18.Finance Commission

Question 1

What is fiscal drag?

Answer 1

Fiscal drag refers to the adverse effect of progressive taxation on demands and economic expansions.

Question 2

When does fiscal drag occur?

Answer 2

Fiscal drag occurs when an increase in national income results in more individuals falling into higher tax brackets, leading to an increased tax burden due to progressive taxation.

Question 3

What is the impact of fiscal drag on individuals’ purchasing power?

Answer 3

As individuals’ income increases and they move into higher tax brackets, their real income may not increase proportionately. This leads to a decline in their purchasing power.

Question 4

How does high taxation contribute to a reduction in aggregate demand?

Answer 4

High taxation, resulting from fiscal drag, reduces individuals’ disposable income and purchasing power. This, in turn, leads to a decline in aggregate demand, which can cause an economic slowdown.

Question 5

What is the relationship between fiscal drag and economic expansion?

Answer 5

Fiscal drag can have a negative impact on economic expansion as it reduces individuals’ purchasing power and weakens aggregate demand, potentially leading to a slowdown in the economy.

Question 6

What is the distribution of powers between the Centre and the States in India?

Answer 6

The distribution of powers between the Centre (Union Government) and the States is defined in Article 246 of the Indian Constitution.

Question 7

How are the powers divided between the Union and the States?

Answer 7

The powers are divided into three categories: State List, Concurrent List, and Union List.

Question 8

Which level of government has the authority to collect important taxes in India?

Answer 8

The Union Government (Centre) has the authority to collect important taxes like Income Tax and Corporate Tax.

Question 9

Do State Governments have the authority to collect Income and Corporate taxes in India?

Answer 9

No, State Governments in India do not have the authority to collect Income and Corporate taxes.

Question 10

Why are State Governments mostly dependent on the Union Government for revenue purposes in India?

Answer 10

State Governments are mostly dependent on the Union Government for revenue purposes because the Union Government collects and shares important taxes among the States based on their needs.

Question 11

What was the purpose of forming the Finance Commission in India?

Answer 11

The Finance Commission was formed to ensure the impartial distribution of taxes by the Central Government to the States, reducing financial disparities among the States.

Question 12

Under which article of the Indian Constitution is the Finance Commission constituted?

Answer 12

The Finance Commission is constituted under Article 280 of the Indian Constitution.

Question 13

How often is the Finance Commission constituted?

Answer 13

The Finance Commission is constituted once every five years.

Question 14

What is the main purpose of the Finance Commission?

Answer 14

The main purpose of the Finance Commission is to give recommendations on the distribution of tax revenues between the Union and the States, as well as among the States themselves.

Question 15

What are the functions of the Finance Commission?

Answer 15

The functions of the Finance Commission include making recommendations on the distribution of tax proceeds between the Union and the States, allocating shares of such proceeds among the States, providing grants-in-aid to the State Government, suggesting measures to augment the Consolidated Fund of a State to support Panchayats and Municipalities, and addressing any other matter referred to the Commission by the President in the interests of sound finance.

Question 16

What is the power of the Finance Commission in determining its procedure and functions?

Answer 16

The Finance Commission determines its procedure and has powers conferred on it by Parliament through legislation.

Question 17

Who is currently heading the 15th Finance Commission?

Answer 17

N.K. Singh is currently heading the 15th Finance Commission.

Question 18

When is the Finance Commission generally appointed?

Answer 18

The Finance Commission is generally appointed two years prior to the commencement of its tenure.

Question 19

What is the tenure of the 15th Finance Commission?

Answer 19

The tenure of the 15th Finance Commission is for a period of six years, covering the years 2020-2021 and 2021-2026.

Question 20

What is the role of the Finance Commission during its tenure?

Answer 20

During its tenure, the Finance Commission discusses with both the Central and State Governments and provides recommendations on various financial matters.

Question 21

What is the main function of the Finance Commission?

Answer 21

The main function of the Finance Commission is to make recommendations on the distribution of tax revenues between the Union and the States, as well as among the States themselves.

Question 22

What is vertical devolution?

Answer 22

Vertical devolution refers to the distribution of the net proceeds of taxes of the Union between the Union and the States.

Question 23

What is horizontal devolution?

Answer 23

Horizontal devolution refers to the allocation of the respective shares of the net proceeds of taxes among the States.

Question 24

What is the meaning of ‘net proceeds’?

Answer 24

‘Net proceeds’ refers to the proceeds of a tax or duty minus the cost of collection.

Question 25

What was the recommendation of the 14th Finance Commission regarding the state’s share in the net proceeds of Union tax revenues?

Answer 25

The 14th Finance Commission recommended that the state’s share in the net proceeds of Union tax revenues be 42%.

Question 26

What criteria did the 15th Finance Commission use to determine the share of the States?

Answer 26

The 15th Finance Commission used criteria such as Income Distance, Population (Census 2011), Area of the state, Forest and Ecology, Demographic Performance, and Tax Effort.

Question 27

Why did the 15th Finance Commission choose the 2011 Census instead of the 1971 Census?

Answer 27

The 15th Finance Commission chose the 2011 Census as the basis because it wanted to reward states that have lower fertility rates and performed well in controlling the population.

Question 28

What was the vertical devolution of funds recommended by the 15th Finance Commission?

Answer 28

The 15th Finance Commission recommended a vertical devolution of funds at 41%, with 1% of the net proceeds of Union taxes retained by the Central Government for the requirements of Jammu and Kashmir and Ladakh.

Question 29

What is income distance?

Answer 29

Income distance refers to the difference between the Gross State Domestic Product (GSDP) of a specific state and the GSDP of the benchmark state.

Question 30

Why is income distance considered in revenue sharing?

Answer 30

Income distance is considered to ensure inter-state equity by allocating a higher share of revenue to states with lower per capita income.

Question 31

Which states are likely to receive the highest revenue share based on income distance?

Answer 31

States with the lowest per capita income, such as Uttar Pradesh and Bihar, are likely to receive the highest revenue share based on income distance.

Question 32

What was the weightage given to income distance by the 14th Finance Commission and the 15th Finance Commission?

Answer 32

The 14th Finance Commission assigned a weightage of 50.0 to income distance, while the 15th Finance Commission reduced it to 45.0.

Question 33

What other criteria were considered by the 15th Finance Commission for determining revenue sharing?

Answer 33

The 15th Finance Commission also considered criteria such as population (2011), area, forest and ecology, demographic performance, and tax effort.

Question 34

What weightage was given to demographic performance by the 15th Finance Commission?

Answer 34

The 15th Finance Commission assigned a weightage of 12.5 to demographic performance.

Question 35

What weightage was given to tax effort by the 15th Finance Commission?

Answer 35

The 15th Finance Commission assigned a weightage of 2.5 to tax effort.

Question 36

What was the total weightage assigned to all criteria by both the 14th and 15th Finance Commissions?

Answer 36

Both the 14th and 15th Finance Commissions allocated a total weightage of 100 across all criteria.

Question 37

What are Ways and Means Advances (WMA)?

Answer 37

Ways and Means Advances (WMA) are temporary loan facilities provided by the Reserve Bank of India (RBI) to the Central and State governments.

Question 38

When was the Ways and Means Advances (WMA) scheme introduced?

Answer 38

The Ways and Means Advances (WMA) scheme was introduced in 1997.

Question 39

Why was the Ways and Means Advances (WMA) scheme introduced?

Answer 39

The scheme was introduced to address mismatches in the receipts and payments of the government.

Question 40

What is the repayment period for the amount availed under Ways and Means Advances (WMA)?

Answer 40

The government is required to repay the amount availed under Ways and Means Advances (WMA) within 90 days.

Question 41

What is the interest rate charged on Ways and Means Advances (WMA)?

Answer 41

The interest charged on Ways and Means Advances (WMA) is the existing repo rate.

Question 42

What happens if the credit provided under Ways and Means Advances (WMA) exceeds 90 days?

Answer 42

If the credit provided under Ways and Means Advances (WMA) exceeds 90 days, it is treated as an overdraft, and the interest rate becomes 2 percentage points more than the repo rate.