Samacheer Kalvi 12th Economics Solutions Chapter 9 Fiscal Economics

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Tamilnadu Samacheer Kalvi 12th Economics Solutions Chapter 9 Fiscal Economics

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Samacheer Kalvi 12th Economics Fiscal Economics Text Book Back Questions and Answers

Part – A
Multiple Choice Questions.

Question 1.
The modem state is ……………………..
(a) Laissez – faire state
(b) Aristocratic state
(c) Welfare state
(d) Police state
Answer:
(c) Welfare state

Question 2.
One of the following is NOT a feature of private finance.
(a) Balancing of income and expenditure
(b) Secrecy
(c) Saving some part of income
(d) Publicity
Answer:
(d) Publicity

Question 3.
The tax possesses the following characteristics.
(a) Compulsory
(b) No quid pro quo
(c) Failure to pay is offence
(d) All the above
Answer:
(d) All the above

Question 4.
Which of the following canons of taxation was not listed by Adam smith?
(a) Canon of equality
(b) Canon of certainty
(c) Canon of convenience
(d) Canon of simplicity
Answer:
(d) Canon of simplicity

Question 5.
Consider the following statements and identify the correct ones.
i. Central government does not have exclusive power to impose tax which is not mentioned in state or concurrent list.
ii. The Constitution also provides for transferring certain tax revenues from union list to states.
(a) i only
(b) ii only
(c) both
(d) none
Answer:
(b) ii only

Question 6.
GST is equivalence of ……………………..
(a) Sales tax
(b) Corporation tax
(c) Income tax
(d) Local tax
Answer:
(a) Sales tax

Question 7.
The direct tax has the following merits except
(a) equity
(b) convenient
(c) certainty
(d) civic consciousness
Answer:
(b) convenient

Question 8.
Which of the following is a direct tax?
(a) Excise duty
(b) Income tax
(c) Customs duty
(d) Service tax
Answer:
(b) Income tax

Question 9.
Which of the following is not a tax under Union list?
(a) Personal Income Tax
(b) Corporation Tax
(c) Agricultural Income Tax
(d) Excise duty
Answer:
(c) Agricultural Income Tax

Question 10.
“Revenue Receipts” of the Government do not include
(a) Interest
(b) Profits and dividents
(c) Recoveries and loans
(d) Rent from property
Answer:
(d) Rent from property

Question 11.
The difference between revenue expenditure and revenue receipts is
(a) Revenue deficit
(b) Fiscal deficit
(c) Budget deficit
(d) Primary deficit
Answer:
(a) Revenue deficit

Question 12.
The difference between total expenditure and total receipts including loans and other liabilities is called …………………………….
(a) Fiscal deficit
(b) Budget deficit
(c) Primary deficit
(d) Revenue deficit
Answer:
(a) Fiscal deficit

Question 13.
The primary purpose of deficit financing is
(a) Economic development
(b) Economic stability
(c) Economic equality
(d) Employment generation
Answer:
(a) Economic development

Question 14.
Deficit budget means
(a) An excess of government’s revenue over expenditure
(b) An excess of government’s current expenditure over its current revenue
(c) An excess of government’s total expenditure over its total revenue
(d) None of above
Answer:
(c) An excess of government’s total expenditure over its total revenue

Question 15.
Methods of repayment of public debt is
(a) Conversion
(b) Sinking fund
(c) Funded debt
(d) All these
Answer:
(d) All these

Question 16.
Conversion of public debt means exchange of ……………………………
(a) New bonds for the old ones
(b) Low interest bonds for higher interest bonds
(c) Long term bonds for short term bonds
(d) All the above
Answer:
(b) Low interest bonds for higher interest bonds

Question 17.
The word budget has been derived from the French word “bougette” which means
(a) A small bag
(b) An empty box
(c) A box with papers
(d) None of the above
Answer:
(a) A small bag

Question 18.
Which one of the following deficits does not consider borrowing as a receipt?
(a) Revenue deficit
(b) Budgetary deficit
(c) Fiscal deficit
(d) Primary deficit
Answer:
(c) Fiscal deficit

Question 19.
Finance Commission determines
(a) The finances of Government of India
(b) The resources transfer to the states
(c) The resources transfer to the various departments
(d) None of the above
Answer:
(b) The resources transfer to the states

Question 20.
Consider the following statements and identify the right ones.
i. The finance commission is appointed by the President
ii. The tenure of Finance commission is five years

(a) i only
(b) ii only
(c) Both
(d) None
Answer:
(c) Both

Part – B
Two Mark Questions.

Question 21.
Define public finance?
Answer:
“Public finance is one of those subjects that lie on the borderline between Economics and Politics. It is concerned with income and expenditure of public authorities and with the adjustment of one to the other”. – Huge Dalton

“Public finance is an investigation into the nature and principles of the state revenue and expenditure”. – Adam Smith

Question 22.
What is public revenue?
Answer:
Public revenue deals with the methods of raising public revenue such as tax and non -tax, the principles of taxation, rates of taxation, impact, incidence, and shifting of taxes and their effects.

Question 23.
Differentiate tax and fee?
Answer:
Tax:

A tax is a compulsory payment made to the government.
People on whom a tax is imposed must pay the tax.
There is no quid pro quo between a taxpayer and public authorities. This means that the tax payer cannot claim any specific benefit against the payment of a tax.

Fee:

Fees are another important source of revenue for the government.
A fee is charged by public authorities for rendering a service to the citizens.
The government provides certain services and charges certain fees for them. For example, fees are charged for issuing of passports, driving licenses, etc.

Question 24.
Write a short note on zero-based budget/
Answer:
Zero-based budgeting involves a fresh evaluation of expenditure in the government budget, assuming it as a new item.

Question 25.
Give two examples for direct tax?
Answer:
Equity:
Direct taxes are progressive i.e. rate of tax varies according to tax base. For example, income tax satisfies the canon of equity.

Certainty:
Canon of certainty can be ensured by direct taxes. For example, an income tax payer knows when and at what rate he has to pay income tax.

Question 26.
What are the components of GST?
Answer:
Components of GST:
The component of GST is of 3 types. They are CGST, SGST & IGST.

CGST: Collected by the Central Government on an intrastate sale (e.g. Within state/ union territory)
SGST: Collected by the State Government on an intrastate sale {e.g. Within state/ union territory)
IGST: Collected by the Central Government for inter-state sale {e.g. Maharashtra to Tamil Nadu)

Question 27.
What do you mean by public debt?
Answer:
Public debt deals with the methods of raising loans from internal and external sources. The burden, effects and redemption of public debt fall under this head.

Part – C
Three Mark Questions.

Question 28.
Describe canons of Taxation?
Answer:

Canon of Ability:
The government should impose tax according to the ability of taxpayers.
Canon of certainty:
The government must ensure that there is no uncertainty regarding the rate of tax or the time of payment.
Canon of convenience:
The government should make convenient arrangements for all the taxpayers to pay the taxes without difficulty.
Canon of Economy:
According to Smith, the government should impose only those taxes whose col-lection costs are very less and cheap.

Question 29.
Mention any three similarities between public finance and private finance?
Answer:
Similarities:
1. Rationality:

Both public finance and private finance are based on rationality.
Maximization of welfare and least cost factor combination underlie both.

2. Limit to borrowing:

Both have to apply restraint with regard to borrowing.
The Government also cannot live beyond its means.
There is a limit to deficit financing by the state also.

3. Resource utilisation:

Both the private and public sectors have limited resources at their disposal.
So both attempt to make optimum use of resources.

Question 30.
What are the functions of a modern state?
Answer:
Functions of Modern State:

1. The modem state is a welfare state and not just a police state.

2. The state assumes greater roles by creating economic and social overheads, ensuring stability both internally and externally, conserving resources for sustainable development and so on.

Samacheer Kalvi 12th Economics Solutions Chapter 9 Fiscal Economics

(I) Defence:
The primary function of the Government is to protect the people from external aggression and internal disorder.
The government has to maintain adequate police and military forces and render protective services.

(II) Judiciary:
Rendering justice and settlement of disputes are the concern of the government.
It should provide an adequate judicial structure to render justice to all classes of citizens.

(III) Enterprises:
The regulation and control of private enterprise fall under the purview of the modem State. Ownership of certain enterprises and operating them successfully are the responsibilities of the government.

(IV) Social Welfare:
It is the duty of the state to make provisions for education, social security, social insurance, health and sanitation for the betterment of the people in the country.

(V) Infrastructure:
Modem States have to build the base for the economic development of the country by creating social and economic infrastructure.

(VI) Macroeconomic policy:
The Government has to administer fiscal policy and monetary policy to achieve macro¬economic goals.

(VII) Social Justice:
During the process of growth of an economy, certain sections of the society gain at the cost of others.
The Government needs to intervene with fiscal measures to redistribute income.

(VIII) Control of Monopoly:

The concentration of economic power is another evil to be corrected by the Government.
So, the state intervenes through control of monopolies and restrictive trade practices to curb the concentration of economic power.

Question 31.
State any three characteristics of taxation?
Answer:

A tax is a compulsory payment made to the government. Refusal to pay the tax is a punishable offense.
Every tax involves some sacrifice on part of the taxpayer.
A tax is not levied as a fine or penalty for breaking the law.

Question 32.
Point out any three differences between direct tax and indirect tax?
Answer:
Direct Tax:

Progressive
It Falls on the same person.
Cannot be shifted.

Indirect Tax:

Regressive
Falls on different persons.
Can be shifted

Question 33.
What is the primary deficit?
Answer:
Primary Deficit (PD) = Fiscal deficit (FD) – Interest payment (IP)
Primary Deficit shows the real burden of the government and it does not include the interest burden on loans taken in the past. Thus, the primary deficit reflects the borrowing requirement of the government exclusive of interest payments.

Question 34.
Mention any three methods of redemption of public debt?
Answer:
Methods of Redemption of Public Debt:
The process of repaying a public debt is called redemption. The Government sells securities to the public and at the time of maturity, the person who holds the security surrenders it to the Government. The following methods are adopted for debt redemption.

(I) Sinking Fund:

Under this method, the Government establishes a separate fund known as “Sinking Fund”.
The Government credits every year a fixed amount of money to this fund.
By the time the debt matures, the fund accumulates enough amount to pay off the principal along with interest.
This method was first introduced in England by Walpol.

(II) Conversion:

Conversion of loans is another method of redemption of public debt.
It means that an old loan is converted into a new loan.
Under this system a high-interest public debt is converted into a low interest public debt.
Dalton felt that debt conversion actually relaxes the debt burden.

(III) Budgetary Surplus:

When the Government presents surplus budget, it can be utilised for repaying the debt.
Surplus occurs when public revenue exceeds the public expenditure.
However, this method is rarely possible.

Part – D
Five Mark Questions.

Question 35.
Explain the scope of public finance?
Answer:
Scope of Public Finance:
The subject ‘Public Finance’ includes five major sub-divisions, viz., Public Revenue, Public Expenditure, Public Debt, Financial Administration and Fiscal Policy.
Samacheer Kalvi 12th Economics Solutions Chapter 9 Fiscal Economics

(I) Public Revenue:
Public revenue deals with the methods of raising public revenue such as tax and non-tax, the principles of taxation, rates of taxation, impact, incidence and shifting of taxes and their effects.

(II) Public Expenditure:
This part studies the fundamental principles that govern the Government expenditure, effects of public expenditure and control of public expenditure.

(III) Public Debt:

Public debt deals with the methods of raising loans from internal and external sources.
The burden, effects and redemption of public debt fall under this head.

(IV) Financial Administration:

This part deals with the study of the different aspects of public budget.
The budget is the Annual master financial plan of the Government.
The various objectives and steps in preparing a public budget, passing or sanctioning, allocation evaluation and auditing fall within financial administration.

(V) Fiscal Policy:
Taxes, subsidies, public debt and public expenditure are the instruments of fiscal policy.

Question 36.
Bring out the merits of indirect taxes over direct taxes?
Answer:
1) Convenient:
Indirect taxes are levied on commodities and services. Whenever consumers make a purchase, they pay tax along with the price. They do not feel the pinch of paying tax. Whereas direct tax payers find it inconvenient to maintain accounts, submit returns and pay tax in lump sum.

2) Tax Evasion:
Tax Evasion is possible in direct tax but it is hardly possible in Indirect tax. Because indirect taxes is include in the price of the goods and services.

3) Wider coverage:
All the consumers, whether they are rich or poor, have to pay indirect taxes. In India everybody pays indirect tax as against just 2 percent paying in-come tax (direct tax)

4) Less Burdensome:
As the tax is hidden in price, the consumers feel it less Burdensome, but the
direct tax is inconvenient to be paid in lump sum.

5) Repudiation:
In such cases, the government does not recognize its obligation to repay the loan. It is certainly not paying off a loan but destroying it.

6) Reduction in Rate of interest: ‘
It is the method of reduction in the rate of interest, during the time of financial crisis.

7) Capital levy:

When the government imposes levy on the capital assets owned by an individual or any institution,it is called capital levy. This levy is imposed on capital assets above a minimum limit on a progressive scale.
The fund so collected can be used by the government for paying off war debt obligations.

Question 37.
Explain the methods of debt redemption?
Answer:
Methods of Redemption of Public Debt:
The process of repaying a public debt is called redemption. The Government sells securities to the public and at the time of maturity, the person who holds the security surrenders it to the Government. The following methods are adopted for debt redemption.

(I) Sinking Fund:

Under this method, the Government establishes a separate fund known as “Sinking Fund”.
The Government credits every year a fixed amount of money to this fund.
By the time the debt matures, the fund accumulates enough amount to pay off the principal along with interest.
This method was first introduced in England by Walpol.

(II) Conversion:

Conversion of loans is another method of redemption of public debt.
It means that an old loan is converted into a new loan.
Under this system a high-interest public debt is converted into a low-interest public debt.
Dalton felt that debt conversion actually relaxes the debt burden.

(III) Budgetary Surplus:

When the Government presents surplus budget, it can be utilised for repaying the debt.
Surplus occurs when public revenue exceeds the public expenditure.
However, this method is rarely possible.

(IV) Terminal Annuity:

In this method, Government pays off the public debt on the basis of terminal annuity in equal annual instalments.
This is the easiest way of paying off the public debt.

(V) Repudiation:

It is the easiest way for the Government to get rid of the burden of payment of a loan.
In such cases, the Government does not recognise its obligation to repay the loan.
It is certainly not paying off a loan but destroying it.
However, in normal case the Government does not do so; if done it will lose its credibility, (vz) Reduction in Rate of Interest:
Another method of debt redemption is the compulsory reduction in the rate of interest, during the time of financial crisis.

(VII) Capital Levy:

When the Government imposes levy on the capital assets owned by an individual or any . institution, it is called capital levy.
This levy is imposed on capital assets above a minimum limit on a progressive scale.
The fund so collected can be used by the Government for paying off war time debt obligations.
This is the most controversial method of debt repayment.

Question 38.
State and explain instruments of fiscal policy?
Answer:
Fiscal Instruments:
Fiscal Policy is implemented through fiscal instruments also called ‘fiscal tools’ or fiscal levers: Government expenditure, taxation and borrowing are the fiscal tools.
(I) Taxation:

Taxes transfer income from the people to the Government.
Taxes are either direct or indirect.
An increase in tax reduces disposable income.
So taxation should be raised to control inflation.
During depression, taxes are to be reduced.

(II) Public Expenditure:

Public expenditure raises wages and salaries of the employees and thereby the aggregate demand for goods and services.
Hence public expenditure is raised to fight recession and reduced to control inflation.

(III) Public debt:

When Government borrows by floating a loan, there is transfer of funds from the public to the Government.
At the time of interest payment and repayment of public debt, funds are transferred from Government to public.

Question 39.
Explain the principles of federal finance?
Answer:

Principle of Independence:
Under the system of federal finance, a government should be autonomous and free about the internal financial matters concerned. The Government should normally enjoy autonomy in fiscal matters.
Principle of Equity:
The resources should be distributed among the different states so that each state receives a fair share of revenue.
Principle of Uniformity:
5 In a federal system, each state should contribute equal tax payments for federal finance.
Principle of Adequacy of Resources :
It means that the resources of each government (ie) central and state should be adequate to carry out its functions effectively. Here adequacy must be decided with reference to both current as well as future needs. Besides, resources should be elastic in order to meet the growing needs and unfore¬seen expenditure like war, floods etc.,
Principle of Fiscal Access:
The resources should grow with the increase in the responsibilities of the government.
Principle of Intergration and coordination:
The financial system as a whole should be well inter grated. There should , be perfect coordination among different layers of the financial system of the country then only the federal system will survive.
Principle of Efficiency :
The financial system should be well organized and efficiently administered. There should be no scope for evasion and fraud. No one should be taxed more than once in a year. Double taxation should be avoided.
Principle of Administrative Economy:
Economy is the important criterion of any federal financial system. That is, the cost of collection should be at the minimum level and the major portion of revenue should be made available for the other expenditure outlays of the governments.
Principle of Accountability:
Each Government should be accountable to its own legislature for its financial decisions.

Question 40.
Describe the various types of deficit in budget?
Answer:
The Indian Government budget, budget deficit is of four major types.

Revenue Deficit
Budget Deficit
Fiscal Deficit, and
Primary Deficit

(I) Revenue Deficit:
It refers to the excess of the government revenue expenditure over revenue receipts. It does not consider capital receipts and capital expenditure. Revenue deficit implies that the government is living beyond its means to conduct day-to-day operations.
Revenue Deficit (RD) = Total Revenue Expenditure (RE) – Total Revenue Receipts (RR) When RE – RR > 0

(II) Budget Deficit:
Budget deficit is the difference between total receipts and total expenditure (both revenue and capital)
Budget Deficit = Total Expenditure – Total Revenue

(III) Fiscal Deficit:
Fiscal deficit (FD) = Budget deficit + Government’s market borrowings and liabilities

(IV) Primary Deficit:
Primary deficit is equal to fiscal deficit minus interest payments. It shows the real burden of the government and it does not include the interest burden on loans taken in the past. Thus, primary deficit reflects borrowing requirement of the government exclusive of interest payments.
Primary Deficit (PD) = Fiscal deficit (PD) – Interest Payment (IP)

Question 41.
What are the reasons for the recent growth in public expenditure?
Answer:
The modem state is a welfare state.
In a welfare state, the government has to perform several functions viz social, economic, and political. These activities are the cause for increasing public expenditure.

Population growth:
The growth iii population requires massive investment in health and education, law and order etc., young population requires increasing expenditure on education youth services, whereas the aging population requires transfer payments like old-age pension, social security and health facilities.

Defence expenditure:
There has been an enormous increase in defense expenditure in India during planning period. The defence expenditure has been increasing tremendously by due to the modernization of defence equipment.

Government subsidies:
The government of India has been providing subsidies on a number of items such as food, fertilizers, interest on priority sector lending, exports,education etc.
Because of the massive amounts of subsidies, the public expenditure has increased manifold.

Debt servicing:
The government has been borrowing heavily both from internal and external sources As a result the government has to a make huge amounts of repayment towards debt servicing.

Development projects:
The government has been undertaking various development projects. The development Projects involve huge investment.

Urbanization.
There has been an increase in urbanization. The increase in urbanization re¬quires heavy expenditure on law and order, education and civic amenities.

Industrialization:
Setting up of basic and heavy industries involves a huge capital and long gestation period. It is the government which starts such industries in a planned economy.

Increase in grants in aid to state and union territories :
There has been a tremendous increase in grant – in- aid to state and union territories to meet natural disasters.

Samacheer Kalvi 12th Economics Fiscal Economics Additional Questions and Answers

I. Multiple Choice Questions.

Question 1.
“public finance is an investigation into the nature and principles of the state revenue and expenditure” is defined by …………….
a) Adam smith
b) Marshall
c) Keynes
d) Dalton
Answer:
a) Adam smith

Question 2.
Tax revenue deals with the ……………………….
(a) Fees
(b) Revenue
(c) Kinds of taxes
(d) Non – tax revenue
Answer:
(c) Kinds of taxes

Question 3.
Taxes, subsidies, public debt -and public expenditure are the instruments of ……………….
a) Public Expenditure
b) Fiscal policy
c) Public Debt
d) Public Revenue
Answer:
b) Fiscal policy

Question 4.
In ZBB every year is considered as a ……………………….
(a) Academic year
(b) New year
(c) Financial year
(d) Base year
Answer:
(b) New year

Question 5.
The expenditure on subsidies by central government is ……………… crores in 2018-19
a) 3,29,715.67
b) 21500
c) 2,29,715.67
d) 4,29,715.67
Answer :
c) 2,29,715.67

Question 6.
Public debt deals with the methods of raising loans from Internal and ………………………. sources.
(a) International
(b) National
(c) External
(d) State level
Answer:
(c) External

Question 7.
Taxes, subsidies, public debt and public expenditure are the instruments of ……………………….
(a) Public Revenue
(b) Public Expenditure
(c) Public debt
(d) Fiscal policy
Answer:
(d) Fiscal policy

Question 8.
……………… tax is referred to as a tax charged on a person who purchases the goods and services.
a) Direct
b) Indirect
c) Institutional tax
d) Service
Answer:
b) Indirect

Question 9.
Both Public Finance and Finance are based on rationality.
(a) Private
(b) Resource
(c) Maximization
(d) Private
Answer:
(d) Private

Question 10.
The Debt redemption, in which the Government establishes a separate fund known as ………………
a) Public finance
b) Sinking fund
c) Direct tax
d) Indirect tax
Answer:
b) Sinking fund

Question 11.
………………………. is the duty of the state to make provisions for education, social security, social insurance, health and sanitation.
(a) Social Welfare
(b) Infrastructure
(c) Social Justice
(d) Macro Economic Policy
Answer:
(a) Social Welfare

Question 12.
…………………………… refers to Government spending incurred by central, state, local government of a country.
(a) Public Finance
(b) Public Expenditure
(c) Public Revenue
(d) Social Welfare
Answer:
(b) Public Expenditure

Question 13.
Adam Smith classified public expenditure on the basis of Production Functions, Commercial Functions and ………………………………. Functions.
(a) Defence
(b) Growth
(c) Development
(d) Government
Answer:
(c) Development

Question 14.
The chairman of the fifteenth finance commission was ………………….
a) Dr. Vijay L. Kelkar
b) Dr. Y. V. Reddy
c) C. Rangarajan
d) N.K. Singh
Answer:
d) N.K. Singh

Question 15.
The increase in ………………………… requires a heavy expenditure on law and order, education, and civic amenities.
(a) Development project
(b) Industrialization
(c) Urbanisation
(d) Public revenue
Answer:
(c) Urbanisation

Question 16.
Heavy Industries involves a huge …………………………. and long gestation period.
(a) Capital
(b) Investment
(c) Revenue
(d) Finance
Answer:
(a) Capital

Question 17.
Welfare activities are undertaken by …………………………..
(a) Modem governments
(b) Capitalist governments
(c) Mixed governments
(d) Socialist governments
Answer:
(a) Modem governments

Question 18.
Borrowing by the government from the public is called ……………………..
(a) Public Revenue
(b) Public expenditure
(c) Public debt
(d) Public finance
Answer:
(c) Public debt

Question 19.
Budget is prepared and submitted …………………………
(a) Every year
(b) Twice in a year
(c) Thrice in a year
(d) Five in a year
Answer:
(a) Every year

Question 20.
Sources of Public Revenue is Tax Revenue and …………………….
(a) Taxes
(b) Non – Tax Revenue
(c) Direct Tax
(d) Indirect Tax
Answer:
(b) Non – Tax Revenue

Question 21.
Income Tax is an example of ………………………….
(a) Proportional Tax
(b) Direct Tax
(c) Indirect Tax
(d) Regressive Tax
Answer:
(b) Direct Tax

Question 22.
………………………… is referred to as a tax charged on a person who purchases the goods and services and it is paid indirectly to the government.
(a) Direct Tax
(b) Indirect Tax
(c) Progressive Tax
(d) Regressive Tax
Answer:
(b) Indirect Tax

Question 23.
……………………….. is an Indirect tax levied on the supply of goods and services.
(a) Direct Tax
(b) Regressive Tax
(c) GST
(d) Progressive Tax
Answer:
(c) GST

Question 24.
………………………… institutions like UTI, LIC, GIC, etc. also buy the Government bonds.
(a) Financial
(b) Non – Financial
(c) Government
(d) Private
Answer:
(a) Financial

Question 25.
The main sources of …………………………… are IMF, World Bank, IDA, and ADB, etc.
(a) Internal public debt
(b) External public debt
(c) International debt
(d) World public debt
Answer:
(b) External public debt

II. Match the following and choose the correct answer by using the codes given below:

Question 1.
A. Modern state – (i) Indirect tax
B. Gift tax – (ii) Welfare state
C. Corporate tax – (iii) Direct tax
D. Sales tax – (iv) Tax of the central government
Codes:
(a) A (ii) B (iii) C (iv) D (i)
(b) A (iii) B (ii) C (i) D (iv)
(c) A (iv) B (i) C (ii) D (iii)
(d) A (i) B (iv) C (iii) D (ii)
Answer:
(a) A (ii) B (iii) C (iv) D (i)

Question 2.
A. Gifts and grants – (i) Canon of equity
B. Ability to pay – (ii) State government tax
C. Income tax – (iii) Non tax revenue
D. Stamp duties Codes – (iv) Progressive tax
Codes:
(a) A (i) B (ii) C (iii) D (iv)
(b) A (iii) B (i) C (iv) D (ii)
(c) A (iv) B (ii) C (i) D (iv)
(d) A (i) B (iv) C (iii) D (ii)
Answer:
(b) A (iii) B (i) C (iv) D (ii)

Question 3.
A. Components of budget – (i) Macro Economic Policy
B. Causes for public debt – (ii) Revenue Receipts
C. Fiscal policy – (iii) Tax on animals
D. Municipality revenue – (iv) War and preparation of war
Codes:
(a) A (i) B (ii) C (iii) D (iv)
(b) A (ii) B (iv) C(i) D (iii)
(c) A (iv) B (iii) C (ii) D (i)
(d) A (iii) B (i) C (iv) D (ii)
Answer:
(b) A (ii) B (iv) C(i) D (iii)

Question 4.
A. Adam Smith – (i) Progressive tax
B. Best tax system – (ii) Fiscal policy
C. Rebate and subsidies – (iii) Regressive tax
D. Tax rate decreases – (iv) Canons of taxation
Codes:
(a) A (i) B (ii) C (iii) D (iv)
(b) A (ii) B (iv) C (i) D (iii)
(c) A (iii) B (iv) C (ii) D (i)
(d) A (iv) B (i) C (ii) D (iii)
Answer:
(d) A (iv) B (i) C (ii) D (iii)

Question 5.
A. Government Accounts Maintained – (i) Committees of Parliament
B. The estimates committee – (ii) Consolidated Fund
C. Budgetary deficit – (iii) Source of Revenue
D. Federal finance – (iv) Government Deficit
Codes:
(a) A (i) B (ii) C (iii) D (iv)
(b) A (iii) B (iv) C (ii) D (i)
(c) A (ii) B (i) C (iv) D (iii)
(d) A (iv) B (iii) C (i) D (ii)
Answer:
(c) A (ii) B (i) C (iv) D (iii)

III. State whether the statements are true or false.

Question 1.
(i) The difference between Revenue expenditure and Revenue Receipt is Revenue deficit.
(ii) The primary purpose of deficit financing is Economic Development.

(a) Both (i) and (ii) are true
(b) Both (i) and (ii) are false
(c) (i) is true but (ii) is false
(d) (i) is false but (ii) is true
Answer:
(a) Both (i) and (ii) are true

Question 2.
(i) GST is equivalence of sales tax.
(ii) The modem state is police state.

(a) Both (i) and (ii) are true
(b) Both (i) and (ii) are false
(c) (i) is true but (ii) is false
(d) (i) is false but (ii) is true
Answer:
(c) (i) is true but (ii) is false

Question 3.
(i) The word budget has been derived from the French word “bougette” means a small bag.
(ii) Finance commission determines the resources transfer to the various departments.

(a) Both (i) and (ii) are frue
(b) Both (i) and (ii) are false
(c) (i) is true but (ii) is false
(d) (i) is false but (ii) is true
Answer:
(c) (i) is true but (ii) is false

Question 4.
(i) Bougett refers to a small purse.
(ii) Budget estimates are prepared by public finance.

(a) Both (i) and (ii) are tme
(b) Both (i) and (ii) are false
(c) (i) is true but (ii) is false
(d) (i) is false but (ii) is true
Answer:
(b) Both (i) and (ii) are false

Question 5.
(i) Public revenue occupies an important place in the study of public finance.
(ii) Public finance is concerned with the Income and expenditure of public authorities.

(a) Both (i) and (ii) are tme
(b) Both (i) and (ii) are false
(c) (i) is tme but (ii) is false
(d) (i) is false but (ii) is true
Answer:
(a) Both (i) and (ii) are true

IV. Which of the following is correctly matched.

Question 1.
(a) Ministry of finance – Central budget every year
(b) Types of budget – Credit budget
(c) Public debt – Agriculture
(d) Federal finance – Employment
Answer:
(a) Ministry of finance – Central budget every year

Question 2.
(a) Canons of taxation – Adam Smith
(b) Indirect tax – Modem state
(c) Compulsory payment – Indirect tax
(d) Proportional tax – Direct tax
Answer:
(a) Canons of taxation – Adam Smith

Question 3.
(a) Wealth tax – Indirect tax
(b) Sales tax – Direct tax
(c) Progressive tax – Health tax
(d) Corporate tax – Tax of the Central Government
Answer:
(d) Corporate tax – Tax of the Central Government

Question 4.
(a) Gifts and grants – Non tax Revenue
(b) Gift tax – Indirect tax
(c) Tax evasion – Capital receipts
(d) Loans from RBI – Deficit budget
Answer:
(a) Gifts and grants – Non tax Revenue

Question 5.
(a) Stamp duties – Tax of the Central Government
(b) Interest on debts – Revenue expenditure
(c) Land tax collected – Direct tax
(d) Income tax – Expenditure
Answer:
(b) Interest on debts – Revenue expenditure

V. Which of the following is not correctly matched:

Question 1.
(a) Canons of Taxation – Adam Smith
(b) SGST – State and Union Territory
(c) Compulsory payment – Tax
(d) Modem state – Technology
Answer:
(d) Modem state – Technology

Question 2.
(a) Income tax – Direct tax
(b) Sales tax – Indirect tax
(c) Proportional tax – Village tax
(d) GST – Goods and Services tax
Answer:
(c) Proportional tax – Village tax

Question 3.
(a) Components of budget – Capital Receipts
(b) State sources – Land and building tax
(c) Redemption of public debt – Sinking fund
(d) Fiscal policy – Micro economic policy
Answer:
(d) Fiscal policy – Micro economic policy

Question 4.
(a) Fiscal Deficit – Budget deficit
(b) Primary Deficit – Fiscal deficit
(c) Revenue Deficit – Total revenue receipt
(d) Deficit budget – Private Revenue
Answer:
(d) Deficit budget – Private Revenue

Question 5.
(a) Public debt – Fiscal instmment
(b) Economic growth – Fiscal policy
(c) Transfer wealth – Internal public debt
(d) Loans from other countries – External revenue
Answer:
(d) Loans from other countries – External revenue

VI. Pick the odd one out.

Question 1.
Causes for increase in public debt
(a) War and preparation of war
(b) Social obligations
(c) Economic development and deficit
(d) Unemployment problem
Answer:
(d) Unemployment problem

Question 2.
Methods of Redemption of public debt
(a) Sinking Fund
(b) Budgetary Surplus
(c) Depression
(d) Terminal Annuity
Answer:
(d) Terminal Annuity

Question 3.
Types of Budget
(a) Revenue budget
(b) Capital budget
(c) Union budget
(d) Supplementary budget
Answer:
(c) Union budget

Question 4.
Central financial relationship union sources are
(a) Corporation tax
(b) Foreign loans
(c) Transport
(d) Railways
Answer:
(c) Transport

Question 5.
Principles of Federal finance
(a) Principles of Integration
(b) Principle of Equity
(c) Principle of Efficiency
(d) Principle of Accountability
Answer:
(a) Principles of Integration

VII. Assertion and Reason.

Question 1.
Assertion (A): Public finance is a study of the financial aspects of government.
Reason (R): Public finance is concerned with the revenue and expenditure of public authorities and with adjustment of the one to the other.

(a) Both ‘A’ and ‘R’ are true and ‘R’ is the correct explanation to ‘A’
(b) Both ‘A’ and ‘R’ are true but ‘R’ is not the correct explanation to ‘A’
(c) ‘A’ is true but ‘R’ is false
(d) ‘A’ is false but ‘R’ is true
Answer:
(a) Both ‘A’ and ‘R’ are true and ‘R’ is the correct explanation to ‘A’

Question 2.
Assertion (A): Fiscal Economics is a new one. The old and popular term of the subject is ‘Public Finance’.
Reason (R): Public Finance is related to financing the central activities only.

Question 3.
Assertion (A): The modem state is a police state.
Reason (R): Functions of a government is called Defence, judiciary, enterprises and so on.

Question 4.
Assertion (A): Sources of Public Revenue is called Tax Revenue and Non tax Revenue.
Reason (R): Some of the tax revenue sources are Income-tax, Corporate tax, Sales tax, Surcharge and Cess.

Question 5.
Assertion (A): Canons of Taxation are Economical, Equitable, Convenient, Certain Efficient, and Flexible.
Reason (R): Adam Smiths four canons of taxation are Canon of Ability, Canon of Certainty, Canon of Convenience, Canon of Economy.

Part – B
Answer The Following Questions In One or Two Sentences.

Question 1.
Name the sub-divisions of Public Finance.
Answer:

Public Revenue
Public Expenditure
Public Debt
Financial Administration
Fiscal policy

Question 2.
What do you mean by Public Expenditure?
Answer:
Public expenditure refers to Government spending incurred by Central, State and Local governments of a country.

Question 3.
Define Public Expenditure.
Answer:
“The expenditure incurred by public authorities like central, state and local government to satisfy the collective social wants of the people is known as public expenditure”.

Question 4.
Define “Public Revenue”?
Answer:

Public revenue occupies an important place in the study of public finance.
The Government has to perform several functions for the welfare of the people.
They involve substantial amount of public expenditure which can be financed only through public revenue.
The amount of public revenue to be raised depends on the necessity of public expenditure and the people’s ability to pay.

Question 5.
Define Tax.
Answer:
“A Tax is a compulsory payment made by a person or a firm to a government without reference to any benefit the payer may derive from the government”. – Anatol Murad.

Question 6.
What do you mean by Tax Revenue?
Answer:

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 taxpayer and in no case taxpayer can refuse to pay taxes to the government.

Question 7.
State the merits and demerits of direct tax.
Answer:
Merits:

Equity
Certainty
Elasticity
Economy

Demerits:

Unpopular
Productivity affected
Inconvenient
Tax Evasion

Question 8.
Write some of the tax revenue sources?
Answer:
Some of the tax revenue sources are

Income tax
Corporate tax
Sales tax
Surcharge and
Cess

Question 9.
What are Budgetary procedures?
Answer:

Preparation of the Budget
Presentation of the Budget
Execution of the Budget.

Question 10.
What is the method of maintaining Government Accounts in India?
Answer:

Consolidated Fund
Contingency Fund
Public Accounts

Part – C
Answer The Following Questions In One Paragraph.

Question 1.
Explain the source of revenue of the Central Government.
Answer:

Corporation tax.
Currency, coinage and legal tender, foreign exchange.
Duties of customs including export duties.
Duties of excise on tobacco and certain goods manufactured or produced in India.
Estate duty in respect of property other than agricultural land.
Fees in respect of any of the matters in the union list, but not including any fees taken in any court.
Foreign loans
Lotteries organized by the Government of India of the Government of a state.
Post office Savings Bank.
Posts and Telegraphs, Telephones, wireless, Broadcasting and other forms of communication.
Property of the union.
Public Debt of the union.
Railways.
Rates of the stamp duty in respect of Bills of Exchange, Cheques, Promissory Notes, etc.
Reserve Bank of India.
Taxes on income other than agricultural income.
Taxes on the capital value of the assets, exclusive of agricultural land of individuals and companies.
Taxes other than stamp duties on transactions in stock exchanges and futures markets
Taxes on the sale or purchase of newspapers and on advertisements published therein.
Terminal taxes on goods or passengers, carried by railways, sea, or air.

Question 2.
What do you mean by Public Revenue?
Answer:

The income of the government through all sources is called public income or public revenue.
According to Dalton, the term “Public Income” has two senses — wide and narrow.
In its wider sense, it includes all the incomes or receipts which a public authority may secure during any period of time.
In its narrow sense, it includes only those sources of income of the public authority which are ordinarily known as “revenue resources.”
To avoid ambiguity, the former is termed “public receipts” and the latter “public revenue.”
In a narrow sense, it includes only those sources of income of the Government which are described as “revenue resources”.
In broad sense, it includes loans raised by the Government also.

Question 3.
Bring out the merits and demerits of direct taxes?
Answer:
Merits of Direct Taxes:
(I) Equity:

Direct taxes are progressive i.e. rate of tax varies according to the tax base.
For example, income tax satisfies the canon of equity.

(II) Certainty:

Canon of certainty can be ensured by direct taxes.
For example, an income tax payer knows when and at what rate he has to pay income tax.

(III) Elasticity:

Direct taxes also satisfy the canon of elasticity.
Income tax is income elastic in nature.
As income level increases, the tax revenue to the Government also increases automatically.

(IV) Economy:

The cost of collection of direct taxes is relatively low.
The tax payers pay the tax directly to the state.

Demerits of Direct Taxes:

(I) Unpopular:

Direct taxes are generally unpopular.
It is inconvenient and less flexible.

(II) Productivity affected:

According to many economists, the direct tax may adversely affect productivity.
Citizens are not willing to earn more income because in that case, they have to pay more taxes.

(III) Inconvenient:
The taxpayers find it inconvenient to maintain accounts, submit returns, and pay tax in a lump sum.

(IV) Tax Evasion:

The burden of direct tax is so heavy that tax-payers always try to evade taxes.
This ultimately leads to the generation of black money, which is harmful to the economy.

Question 4.
What are the several types of Indirect taxes?
Answer:
There are several types of Indirect Taxes, such as:

Excise Duty: Payable by the manufacturer who shifts the tax burden to retailers and wholesalers.
Sales Tax: Paid by a shopkeeper or retailer, who then shifts the tax burden to customers by charging sales tax on goods and services.
Customs Duty: Import duties levied on goods from outside the country, ultimately paid for by consumers and retailers.
Entertainment Tax: Liability is on the cinema theatre owners, who transfer the burden to cinema-goers.
Service Tax: Charged on services like telephone bill, insurance premium such as food bill in a restaurant, etc.

Part – D
Answer The Following Questions In About A Page.

Question 1.
What are the Dissimilarities of Public and Private finance?
Answer:
Dissimilarities:
(I) Income and Expenditure adjustment:

The government adjusts the income to the expenditure while individuals adjust their expenditure to the income.
Private finance involves stitching coat according to cloth available whereas public finance decides the cloth according to the need for the coat.

(II) Borrowing:

The government can borrow from internal and external sources; it can borrow from the people by issuing bonds.
However, an individual cannot borrow from himself.

(III) Right to print currency:

The government can print currency.
This involves the creation, distribution and monitoring of currency.
The private sector cannot create currency.

(IV) Present vs. future decisions:

The public finance is more involved with future planning and making long-term decisions.
These investments could include building of schools, hospitals, and infrastructure.
The private finance makes financial decisions on projects with a short term vision.

(V) Objective:

The public sector’s main objective is to provide social benefit in the economy.
The private sector aims to maximize personal benefit i.e. Profit.

(VI) Coercion to get revenue:

The sources of income of a private individual is relatively limited while those of the Government is wide.
The Government can use its power and authority.

(VII) Ability to make huge and deliberate changes:

Public finance has the ability to make big decisions on income.
For example, it can effectively and deliberately adjust the revenue.
But individuals cannot make such massive decisions.

Question 2.
Briefly explain classification of Public expenditure?
Answer:
Classification of public expenditure are as follows:
(I) Classification on the Basis of Benefit:
Cohn and Plehn have classified the public expenditure on the basis of benefit into four classes:

(a) Public expenditure benefiting the entire society, e.g., the expenditure on general administration, defence, education, public health, transport.

(b) Public expenditure conferring a special benefit on certain people and at the same time common benefit on the entire community, e.g., administration of justice etc.

(c) Public expenditure directly benefiting particular group of persons and indirectly the entire society, e.g., social security, public welfare, pension, unemployment relief etc.

(d) Public expenditure conferring a special benefit on some individuals, e.g., subsidy granted to a particular industry.

(II) Classification on the Basis of Function:
Adam Smith classified public expenditure on the basis of functions of government in the following main groups:

(a) Protection Functions:
This group includes public expenditure incurred on the security of the citizens, to protect from external invasion and internal disorder, e.g., defence, police, courts etc.

(b) Commercial Functions:
This group includes public expenditure incurred on the development of trade and commerce, e.g., development of means of transport and communication etc.

(c) Development Functions:
This group includes public expenditure incurred for the development infrastructure and industry.

Question 3.
Explain the sources of Non-Tax Revenue?
Answer:
The sources of non-tax revenue are:
(I) Fees:

Fees are another important source of revenue for the government.
A fee is charged by public authorities for rendering a service to the citizens.
Unlike tax, there is no compulsion involved in case of fees.
The government provides certain services and charges certain fees for them.
For example, fees are charged for issuing of passports, driving licenses, etc.

(II) Fine:

A fine is a penalty imposed on an individual for violation of law.
For example, violation of traffic rules, payment of income tax after the stipulated time etc.

(III) Earnings from Public Enterprises:

The Government also gets revenue by way of surplus from public enterprises.
Some of the public sector enterprises do make a good amount of profits.
The profits or dividends which the government gets can be utilized for public expenditure.

(IV) Special assessment of betterment levy:
1. It is a kind of special charge levied on certain members of the community who are beneficiaries of certain government activities or public projects.

2. For example, due to a public park or due to the construction of a road, people in that locality may experience an appreciation in the value of their property or land.

(V) Gifts, Grants and Aids:

A grant from one government to another is an important source of revenue in the modem days.
The government at the Centre provides grants to State governments and the State governments provide grants to the local government to carry out their functions.
Grants from foreign countries are known as Foreign Aid.
Developing countries receive military aid, food aid, technological aid, etc. from other countries.

(VI) Escheats:
It refers to the claim of the state to the property of persons who die without legal heirs or documented will.

Question 4.
Bringout the Demerits of Indirect taxes?
Answer:
Demerits of Indirect Taxes:
(I) Higher Cost of Collection:

The cost of collection of indirect taxes is higher than the direct taxes.
The Government has to spend huge money to collect indirect taxes.

(II) Inelastic:

Indirect taxes are less elastic compared to direct taxes.
As indirect taxes are generally proportional.

(III) Regressive:
Indirect taxes are sometimes unjust and regressive in nature since both rich and poor persons have to pay same amount as taxes irrespective of their income level.

(IV) Uncertainly:

The rise in indirect taxes increase the price and reduces the demand for goods.
Therefore, the Government is uncertain about the expected revenue collection.
So Dalton says under indirect taxes 2 + 2 is not 4 but 3 or even less than 3.

(V) No civic Consciousness:
As the tax is hidden in price, the consumers are not aware of paying tax.

Samacheer Kalvi 12th Economics Solutions Chapter 9 Fiscal Economics

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