	MrJM Shellat	14th (2013)	YV Reddy

Fourteenth Finance Commission

The Fourteenth Finance Commission constituted under the chairmanship of former RBI Governor YV Reddy. The five-member panel is to submit its report by 31st Oct, 2014. Apart from its recommendations on the sharing of tax proceeds between the centre and the states, which will apply for a 5 yr period beginning 1st April, 2015, the commission has been asked to suggest steps for pricing of public utilites such as electricity and water is an independent manner and also look into issues like disinvestment. GST compensation, sale of non-priority PSUs and subsidies. Besides, the Fourteenth Finance Commission would suggest measures for maintaining a stable and sustainable fiscal environment consistent with equitable growth.

Recommendations of 14th Finance Commission

The Government of India on 24th Feb, 2015 accepted recommendations of the 14th Finance Commission for increasing share of States in Central taxes to 42%.

• The Commission recommended increase in the share of States in the Centre’s tax revenue from the current 32% to 42%, the single largest increase ever recommended.
• The recommendation will give more power to States in determining how they spend this money (it also correspondingly reduces the fiscal resources available to the Centre).
• 14th Finance Commission, headed by former RBI Governor YV Reddy, has endorsed compensation roadmap for the goods and services tax finalised by the Centre, but has called for an autonomous and independent GST compensation fund.
• In the case of value added tax, compensation was provided to the States for three years, at 100% in the first year, 75% in the second year and 50% in the third year, and the Commission has suggested a similar pattern for GST compensation, but for five years. The government has introduced the Constitution Amendment Bill on GST in Lok Sabha in the previous session. It is hoping to introduce the new tax from April, 2016.

Inflation

It is defined as a sustained increase in the general level of prices for goods and services. It is measured as an annual percentage increase. Inflation is the percentage change in the value of the Wholesale Price Index (WPI) or, a year basis.

Causes of Inflation
Causes of inflation in India are

• Increase in public expenditure
• Deficit financing
• Erratic agricultural growth
• Agricultural price policy of government
• Upward revision of administered price
• Inadequate rise in industrial production

The main causes or inflation are either excess aggregate demand (economic growth too fast) or cost push factors (supply side factors).

Calculation of Inflation in India
Inflation is usually measured based on certain indices. Broadly, there are two categories of indices for measuring inflation i.e. wholesale prices and consumer prices.

Index

An index number is a single figure that shows how the whole set of related variables has changed over time or from one place to another.

Two types of index given below

• Wholesale Price Index (WPI) It is the index that is used to measure the change in the average price level of goods traded in wholesale market. In India, a total of 435 commodities data on price level is tracked through WPI which is an indicator of movement in prices of commodities in all trade and transactions.

• Consumer Price Index (CPI) It is a statistical time-series measure of a weighted average of prices of a specified set of goods and services purchased by consumers. It is a price index that tracks the prices of a specified basket of consumer goods and services, providing a measure of inflation. CPI is a fixed quantity price index and considered by some as a cost of living index.

Under CPI, an index is scaled so that it is equal to 100 at a chosen point in time, so that all other values of the index are in percentage relative to this one.

Till January 2012, in India there were only following four CPIs compiled and released on national level. They are

1. Industrial Workers (IW) (base 2001)
2. Agricultural Labourer (AL) (base 1986-87)
3. Rural Labourer (RL) (base 1986-87) and
4. Urban Non-Manual Employees (UNME) (base 1984-85)

• House Price Index (HP!) An index that measures the price of residential housing (specially single-family  properties), which is polished quarterly by the Federal Housing Finance Agency (FHFA). ’
• Service Price Index (SPI) An index that measure the fluctuation of service value. Indian Government want to launch this index soon.

Concepts Related to Inflation

These are as follows

• Money Deflation: When the overall price level decreases so that inflation rate becomes negative, it is called deflation. It is the opposite of the often encountered inflation.
• Monetary Reflation: A Fiscal or Monetary Policy, designed to expand a country’s output and curb the effects of deflation. Reflation policies can include reducing taxes, changing the money supply and lowering interest rates.

The term reflation is also used to describe the first phase of economic recovery after a period of contraction.

• Stagflation: Stagflation, a portmanteau of stagnation and inflation, is a term used in economics to describe a situation where the inflation rate is high, the economic growth rate slows down and unemployment remains steadily high. It raises a dilemma for economic policy since actions designed to lower inflation may exacerbate unemployment and vice versa.
• Devaluating of Money: It is decided by the government issuing the currency and unlike depreciation, is not the result of non-governmental activities. One reason a country may devaluate its currency is, to combat trade imbalances. Devaluation causes a country’s exports to become less expensive, making them more competitive on the global market. This in turn, means that imports are more expensive, making domestic consumers less likely to purchase them.
• Recession: It is a slow down or a massive contraction in economic activities. A significant fall in spending generally leads to a recession. Such a slow down in economic activities may last for some quarters, thereby completely hampering the growth of an economy. In such a situation, economic indicators such as GDP, corporate profits, employments etc., fall.
• Foreign Exchange Regulation Act (FERA): It was passed in 1947 which was amended in 1973. The new FERA came into force from 1st Jan, 1974. The objective was the conservation of India’s Foreign exchange reserves, judicious use of foreign exchange, using mainly in these sector which require foreign technology.
• Foreign Exchange Management Act (FEMA): FERA was repealed in 1998 and Foreign Exchange Management Act (FEMA) was enacted. No unauthorised person would be allowed to deal in foreign exchange.

The authorised person could sell; draw foreign exchange from any authorised person on current account transaction, subject to approved of RBI. RBI has exclusive authority to regulate supply; use of foreign exchange. RBI, if thinks fit at the compelling situation can prohibit use of foreign exchange for any specific purpose.

Difference between FERA and FEMA

FERA	FEMA
FERA was passed in 1947 which was ammended in 1973.	FEMA came in place of FERA from 1998.
FERA deals with foreign exchange regulation.	FEMA deals with exchange management.
In case of FERA, RBI’s permission is required.	Exchange dealing in foreign exchanges, no permission is required from RBI.
FERA was old and not upto the current economic situational requirement.	FEMA came out a time when India’s foreign exchange position was satisfactory.
FERA gives wide power to enforcement directorate to arrest any person, seize any document.	FEMA violation will not bring any criminal proceedings. It is a civil offence.

Money Laundering

It is the generic term used to describe the process by which criminals disguise the original ownership and control of the proceeds of criminal conduct, by making such proceeds appear to have derived from a legitimate source. The processes by which criminally derived property may be laundered are extensive.

QUESTION BANK

1. Which one of the following items will be subsumed under the Goods and Services Tax of India?

1. Additional excise duties
2. Special additional custom duties
3. Additional surcharges and cesses
4. All of the above
5. None of the above

2. Which one of the following deficits deducted the interest payments to internal and external debt from the fiscal deficit to calculate the deficit of an economy?

1. Revenue deficit
2. Twin deficit
3. Primary deficit
4. Budgetary deficit
5. None of the above

3. ‘Dark Block’ is an area

1. where literacy rate is below 15%
2. where people below the poverty line are more than 90%
3. where underground source of water is not available
4. where more than 85% exploitation has taken place on the available underground water
5. None of the above

4. ‘Hedging’ denotes

1. ‘protecting against fluctuations/ uncertainty risk in forex markets
2. credit risk assessment in respect of advance
3. speculative buying/selling of foreign currency
4. capital risk assessment in respect of advances
5. None of the above

5. A direct tax cannot be shifted to other person. Central direct taxes is/are

1. Income tax
2. Gift tax
3. Corporate tax
4. All of the above
5. None of the above

6. Indian tax system is accused of

1. Discouraging employment
2. Distorting prices
3. Adversely affecting savings
4. All of the above
5. None of the above

7. Which one of the following is the major source of the revenue to State Government in India?

1. Agriculture income tax
2. Professional tax
3. General sales tax
4. Stamp duties
5. All of these

8. Which of the following is not included in government securities?

1. Promissory notes
2. Debentures
3. Bearer bonds
4. All of these
5. None of these

9. Which of the following statements is incorrect?

1. VAT is the neutral tax since it does not influence the organisation of production
2. VAT is easier to enforce than the sales tax to impose through cross-checking
3. GST consists of three components such as Central-GST, State-GST and Local-GST
4. Central -GST and State -GST will apply to all transaction of goods and services
5. The Union Government of India passed the General Sales Tax in 1956

10. Inflation is caused by

1. increase in supply of goods
2. increase in cash with the government
3. decrease in money supply
4. increase in money supply
5. All of the above

11. Which one of the following duties/taxes is the major component of the customs duties in the Indian Economy?

1. Import duties
2. Export duties
3. Estate duties
4. Both 1 and 2
5. None of these

12. Which one of the following is refer to the use of taxation, public expenditure and the management of public debt in order to achieve certain specified objectives?

1. Fiscal policy
2. Trade policy
3. Revenue policy
4. None of these
5. All of these

13. ‘Caused Bill of Lading’ is one which indicates

1. no defects in packaging or condition of goods
2. defective condition of package
3. no documents attached to it
4. complete documents attached to it
5. None of the above

14. Sub-prime refers to

1. lending done by banks at rates below PLR
2. funds raised by the banks at sub-libor rates
3. group of banks which are not rate as prime banks as per banker’s almanac
4. lending done by financing institutions including banks to customers not meeting with normally required credit appraisal standards
5. None of the above

15. A country is said to be in a debt trap if

1. it has to borrow to make interest payments on outstanding loans
2. it has to borrow to make interest payments on standing loans
3. it has been refused loans or aid by creditors abroad
4. the world bank charges a high rate of interest on outstanding as well as new loans
5. it has to borrow to make interest payments on all types of loan

16. The Goods and Services Tax (GST) proposed to be introduced covers taxes like

1. Trade/Sale Tax
2. Service Tax
3. Service, Excise
4. Service, Excise,VAT
5. All of the above

17. A debt becomes time-barred after

1. one year
2. two and a half years
3. three years
4. five years
5. None of these

18. The purpose of providing depreciation on the bank’s property is

1. to reduce the profit of the bank
2. to make usual allowances for annual wear and tear
3. to enable the bank to recover this amount from the Reserve Bank of India
4. to strengthen the financial position of the bank
5. None of the above

19. Most of the Indirect Taxes replaced by

1. CENVAT
2. VAT
3. Indirect Tax Code
4. Goods and Services Tax (GST)
5. None of the above

20. Among which of the following is related to bank risks?

1. Deposits
2. Bank funds
3. NPA
4. All of these
5. None of these

21. Service Tax was introduced in India in

1. 1994-95
2. 1996-97
3. 1998-99
4. 2001-02
5. 2004-05

22. ‘Sub-prime lending’ is a term applied to the loans made to

1. these borrowers who do not have a good credit history
2. those who wish to take loan against the mortgage of tangible assets
3. those who have a good credit history and are known to bank since 10 yr
4. Both 1 and 2
5. None of the above

23. Choose the correct statements regarding GAAR.

1. GAAR means General Anti Avoidance rules.
2. GAAR was introduced by previous finance Minister Mr Pranab Mukherjee.
3. GAAR will help in bringing transparency and efficiency in economic policy making and taxation.
4. All of the above
5. None of the above

24. Securitisation is

1. non-performing loans are acquired from banks and financial institutions at a discounted value and security receipts issued to them so that these loans are removed from their in respect of such loans and improve profitability
2. converting the illiquid loans of banks and financial institutions by securitisation companies into tradable securities, after they are acquired and sold to the investors
3. a process of acquisition of non-performing loans from banks by a securitisation company and covert them into tradable securities and sold to the investors
4. All of the above
5. None of the above

25. Which of the following is not a reason for demand pull inflation?

1. Shortage of consumer goods
2. More exports
3. Economic growth
4. Less import
5. More exports and less imports

26. During inflation

1. exports becomes more expensive
2. exports becomes more cheap
3. imports becomes more expensive
4. surplus balance of payment
5. All of the above

27. Inflation can defined as

1. a persistent rise in general price level
2. a persistent fall in general price level
3. an increase purchasing power
4. increase in value of money
5. decrease in money

28. Reason for cost push inflation is

1. increase in wage rate
2. increase in interest rate
3. increase in the price of raw material
4. increase in indirect tax
5. decrease in cost of production

29. Primary deficit is the difference between the

1. fiscal deficit and the expenditure
2. capital receipts
3. plan expenditure
4. interest payment
5. Non-tax revenue

30. Deflation depresses aggregate demand because of

1. the wealth effect
2. the expectations effect
3. the income effect
4. the consumption effect
5. All of these

31. VAT was introduced in

1. 1995
2. 1997
3. 1999
4. 2002
5. 2007

32. Which of the following is a measure of fiscal reforms Government of India has adopted?

1. Bringing down fiscal deficit to a particular level by an Act of Law
2. Fixing higher rate of growth
3. Allocation of more funds to job oriented schemes
4. Allocation of more funds to provide education to children who are 6-14 years of age
5. None of the above

33. Central Value Added Tax (CENVAT) was introduced in

1. 2000-01
2. 2001-02
3. 2002-03
4. 2003-04
5. 2006-07

34. Which of the following is not a tax/duty levied by the Government of India?

1. Income Tax
2. Education Cess
3. Service Tax
4. Customs Duty
5. Toll Tax

35. Union budget is always presented first in

1. the Lok Sabha
2. the Rajya Sabha
3. joint session of the Parliament
4. meeting of the Union Cabinet
5. the State Assemblies

36. Krishi Kalyan Cess is a levy/tax imposed by Union Government on all services tax, at the rate of …for financing improvement of agriculture and welfare of farmer.

1. 0.01%
2. 0.2%
3. 0.5%
4. 1%
5. 1.5%

37. Fiscal deficit is

1. total income less government borrowing
2. total payments less total receipts
3. total payments less capital receipts
4. total expenditure less total receipts excluding borrowing Rs. 2
5. None of the above

38. Money Laundering normally involves

1. placement of funds
2. layering of funds
3. integration of funds
4. All of these
5. None of these

39. As we all know India has a three-tier structure of tax administration. There are taxes levied by Central Government, State Governments and Local Governments. Which of the  following taxes is levied by the local government bodies?

1. Value Added Tax
2. Stamp Duty
3. Service Tax
4. Land Revenue
5. Tax on water supply and drainage etc

40. The amount of which of the following reflects the overall budgetary position of the Government of India at a given time?

1. Revenue deficit
2. Total amount of income tax collected
3. Capital deficit
4. Fiscal deficit
5. None of the above

41. Which of the following services provided by a bank in India is not liable for Service Tax as per existing laws?

1. Safe deposit lockers
2. Merchant banking services
3. Credit cards
4. Discount earned on certain discounted bills
5. None of the above

42. The maximum amount of the total revenue earned by the Government of India comes from

1. Income Tax
2. Customs Duty
3. Excise Duty
4. Value Added Tax
5. Corporate Tax

43. Which of the following commissions setup by the President of India decides the distribution of tax incomes between the Central and State Governments?

1. Central Law Commission
2. Pay Commission for Government Employees
3. Administrative Reforms Commission
4. Planning Commission
5. Finance Commission

44. Minimum Alternative tax was introduced in India for the first time in the year

1. 1990-91
2. 1991-92
3. 1997-98
4. 1980-81
5. 2000-01

45. Modified Value Added Tax (MODVAT) was introduced in

1. 1986-87
2. 1980-81
3. 1982-83
4. 1981-82
5. 1990-91

46. Excise duty is levied on

1. Sale
2. Production
3. Imports
4. Exports
5. Metal

47. Which of the following taxes is not levied by the Union Government?

1. Customs
2. Corporate Tax
3. Land Revenue
4. Income Tax
5. Surcharge on Income Tax

48. As we all know, Government of India pays special emphasis on the management of Fiscal Deficit. What is Fiscal Deficit?

1. The gap between projected or estimated GDP and actual GDP
2. The gap between the total number and value of the currency notes issued by the RBI uptill now over the number and value of those which are in actual circulation
3. The gap between the actual borrowings of the Government of India and the expected expenditure for which provision is made in the budget
4. Excess of government’s disbursement comprising current and capital expenditures over its current receipts (tax/non-tax receipts)
5. None of the above

49. Transport of goods by which of the following is free from levy of the Service Tax?

1. Indian railways
2. Shipping companies owned by NRIs
3. All private road transport companies
4. By the Transport Corporation of India in its own special containers
5. None of the above

50. Service tax was introduced in India in the year

1. 1993
2. 1994
3. 2000
4. 2004
5. 2005

51. Service tax was introduced in India on the recommendation of

1. Keikar Committee
2. Dr Raja Challiah Committee
3. Dr Manmohan Singh Commitee
4. Dr Yashwant Sinha Committee
5. Bimal Jalan Committee

52. Which of the following are the direct taxes?

1. Income Tax
2. Gift Tax
3. Wealth Tax
4. Both 1 and 2
5. All the above

53. Which of the following are the indirect taxes?

1. Custom Duty
2. Excise Duty
3. Sales Tax and Service Tax
4. Both 2 and 3
5. All of these

54. Income Tax in India was introduce in

1. 1832
2. 1845
3. 1897
4. 1860
5. 1895

55. Which of the following duty was levied on the total property passing to the heirs on the death of a  person?

1. Custom Duty
2. Estate Duty
3. Excise Duty
4. Wealth Tax
5. All of these

56. Wealth Tax was introduced in India in

1. 1967
2. 1965
3. 1969
4. 1957
5. 1980

57. Gift received from any person is taxable if the aggregate value exceeds

1. ₹ 50000
2. ₹ 40000
3. ₹ 45000
4. ₹ 55000
5. ₹ 66000

58. Direct Tax Code (DTC) Bill 2010 was introduced in Parliament to overcome the complications of

1. Wealth Tax and Gift Tax
2. Excise Duties
3. Custom Duties and Sales Tax
4. All Direct Taxes
5. None of the above

59. Import Duties are generally levied on

1. the basis of Type of commodity
2. turnover size of the commodity
3. ad valorem (percentage of the price of commodity)
4. All of the above
5. None of the above

60. Which of the following is/are the Non-Tax Revenue components of the Union Budget of India?

I. Customs Duties
II. Interest Receipts
III. Dividends and Profits

Select the correct answer using the codes given below .

1. Only I
2. Only II
3. II and III
4. Only IV
5. All of these

61. Which of the following is/are the components of the Fiscal Deficit?

I. Budgetary Deficit
II. Market Borrowing
III. Expenditure made from Pradhan Mantri Rahat Kosh

Select the correct answer using the codes given below

1. Only I
2. Only II
3. Only III
4. All of these
5. None of these

62. As we all know, the Ministry of Finance every year prepares the Union Budget and presents it to the Parliament. Which of the following is/are the elements of the Union Budget?

I. Estimates of revenue and capital receipts.
II. Ways and means to raise the revenue.
III. Estimates of expenditure

Select the correct answer using the codes given below

1. Only I
2. Only II
3. Only m
4. All of the above
5. None of the above

63. Consider the true statements regarding provision under the black money (undisclosed foreign income and assets) and Imposition of Tax Bill, 2015

I. Undisclosed foreign income or assets shall be taxed at the rate of 30%.
II. The punishment would be rigrous imprisonment from 3 to 10 yr.
IIl. Maximum penalty of ?₹lcrore with imprisonment.

Select the correct answer using the codes given below

1. I and II
2. Only II
3. II and in
4. Only III
5. I, II and III

64. Consider the following statements in the context of governance.

I. Encouraging foreign direct investment inflows.
II. Privatisation of higher educational institutions.
III. Down-sizing of bureaucracy

Which of the above can be used as measures to control the fiscal deficit  in India?

1. Only 1
2. Only II
3. Only III
4. All of the above
5. None of the above

65. Many a times we read about rural indebtedness in various newspapers/ magazines. What are the main causes of the rural indebtedness?

I. Poverty
II. Inability to repay the loans.
III. Zamindari system which prevents farmers to own the land.

Select the correct answer using the codes given below

1. Only I
2. Only II
3. Both I and n
4. All of the above
5. None of the above

66. Which of the following correctly describes what sub-prime lending is?

I. Lending to the people with less than ideal credit status.
II. Lending to the people who are high value customers of the banks.
III. Lending to those who are not a regular customer of a bank.

Select the correct answer using the codes given below

1. Only I
2. Only II
3. Only III
4. All of these
5. None of these

67. Which of the following is/are the central tax(es) replaced by GST?

I. Central Excise Duty
II. Cesses and surcharges on supply of goods and services.
III. Special Additional Duty of Customs. (SAD)

Select the correct answer using the codes given below

1. Only II
2. II and III
3. I and III
4. All of these
5. None of these

68. Assessment of Government deficits can be done on following basis.

I. Fiscal Deficit
II. Revenue Deficit
III. Non-plan deficit

Select the correct answer using the codes given below

1. Only I
2. Only II
3. Only III
4. All of these
5. Both I and II

69. According to GST Bill, State taxes subsumed in GST is/are

I. Central Sale tax
II. Luxury tax
III. Taxes on advertisement

Codes

1. II and III
2. I and III
3. I and II
4. Only II
5. All of these

70. Which of the following is called ‘Robinhood Tax’ and was in news during recent summit of G20 nations? [RBI Grade B 2011]

1. Excise Duty
2. VAT
3. Goods and Services
4. Tobin Tax
5. None of these

71. Which of the following policies is known as Annual Policy Statement? [Corporation Bank 2011]

1. Annual budget of Central Government
2. Credit and monetary policy of RBI
3. Foreign trade policy of DGFT
4. Regulations issued by SEBI
5. None of the above

72. As we all know, Government of India collects tax revenue on various activities in the country. Which of the following is a part of the tax revenue of the government? [Corporation Bank 2011]

I. Tax on Income
II. Tax on Expenditure
III. Tax on Property or Capital Asset
IV. Tax on Goods and Services

Select the correct answer using the codes given below

1. I and III
2. II and IV
3. II, III and IV
4. All of these
5. None of these

73. Many times we read about ‘Hawala’ transactions in newspapers. Hawala, in India, is prohibited under the provision of which of the following Acts? [Corporation Bank 2011]

1. Fiscal Responsibility and Budget Management Act
2. Banking Regulation Act
3. Financial Action Task Force Act
4. Foreign Exchange Management Act
5. None of the above

74. Goods and Services Tax (GST) would replace which of the following taxes levied at present? [Indian Overeas Bank 2011]

1. Income Tax
2. Corporate Tax
3. Capital gains Tax
4. Value Added Tax (VAT)
5. All of the above

75. Which of the following bills presented in the Parliament will bring some changes in the existing tax regime? [Corporation Bank 2011]

1. Direct Taxes Code (DTC) Bill
2. Foreign Exchange Management Regulatory Bill
3. Companies Act Bill
4. Salaries and Perks for MPs Bill
5. Finance Bill 2010-11

76. Expand the term FRBM. [Indian Overseas Bank 2011]

1. Financial Responsibility and Business Management
2. Fiscal Responsibility and Business Management
3. Financial Responsibility and Budget Management
4. Fiscal Responsibility and Budget Management
5. Formal Responsibility and Business Management

77. Which of the following is/are the Non-Tax Revenue components of the Union Budget of India? [Andhra Bank 2011]

I. Custom Duties
II. Interest Receipts
III. Dividend and Profits

Select the correct answer using the codes given below

1. I and II
2. Only II
3.  II and III
4.  Only III
5. All of these

78. Which of the following organisations/agencies is actively involved in drafting the Union Budget of India? [Andhra Bank 2011]

1. The Planning Commission
2. The Comptroller and Auditor General
3. Administrative Staff of the Lok $abha
4. Ministry of Finance
5. Ministry of Rural Development

79. Which of the following is the target fixed for maintaining fiscal deficit in the Union Budget of India? [Allahabad Bank 2011]

1. 4.6% of total budget
2. 4.6% of GDP
3. 3.6% of total budget
4. 3.6% of GDP
5. None of these

80. What is a fiscal deficit? [Punjab and Sindh Bank 2011]

1. It is a gap between the values of exports and imports
2. It is a gap between exports and imports minus external borrowings
3. It is a gap between total expenditure and total receipts of the government
4. It is a gap between total receipts minus external borrowings
5. None of the above

81. A tax based on the value of the property/product is called [SBI Associate 2012]

1. Fringe benefit tax
2. Value Added Tax
3. Minimum Alternative tax
4. Turnover tax
5. Ad Valorem tax

82. Excise duty is the tax levied on [SBI Associate 2012]

1. production of goods
2. Import of goods
3. sale of goods
4. profit on sale of goods
5. Income from other sources

83. The Central Board of Direct Taxes has made e-filing of income tax returns mandatory for all assesses whose annual earnings exceed [SBI Associate 2013]

1. 5 lakh during the fiscal
2. 10 lakh during the fiscal
3. 15 lakh during the fiscal
4. 20 lakh during the fiscal
5. 25 lakh during the fiscal

84. According to the provisions of the income Tax Act, 1961 a resident individual is categorised as a ‘very senior citizen’ when he is [IBPS PO 2013]

1. ₹ 80 yr of age or older
2. ₹ 75 yr of age or older
3. ₹ 90 yr of age or older
4. ₹ 85 yr of age or older
5. ₹ 65 yr of age or older

85. The Union Budget 2015-16 announced additional surcharge for the super rich with income of over ? 1 crore. At what rate will this surcharge be charged? [SBI PO 2015]

1. 1%
2. 2%
3. 3%
4. 4%
5. 6%

86. Which of the following taxes has been abolished as per budget 2015? [RBI Grade B 2015]

1. Customs duty
2. Wealth tax
3. Surcharge on Income tax
4. Entertainment tax
5. Service tax

ANSWERS