4.2.3 Evaluation of the Indian tax system
Although direct taxes are progressive there is a differential rate schedule for indirect taxes. With
the increase in national income, the tax yields in general and from direct taxes in particular have
not increased at a rate high enough to show a high degree of income elasticity. Direct taxes were
2.1per cent of the GDP in 1950-51. It has increased to around 6.5 per cent in 2008-09.
Indian Tax system largely depends on urban incomes and leaves out almost completely
agricultural incomes from the purview of direct taxes. India's tax system has a much reduced
scope of manoeuvrability in the field of personal taxation. Thus, while national income rises,
with about one-fifth of it originating in the agricultural sector, the tax system is not able to tap
fully the rising income. The indirect tax system too is characterised by inelasticity.
Both the coverage and the rate schedule have been modified from time to time so that the tax
system plays a truly functional role for economic growth, stability and social justice. It is to be
noted that while the service sector accounts for more than 57 per cent of GDP, service tax
contributes just 10.4 per cent towards tax revenues and 1.2 per cent towards GDP.
In respect of canon of convenience, several, measures have been taken such as self assessment,
advance payment, deduction of tax at source, assessment on the basis of returns submitted,
etc. However, changes in tax laws in quick succession disturb long-term business decision-
making. Indirect taxes, although considered to be regressive, are quite convenient from the
collection point of view.
Simplification of tax system has also been attempted. Income tax returns have been simplified
and made handy. The Booth Lingam Committee and Chelliah Committee recommended
simplification and rationalisation of tax system in India. The proposed Direct Taxes Code also
aims at simplification of tax laws.
The cost of tax collection has increased over the years. It has increased from Rs. 543 cores in
1990-91 (Central Government) to more than 3,700 crore in 2007-08.
However, it is also noticed that the cost of tax collection for the Income Tax Department is the
lowest in the world at the rate of 60 paise for every Rs 100 collected as a tax.
Evasion and tax avoidance are reported to be very high. It has been estimated that black money
is generated at the rate of 50 per cent of the country's' GDP. Because of this, the black money
accumulation is of considerable magnitude. It is growing every year. The unaccounted funds
are invested into business through diverse means and add further to the existing funds of black
money. A part of it is squandered and wasted lavishly on social functions and on anti- social
activities. Besides, the Indian tax system is also accused of (i) discouraging employment (ii)
distorting prices (iii) and adversely affecting savings.
SUMMARY
In order to carry out its functions properly every State needs funds. An important way of
raising funds is levying taxes. Taxes could be direct and indirect. Direct taxes are taxes which
are not shifted i.e., the incidence of which falls on persons that pay them to the government.
Examples of direct taxes are income tax, wealth tax. Where the burden is shifted through a
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change in price, the taxes are indirect. Examples of indirect taxes are service tax, custom duty,
excise duty, VAT etc.
A tax system could be proportional (falling on all the incomes at the same rate), regressive
(falling on higher incomes at a proportionately lower rate) or progressive rising proportionality
with rise in income. Direct taxes are progressive but indirect taxes are generally regressive in
nature. An important technique adopted for taxation in India was MODVAT i.e., Modified
Value Added Tax. Value Added Tax is the tax to be paid by all sellers of goods and services, on
the basis of value added by them. MODVAT was replaced by Central Value Added Tax
(CENVAT). Value Added Tax system has been introduced in many States since April 2005.
MULTIPLE CHOICE QUESTIONS
1. Generally an economy is considered under developed if
a. the standard of living of people is low and productivity is also considerably low.
b. agriculture is the main occupation of the people and productivity in agriculture is
quite low.
c. the production techniques are backward.
d. all of the above.
2. Which of the following statements is correct?
a. Agriculture occupies 10 per cent population of India.
b. Nearly 5 per cent population of India is below the poverty line.
c. The production techniques are backward.
d. None of the above.
3. Which of the statements is correct?
a. The tertiary sector contributes the maximum to the GDP.
b. India is basically a socialist economy.
c. The distribution of income and wealth is quite equitable.
d. None of the above.
4. ____________ is the apex bank for agriculture credit in India.
a. RBI
b. SIDBI
c. NABARD
d. ICICI
5. The share of agriculture in India's national income has __________ over the years.
a. remained constant.
b. decreased.
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c. increased.
d. first decreased and then increased.
6. The green revolution is also known as
a. wheat revolution.
b. rice revolution.
c. maize revolution.
d. forest revolution.
7. The area under irrigation has ____________ over the years in India.
a. remained constant.
b. decreased
c. increased.
d. first increased and then decreased.
8. Which of the following statements is correct?
a. Under zamindari system, farmers directly paid land revenue to the state.
b. At present, income tax revenues from the agriculture sector are negligible.
c. Commercial banks are providing loans to the agriculture sector at zero interest rate.
d. None of the above.
9. Which is of the following is incorrect?
a. Special schemes have been started to promote export of agro-products.
b. India has been a big importer of food grains especially since 1990s.
c. High yielding varieties programme has resulted in improvement in production and
productivity of food grains in India.
d. None of the above.
10. Abolition of intermediaries and tenancy reforms are both parts of
a. industrial reforms in India.
b. external sector reforms in India.
c. land reforms in India.
d. banking reforms in India.
11. Agriculture sector faces the problem of
a. slow and uneven growth.
b. inadequate and incomplete land reforms.
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c. inadequate finance.
d. all of the above.
12. In absolute terms, the number of people engaged in agricultural activities over the planning
period has
a. remained constant.
b. increased.
c. decreased.
d. first increased and then decreased.
13. We can say Indian agriculture has become modern since
a. there has been an increase in the use of high yielding varieties of seeds, fertilizers,
pesticides etc.
b. there has been noticeable positive change in the attitude of farmers towards new
techniques of production.
c. farmers are increasingly resorting to intensive cultivation, multiple cropping, scientific
water management
d. all of the above.
14. Which of the following has been specifically established to meet the requirements of credit
of the farmers and villagers?
a. ICICI bank.
b. Regional Rural Banks.
c. State Bank of India.
d. EXIM bank.
15. Which of the following statements is incorrect?
a. About 80 per cent of agricultural area has irrigation facilities.
b. About 60 per cent area is rain fed in India.
c. Productivity per worker in agriculture is much lower than that in industry.
d. Cropping pattern is quite skewed in India.
16. Which of the following statements is correct?
a. Countries which are industrially well-developed generally have higher per capita
income than countries which are not.
b. India is a capital surplus economy.
c. Agriculture sector need not depend upon industrial sector for its growth.
d. None of the above.
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17. Mahalanobis model stressed upon the establishment of
a. consumer goods industries.
b. export oriented industries.
c. agro-based industries.
d. capital and basic goods industries.
18. Three steel plants in Bhilai, Rourkela and Durgapur were set up in the
a. First plan.
b. Second plan.
c. Third plan.
d. Fourth plan.
19. The industrial sector faced the process of retrogression and deceleration during
a. 1950-1965.
b. 1990-2005.
c. 1980-1995.
d. 1965-1980.
20. Which of the following has resulted in failure to achieve targets of industrial production?
a. Poor planning.
b. Power, finance and labour problems.
c. Technical complications.
d. All of the above.
21. Which of the following statements is correct?
a. A large number of industries face under utilization of production-capacity.
b. The incremental capital -output ratio has been falling over the planning period.
c. In terms of regions, industrial development is quite balanced.
d. None of the above.
22. About ________ per cent of the sick units in India are small units.
a. 10 per cent
b. 5 per cent
c. 30 per cent
d. 96 per cent.
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23. The Tenth Plan aimed at achieving a growth rate of _______________ in the industrial
sector.
a. 5 per cent
b. 8 per cent
c. 10 per cent
d. 6 per cent
24. Oil and Natural Gas Corporation Indian Oil Corporation, Steel Authority of India, and
Bharat Heavy Electricals are all examples of
a. small scale units.
b. private sector units.
c. public sector units.
d. sick units.
25. The Indian industry faced the process of retrogression and deceleration because of
a. unsatisfactory performance of agriculture
b. slackening of real investment in public sector
c. narrow market for industrial goods, especially in rural areas.
d. all of the above.
26. Which of the following statements is correct?
a. The industrial pattern on the eve of Independence was quite balanced.
b. During the planning period, the structure of Indian industry has shifted in favour of
basic and capital goods and intermediate sector.
c. Most of the big industrial units in India are sick.
d. None of the above.
27. Over the planning period the share of industrial sector in the GDP of India has ___________.
a. increased
b. decreased
c. remained constant
d. remained above 50 per cent
28. The industrial sector depends on the agricultural sector because
a. the agriculture sector provides food and other products for the consumption purposes
of industrial sector.
b. the agriculture sector provides raw-materials for the development of a agro-based
industries of the economy.
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c. the agricultural sector provides market for the industrial products.
d. all of the above.
29. A sick industrial unit is one
a. where most of the employees are sick.
b. which is unable to perform its normal functions and activities of production of goods
and services at a reasonable profit on a sustained basis.
c. which is unable to make profits more than 10 per cent of its capital employed.
d. which borrows money from bank for its fixed assets.
30. All of the following can cause sickness to an industrial unit except:
a. demand recession.
b. uneconomic size.
c. high productivity of labour and capital.
d. financial mismanagement.
31. The service sector in India now accounts for
a. more than 80 per cent of GDP.
b. more than 70 per cent of GDP.
c. more than 50 per cent of GDP.
d. more than 90 per cent of GDP.
32. Nearly __________ percent of working population is engaged in the service sector. [2001]
a. 23 per cent
b. 45 per cent
c. 80 per cent
d. 50 per cent
33. Service sector accounted for nearly ______________ percent of exports (2007-08).
a. 10 per cent
b. 20 per cent
c. 45 per cent
d. 80 per cent
34. India has the _____________ largest scientific and technical manpower in the world.
a. fifth
b. tenth
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c. eighth
d. second
35. Which of the following statements is correct?
a. The service sector contributes more than half of the GDP of India.
b. The scope of attracting tourists is limited as there is hardly any place of tourist attraction
in India.
c. Generally as an economy grows first service sector grows and then agriculture and
industrial sectors grow.
d. None of the above.
36. BPO stands for
a. Bharat Petro Organisation
b. Business Process Outsourcing
c. Big Portfolio outsourcing
d. Business Partners Organisation
37. Small scale units exist in India because
a. they are labour intensive and India is a labour surplus economy.
b. they offer methods of ensuring more equitable distribution of income and wealth.
c. they facilitate the creation of a wider entrepreneurial base.
d. all of the above.
38. Which of the following is incorrect?
a. GDP at market price = GDP at factor cost plus net indirect taxes.
b. NNP at factor cost = NNP at market price minus indirect taxes.
c. GNP at market price = GDP at market price plus net factor income from abroad.
d. none of the above.
39. National income differs from net national product at market price by the amount of
a. current transfers from the rest of the world.
b. net indirect taxes.
c. national debt interest.
d. it does not differ.
40. Net national product at factor cost is
a. equal to national income.
b. less than national income.
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c. more than national income.
d. sometimes less than national income and sometimes more than it.
41. Transfer payments refer to payments which are made.
a. without any exchange of goods and services.
b. to workers on transfer from one job to another.
c. as compensation to employees.
d. none of the above.
42. The net values added method of measuring national income is also known as :
a. net output method.
b. production method.
c. industry of origin method.
d. all of the above.
43. Identify the items which is not a factor payment
a. free uniform to defense personnel.
b. salaries to the members of Parliament.
c. imputed rent of an owner occupied building.
d. scholarships given to the scheduled caste students.
44. Mixed income of the self employed means
a. gross profits received by proprietors.
b. rent, interest and profit of an enterprise.
c. combined factor payments which are not distinguishable.
d. wages due to family workers.
45. Demand for final consumption arises in
a. household sector only.
b. government sector only.
c. both household and government sectors.
d. neither household nor government sector.
46. Demand for intermediate consumption arises in
a. consumer households.
b. government enterprises only.
c. corporate enterprises only.
d. all producing sectors of an economy.
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47. Which of the following is an economic activity?
a. Listening to music on the radio.
b. Teaching one's own son at home.
c. Medical facilities rendered by a charitable dispensary.
d. A housewife doing household duties.
48. Net value added is equal to
a. payments accruing to factors of production.
b. compensation to employees.
c. wages plus rent plus rent.
d. value of output minus depreciation.
49. Per capita national income means
÷
a. NNP population
÷
b. Total capital population
÷
c. Population NNP
d. None of the above.
50. Which of the following is correct?
a. If national income rises, per capita income must also rise
b. If population rises, per capita income must fall.
c. If national income rises, welfare of the people must rise.
d. None of the above.
51. One of the following is not the merit of direct taxes. Find it.
a. They are imposed according to the ability of the person to pay.
b. These taxes create civil consciousness.
c. The revenue is income elastic.
d. They do not require maintenance of accounts.
52. Find the tax which is direct tax among the following:
a. Personal income tax.
b. Excise duty.
c. Sales tax.
d. Service tax.
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53. Among the following types of taxes, find the one which is indirect?
a. Gift tax.
b. Corporate income tax.
c. VAT.
d. Wealth tax.
54. Which of the following statements is correct?
a. Income tax was abolished in India in 1991.
b. Gift tax was abolished in India in 1998, but was partially reintroduced in April 2005.
c. No state has adopted VAT system of indirect taxation.
d. Estate duty was abolished in 1995.
55. Which of the following statements is correct?
a. Excise duty is levied on sales volume.
b. Custom duties have been drastically cut down since 1991.
c. VAT has been adopted by two-three states in India.
d. Agriculture contributes the maximum to the direct tax revenues in India.
ANSWERS
1. d 2. c 3. a 4. c 5. b 6. a
7. c 8. b 9. b 10. c 11. d 12. b
13. d 14. b 15. a 16. a 17. d 18. b
19. d 20. d 21. a 22. d 23. c 24. c
25. d 26. b 27. a 28. d 29. b 30. c
31. c 32. a 33. c 34. d 35. a 36. b
37. d 38. d 39. b 40. a 41. a 42. d
43. d 44. c 45. c 46. d 47. c 48. a
49. a 50. d 51. d 52. a 53. c 54. b
55. b
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