FC Recommendations

2B: Finance Commission, Black Money & 2C: subsidies, revenue expenditure
Table of Contents
23 🍋🍋 (🧔🧔⚖��) Taxation → Finance Commission ..................................................... 277
23.1 Introduction to Finance Commission (�व� आयोग) .............................................................. 277
23.2 🕵🕵🕵(🍋🍋 🧔🧔⚖�) Fifteenth FC Composition (setup in 2017-Nov) ............................ 277
23.2.1 📑📑15th FC Terms of Reference (TOR: �वचाराथर् �वषय)?................................................ 278
23.3 🕵🕵🕵📑📑: (� → 😱😱) 15th FC’s TOR: Apprehension of the States................................... 278
23.3.1 👪👪 States Fear#1: Vision for New India 2022............................................................ 278
23.3.2 🏆🏆 States fear#2: Performance based incentives (प्रदशर्न आधा�रत प्रो�ाहन) .................. 278
23.3.3 👪👪 States fear#3: Census-2011 (जनगणना -2011) ......................................................... 279
23.3.4 🔪🔪 States fear#4: Debt and Grants (ऋण और अनुदान) .................................................... 279
23.3.5 �15th FC TOR: Conclusion (�न�षर्) ......................................................................... 279
23.4 🍋🍋 [🧔🧔⚖(��)] FC: Vertical Tax Devolution from Union to States ............... 280
23.5 🍋🍋 [�⚖� �] Horizontal Tax Devolution among States ................................. 280
23.5.1 🍋🍋 [�⚖� �]15th FC: Horizontal devolution: States’ share .................... 281
23.5.2 🧕🧕Finance Commissions & the fate of UTs of J&K & Ladakh ................................. 281
23.6 🧔🧔 → 💸💸💸 (��) Grants from Union to States (सं घ से रा�ों को अनुदान) .................... 282
23.6.1 💸💸💸🏕🏕15th FC: Local Bodies Grants (�ानीय �नकाय अनुदान) ................................... 283
23.6.2 💸💸💸�Post-Devolution Revenue Deficit Grants ................................................. 283
23.6.3 💸💸💸�15th FC: Special Grants: (�वशेष अनुदान) ....................................................... 284
23.6.4 💸💸💸🌬🌬🌬🌬15th FC: Disaster Management Grants (आपदा प्रबं धन अनुदान:)............. 284
23.6.5 💸💸💸🍽🍽15th FC: Sector Specific Grants (�ेत्र-�व�श� अनुदान)-Malnutrition............ 284
23.6.6 💸💸💸🍽🍽15th FC: Sector Specific Grants (�ेत्र-�व�श� अनुदान)-Health ...................... 284
23.6.7 💸💸💸🍽🍽15th FC: Sector Specific Grants (�ेत्र-�व�श� अनुदान)-Health ...................... 285
23.6.8 💸💸💸💸💸💸Defence and Internal Security Fund for Union............................................ 286
23.6.9 🤏🤏 15th FC: Other recommendations to Govt (सरकार के �लए अ� �सफा�रश�) ............... 287
23.6.10 ✍ 15th FC Report: conclusion (�न�षर्) ....................................................................... 287
23.6.11 👻👻ATMANI → 🧔🧔🧔🧔🧔Helping States → Tax devolution and grants .......... 287
23.7 🕵🕵🕵(🍋🍋🍋🍋⚖�)⏰ FC: Giving Permanent Status (�ायी दजार् देना) ............................... 287
23.7.1 �👎👎Arguments against giving permanent status to FC (�वरोध म� तकर् ) ................... 287
23.7.2 �👌👌Argument in favour of giving permanent status to FC .................................. 288
23.7.3 � Conclusion: give permanent status to FC or not? (�न�षर्) ................................ 288
23.8 � FC vs PC vs NITI: What’s the Difference? ................................................................... 289
23.9 🍋🍋(🧔🧔⚖�🙏🙏) Special Category States? �वशेष श्रेणी के रा�?......................................... 290
23.9.1 🍋🍋(🧔🧔⚖�🙏🙏) Sp.Cat States → Economic Surveys criticised ......................... 291
(Batch:PCB3) Mrunal’s Economy Pillar#2B: Budget → Revenue → 15th FC, Black Money, Subsidies→ Page 274
23.9.2 🍋🍋(🧔🧔⚖�🙏🙏) Sp.Cat States → Hill Union Territory Status for J&K? .......... 291
23.10 � Mock Questions for UPSC Mains (250 words each) .................................................. 292
24 🍋🍋🍋🍋🍋 Taxation → Black Money & Allied Issues ................................................................ 293
24.1 (🍋🍋🍋🍋)�Black Money → Notable Organisations ........................................................ 294
24.2 🍋🍋🍋🍋 Tax Evasion (Hiding Income / Transaction) ........................................................ 295
24.2.1 🍋🍋🍋🍋⚖ Prevention of Money Laundering Act (PMLA-2002) ........................... 295
24.2.2 🍋🍋🍋🍋⚖ Undisclosed Foreign Income & Assets Act (UFIA-2015) ..................... 295
24.2.3 🍋🍋🍋🍋⚖ Benami Transactions Prohibition Act (BTPA- 1988, 2016) ................. 296
24.3 (🍋🍋🍋🍋)💼💼 Tax Evasion → Full-Budget-2019 Announcements ................................... 296
24.3.1 🍋🍋🍋🍋🍋🍋 Tax (Evasion) disclosure schemes (“surrender = less punish”) ........... 297
24.3.2 🍋🍋🍋🍋🍋🍋 Vivad se Vishwas Scheme for Direct Taxes (Budget-2020) .................. 297
24.3.3 👻👻 Tax Ordinance 2020 in ATMA NIRBHAR BHARAT[कर अ�ादेश] ................... 298
24.3.4 Dispute Resolution Committee (DRC) in Budget-2021 ............................................... 298
24.3.5 🍋🍋🍋🍋 Tax Evasion → Other Initiatives (अ� कदम) .................................................. 298
24.4 (🍋🍋🍋🍋🍋🍋)Tax avoidance (कर प�रहार / कर टालना) ................................................................. 299
24.4.1 🍋🍋🍋🍋🍋🍋 Double Taxation Avoidance Agreement (DTAA) & Round Tripping 299
24.4.2 🍋🍋🍋🍋🍋🍋 Tax Avoidance through Non-Resident Status ......................................... 300
24.4.3 🍋🍋🍋🍋🍋🍋 Place of Effective Management (POEM: पीओईएम) ................................... 300
24.4.4 🍋🍋🍋🍋🍋🍋 Base Erosion and Profit Shifting (BEPS: बीईपीएस) .................................... 301
24.4.5 🍋🍋🍋🍋🍋🍋 Transfer Pricing (ह�ांतरण मू�) ................................................................... 301
24.4.6 (🍋🍋🍋🍋🍋🍋) � Authority for Advance Rulings (AAR) ........................................... 302
24.4.7 (🍋🍋🍋🍋🍋🍋) � General Anti-Avoidance Rules (GAAR)......................................... 302
24.4.8 🍋🍋🍋🍋🍋🍋 Angel Tax on Startup Investments (2012)................................................ 302
24.5 🍋🍋🍋🍋🍋🍋🍋: � Reforms to reduce Tax Terrorism / Harassment .............................. 303
24.5.1 🍋🍋🍋🍋🍋🍋🍋:🧾🧾 Pre-filled online forms for Tax Payers ............................................. 303
24.5.2 🍋🍋🍋🍋🍋🍋🍋:🧾🧾 Faceless interaction between Tax payers and Tax official ............. 303
24.5.3 🍋🍋🍋🍋🍋🍋🍋:🧾🧾⏰ Time limit on opening of past cases........................................... 304
24.5.4 🍋🍋🍋🍋🍋🍋🍋:🧾🧾 Document Identification Number (DIN: द�ावेज़ पहचान सं �ाक) . 304
24.6 📯📯🍋🍋📜📜 Taxpayers’ Charter in 💼💼 Budget-2020 (करदाताओ का अ�धकारपत्र)........................ 305
24.6.1 📯📯🍋🍋📜📜 (Indian) Tax Payers' Charter released in 2020-Aug ................................... 306
24.6.2 ✍ 📯📯🍋🍋📜📜 Conclusion: Tax Payers' Charter........................................................... 306
24.7 🍋🍋🍋: �� Tax Ombudsman in Economic Survey 2021 ............................................... 306
24.7.1 🍋🍋🍋: ��Tax ombudsman: Indian experience ...................................................... 306
24.7.2 😰😰problems in previous Ombudsman system (2003-19)? .......................................... 307
24.7.3 🍋🍋🍋: ��Tax Ombudsman: Global experience with Independent ..................... 307
24.7.4 🍋🍋🍋: �� Tax Ombudsman: Conclusion / way forward (�न�षर्/आगे का रा�ा) .... 307
24.7.5 🍋🍋🍋: Reducing Tax Terrorism / Harassment: online portals/Apps ....................... 308
24.8 🍋🍋🍋🍋🍋🍋Taxation → Global Treaties, Agreements & Indexes ...................................... 308
24.8.1 🍋🍋🍋🍋🍋🍋 Tax Information Exchange Agreement (TIEA: कर सूचना �व�नमय समझौता) 308
24.8.2 🍋🍋🍋🍋🍋🍋 USA’s Foreign Account Tax Compliance Act (FATCA-2010) ............. 308
24.8.3 🍋🍋🍋🍋🍋🍋 Global Financial Secrecy Index (वै��क �व�ीय गोपनीयता सूचकांक).................. 309
24.9 💸💸Black Money → Demonetisation (�वमुद्रीकरण) ................................................................ 309
24.9.1 💸💸Why Demonetise ₹ 500 & 1000? ............................................................................ 309
24.9.2 💸💸How did 99.30% SBN returned into banking system? ........................................ 310
24.9.3 💸💸99.30% SBN returned, but Demonetization not failed experiment because: .... 310
24.9.4 💸💸Demonetization: Impact as per Economic survey 2016-17 ................................ 311
24.10 📘📘📘📘Economic Survey on taxation and fiscal capacity (�व�ीय �मता) ............................... 311
24.10.1 🍋🍋🍋🍋 Tax: GDP – why low in India (भारत का कर:जीडीपी अनुपात खराब �ों है?) .............. 312
24.10.2 🍋🍋🍋🍋 Tax: GDP 📘📘📘📘 ES19: “Use Behavioural Economics to improve Tax
Compliance” ........................................................................................................................................ 312
24.10.3 🍋🍋🍋🍋 Tax: GDP: 15th Finance Commission on how to improve it? ..................... 314
24.11 🍋🍋Taxation: Misc. Terms ..................................................................................................... 314
24.11.1 🍋🍋 Net Tax Revenue of the Govt (शुद्ध कर राज�) ......................................................... 315
24.11.2 🍋🍋 Revenue Shortfall (राज� म� कमी).............................................................................. 315
24.11.3 � Mock Questions for UPSC Mains (250 words each) .......................................... 316
24.12 📥📥📥📥📥📥 Budget → Revenue Part → Receipts → Non-Tax Receipts ....................... 317
25 📤📤⏰ Budget → Revenue Expenditure (राज� खचर्/ �य).......................................................... 318
25.1 📤📤⏰(🌽🌽⛽) Revenue Expenditure → Subsidies ......................................................... 319
25.1.1 📤📤⏰(🌽🌽⛽) Types of subsidies with selected examples...................................... 319
25.1.2 � � Impact of Subsidies (स��डी का प्रभाव: सकारा�क एवं नकारा�क) ............................ 320
25.1.3 📘📘📘📘 Past Economic Surveys on subsidy delivery (आ�थक सव��णों के उपाय) ............... 320
25.1.4 📘📘📘📘 ES19: Use ‘Behavioural economics (�वहार अथर्शा�)’ to ↓ subsidy bill.......... 321
25.1.5 ��🕵🕵🕵National Recruitment Agency (NRA: रा��ीय भत� एज�सी) ............................... 321
25.2 📤📤⏰🥳🥳 Revenue xpdr → Salaries→ 7th Pay Commission (वेतन आयोग) .................... 322
25.2.1 🥳🥳 Pay Commission: Associated terms ..................................................................... 322
25.3 👻👻📤📤⏰�🥳🥳 SALARY Reforms in Atmanirbharat 2.0 (Oct 2020) .............................. 323
25.3.1 👻👻⏰�🥳🥳 Atma-Nirbhar 2.0: Festival Advance Scheme (�ोहारों म� एडवांस रकम) .... 323
25.3.2 👻👻⏰�🥳🥳 Atma-Nirbhar 2.0: LTC Cash Voucher Scheme ................................... 323
25.4 (📥📥<📤📤)⏰⚠ Revenue Deficit (राज� घाटा: 5.1% of GDP) .......................................... 323
25.5 (📥📥<📤📤)⏰⚠ Effective Revenue Deficit (प्रभावी राज� घाटा: 4.1% of GDP) ................ 324
23 🍋🍋 (🧔🧔⚖��) TAXATION → FINANCE COMMISSION

23.1 INTRODUCTION TO FINANCE COMMISSION (�व� आयोग)
- Fiscal Federalism refers to the division of responsibilities of i) taxation and ii) expenditure
between the different levels of the government. राजकोषीय सं घवाद: क� द्र और रा�ों के बीच कराधान और खचर् क�
�ज�ेदा�रयों का आवं टन/बटवारा/�वभाजन
- While the 7th schedule assigns many responsibilities to the States but their taxation power is
relatively lower than Union’s. So, Finance Commission plays a key role in transferring union’s
revenue resources to the state.. रा� क� कराधान श��यां कम है इस�लए �व� आयोग क� द्र के करो से िह�ा िदलाता है
- Article 280: President of India forms a Finance Commission (a quasi-judicial body) every 5th
Year or earlier, with 1 chairman and 4 members. Eligible for re-appointment. Recommendations
are not binding on the government but usually not rejected.
📔📔Further self-study & HINDI TERMS@ M.Laxmikanth’s Indian Polity ch.45.
14th FC: YV Reddy Recommendation Period: 1st April, 2015 to 31st March, 2020
15th FC: NK Singh Originally, it was meant to cover: 1st April, 2020 to 31st March, 2025
But later, Modi Govt ordered it to submit two reports:
1) Report#1: for 1/Apr/2020 to 31/March/2021 → submitted to President
in 2019-Nov, and accepted in 2020-Jan
2) Report#2: for 1/Apr/2021 to 31/March/2026. Title of report is "“Finance
Commission in Covid Times”. Published in 2021-February.
23.2 🕵🕵🕵(🍋🍋 🧔🧔⚖�) FIFTEENTH FC COMPOSITION (SETUP IN 2017-NOV)
Chairman N.K. Singh (Retd. IAS, Ex-Member of Parliament)

Member1 Shaktikanta Das (Retd. IAS, RBI Gov)
Member2 Dr. Anoop Singh, Professor
Member3 (Part Time) Dr. Ashok Lahiri, Bandhan Bank
Member4 (Part Time) Prof. Ramesh Chand. member of NITI Aayog & Agri Economist.
Secretary Arvind Mehta (IAS)
23.2.1 📑📑15th FC Terms of Reference (TOR: �वचाराथर् �वषय)?
President of India has ordered them to study and recommend following:
1. Union Taxes’ vertical devolution to the states, and its horizontal distribution among the states.
(except cess, surcharge and IGST).
2. Union’s grant-in-aids to the states. (क� द्र द्वारा रा�ों को अनुदान)
3. How to augment State Govts’ Consolidated funds to help their PRI/ULBs
4. Any other matters referred by the President of India such as:
5. Use Census-2011 for your calculation. (जनगणना)
6. Keep in mind Union’s responsibilities for New India 2022 vision. (2022 के नए भारत के �नमार्ण के �लए
क� द्र सरकार क� �ज�ेदा�रयों को �ान म� रखना)
7. Recommend measures for Fiscal Discipline/Consolidation for the Union and State governments.
(राजकोषीय अनुशासन/समेकन)
8. Shd union continue to provide revenue deficit grants to States? (राज� घाटे क� भरपाई के �लए अनुदान)
9. How to finance the disaster management initiatives? (आपदा प्रबं धन)
10. Performance based incentives to the state governments? (प्रदशर्न आधा�रत प्रो�ाहन)
11. (2019-Jul) suggest ways for allocation of non-lapsable funds for defence and internal security.
(र�ा और आंत�रक सुर�ा �बन�पगत �न�ध)
12. (2019-Oct) Award for the UT of J&K. (This terms of reference required under Jammu and
Kashmir Reorganisation Act, 2019. ज�ू क�ीर पुनगर्ठन अ�ध�नयम)
23.3 🕵🕵🕵📑📑: (� → 😱😱) 15TH FC’S TOR: APPREHENSION OF THE STATES
�वचाराथर् �वषय से रा� आशं कावान �ों है
23.3.1 👪👪 States Fear#1: Vision for New India 2022
15th FC is required to keep New India 2022 vision in mind (wherein Modi government aims to double
the farmers’ income, provide housing for all, achieve 175GW of renewable energy etc.)
⇒ 15th FC also required to keep in mind Union’s additional burden regarding Defence, Internal
Security, Infrastructure, Railways, Climate Change, commitments towards administration of
UTs without legislature etc. (र�ा, आंत�रक सुर�ा, बु�नयादी ढाँचा, रेलवे, जलवायु प�रवतर्न)
⇒ So, TOR indirectly implying that 15th FC should give less than 42% to state governments
because union government needs more ₹ ₹ for aforementioned activities. So, Non-BJP states are
angry- “Tax devolution is our constitutional right”. (क� द्र के कर म� िह�ा हमारा सं वैधा�नक अ�धकार है)
23.3.2 🏆🏆 States fear#2: Performance based incentives (प्रदशर्न आधा�रत प्रो�ाहन)
15th FC asked to recommend performance-based incentives based on (list not exhaustive)
Performance parameter Why states apprehensive?
State’s Efforts in expansion of ➢ Manipur can’t do as much as Maharashtra in deepening the
tax-net GST tax net, owning to the variety of economic, geographic
कर-जाल का �व�ार बढ़ाना and political factors (frequent bandh and blockades).
Performance parameter Why states apprehensive?
➢ Secondly, Constitution provides for a separate GST council
with representatives of state governments. FC doesn’t have
state representatives.
State’s Efforts in population Gangetic plain states’ total fertility rate higher, so they’re
control apprehensive that Kerala & other Southern States will get more
आबादी �नयं त्रण money. <More about TFR in Pill#6>
Southern states have been running populist schemes for free TV,
State’s efforts in controlling
Fridge, Mixer, Idli at ₹ 1 etc. Similarly Northern states run
the expenditure on populist
schemes for farm-loan waiver, free bicycle, mobile & laptop
schemes/measures
schemes. They fear they’ll be reviewed negatively, and union will
(लोकलुभावन योजनाएं ).
get to keep more ₹ ₹ for itself.
Electricity theft is a rampant problem in certain Gangetic states
State’s Efforts in controlling
but their ruling parties turn blind eye because of electoral
power sector losses
populism of farmers and villagers. Now they are apprehensive of
(ऊजार् /�बजली)
getting less money.
⇒ States resent that Modi’s Swatchh Bharat Mission is ‘imposed
Behavioral changes to end upon them’. (अनाव�क �प से क� द्र सरकार थोप रही है)
open defecation.
⇒ FC devolution is their Constitutional right, and not an alm
(खुले म� शौच जाने के बतार्व म� सुधार)
(खेरात) tied to their implementation of central schemes.
23.3.3 👪👪 States fear#3: Census-2011 (जनगणना -2011)
For horizontal distribution of taxes among states, 14th FC had used Census-1971 data. Census-1971
population was given 17% weight i.e. more populous state will get more funds.
⇒ 15th FC’s Terms of Reference (TOR) requires NK Singh to use ONLY Census-2011 data.
⇒ But, Southern states ⏬their fertility rate between 1971 to 2011, whereas Northern states could
not- due to poverty, illiteracy and lack of healthcare infrastructure. So, Southern states had
feared Northern states will get proportionately more funds, if Census-2011 is used. (द��ण भारत के
रा�ों ने अपनी आबादी म� / प्रजनन दर म� कटौती क� थी इस�लए उ�� डर िक हम� कम पैसा �मलेगा)
23.3.4 🔪🔪 States fear#4: Debt and Grants (ऋण और अनुदान)
⇒ Article 293: States can’t borrow without consent of the Union. So, what additional conditions
should the Union impose on the states when they (states) borrow from market / external
sources? (रा� सरकार बाजार से पैसा उधार ले तो क� द्र सरकार ने उस पर �ा शत� रखनी चािहए)
⇒ TOR even requires 15th FC to make recommendations in this regard. States fear it’ll reduce their
autonomy in raising loans from the market. (रा� सरकार क� बाजार से कजर् उठाने क� �तं त्रता चली जाएगी)
23.3.5 �15th FC TOR: Conclusion (�न�षर्)
✓ Economic Survey 2016-17 had observed ‘aid-curse’ ('सहायता-अ�भशाप') i.e. over the years, Special
Category States received large amount of funds via Planning Commission and Finance
Commissions yet couldn’t perform well in poverty removal or economic growth due to lack of
accountability and poor governance. (योजना आयोग और �व� आयोग ने दशकों तक �पछड़े रा�ों को पैसा देते िक�ु
कु शासन के चलते गरीबी उ�ूलन व् आ�थक वृ�द्ध नहीं �ई)
✓ The 15th FC TOR aims to link the fund transfers with performance and accountability
parameters. While states are apprehensive, but we’ll have to swallow this bitter pill eventually to
⬆ India’s human dev. & economic growth. (नया �व� आयोग प्रदशर्न आधा�रत प्रो�ाहन और जवाबदेही क� बात
करता है वो आवकायर् प्रशं सनीय है, भारत के मानव �वकास और आ�थक वृ�द्ध के �लए, ये कड़वी दवा हमने पीनी होगी)
✋Error in Answer Writing: Don’t digress to unsolicited suggestions & overthinking like “Southern
states should help Northern states in their family planning programs.”
23.4 🍋🍋 [🧔🧔⚖(��)] FC: VERTICAL TAX DEVOLUTION FROM UNION TO STATES
Finance Commission recommends the vertical devolution (ऊ�ार्धर कर अंतरण) from the ‘divisible pool’
of union taxes. (Here IGST, Cess, Surcharge not counted.)
FC → �व� आयोग 12th (2005-10) 13th (2010-15) 14th (2015-20) 15th (2020-21) & 21-26
Chairman? (अ��) C.Rangarajan Vijay Kelkar VY Reddy NK Singh
States Share 30.5% 32% 42% 41%*
 *15th FC’s justification: Compared to 14 FC, 1% extra Union should keep for UTs of J&K &
th
Ladakh’s security & other needs.

 Sometimes finance minister says “States, along with Ladakh, J&K be given 42% share from Union
tax for 2021-2025” Although UT of J&K & Ladakh= to get 1%, so in reality other states getting
42-1=41%.”
23.5 🍋🍋 [�⚖� �] HORIZONTAL TAX DEVOLUTION AMONG STATES
रा�ों के बीच सम�रीय/�ै�तज करअंतरण
Finance Commission also gives formula for How to distribute that share horizontally with
individual States (Guj | Bihar | MH | TN...). 14th FC (YV Reddy)’s formula was…
14th FC horizontal distribution formula components Weight %
👪👪 आबादी Population: as per Census 1971 17%
👪👪 जनसां��क�य Demographic Change as per Census 2011 (To consider the
10%
बदलाव migration angle.)
Income-Distance: Based on per capita income of a state (GSDP ÷
👜👜 आय-दू री 50%
its population). Accordingly, poorer states get more weight
📏📏 �ेत्र Area: more area more weight 15%
Forest-Cover: more forest cover more weight because of
🌳🌳 वन-आवरण Opportunity cost (State can’t allow industries there, else it could 8%
have obtained some taxes)
Based on above formula, Highest to Lowest: Uttar Pradesh > Bihar > MP > WB > MH > Raj> ….. >
Mizoram > Goa > Sikkim.
15th FC horizontal distribution formula components (घटक) → (भारांक%)
Weight%
(both in Report#1 and Report#2)
Income Distance (आय म� अंतर):
⇒ State GSDP divided by its Population = per capita GSDP.
45%
⇒ For most states, Haryana’s per capita GSDP is taken as benchmark. How
poorer is your state compared to Haryana= more ₹₹ you’ll get.**
📏📏 Area (�ेत्रफल) More area = more ₹₹ 15%
👪👪 Population (as per Census-2011: आबादी): More population = more ₹₹ 15%

Demographic Performance (जनसां��क�य �न�ादन): States that have ⬇ Total
12.5%
Fertility Rate (TFR: कु ल प्रजनन दर), will get ⬆₹₹. More in Pill#6
🌳🌳 Forest and Ecology (वन एवं पा�र��क�): More forest= more ₹₹ 10%
🍋🍋 Tax Effort (कर प्रयास) : States who’ve improved their per capita (State) tax
2.5%
collection in the last 3 years = get more ₹₹
Total (कु ल) 100%
** Note: computing income distance: the Highest per capita GSDP: 1) Goa 2) Sikkim 3) Haryana 4) Himachal.
But since Goa, Sikkim are very small states with a unique economic situation, so it’ll distort statistical formula. So, there are some
internal fine tunings done in formula. Long story cut short: Haryana taken as benchmark for most states. If you’ve more intellectual
curiosity about how above indicators are calculated in real life, you may spend waste time in PHD-reading of the original report@
https://fincomindia.nic.in/
23.5.1 🍋🍋 [�⚖� �]15th FC: Horizontal devolution: States’ share

Table 1: Try to remember 3-5 names in top & bottom each, & your home state.
1) Uttar Pradesh (17.931%) 11) Chhattisgarh (3.418%) 21) Himachal (0.799%)
2) Bihar (10.061%) 12) Gujarat (3.398%) 22) Meghalaya (0.765%)
3) MP (7.886%) 13) Jharkhand (3.313%) 23) Manipur (0.718%)
4) W. Bengal (7.519%) 14) Assam (3.131%) 24) Tripura (0.709%)
5) Maharashtra (6.135%) 15) Telangana (2.133%) 25) Nagaland (0.573%)
6) Rajasthan (5.979%) 16) Kerala (1.943%) 26) Mizoram (0.506%)
7) Odisha (4.629%) 17) Punjab (1.788%) 27) Sikkim (0.388%)
8) Tamil Nadu (4.189%) 18) Arunachal (1.76%) 28) Goa (0.386%)
9) Andhra (4.111%) 19) Uttarakhand (1.104%) ANY type of UT = 0% here
10) Karnataka (3.646%) 20) Haryana (1.082%)
23.5.2 🧕🧕Finance Commissions & the fate of UTs of J&K & Ladakh
Until 10th Finance Commission, the FC would also prescribe the revenue sharing formula between
the Union Government and Union Territories.
 But this practice stopped since 11th finance commission i.e. Finance ministry itself decides how
much revenue will be shared with Union Territories based on its own discretion (क� द्रशा�सत प्रदेशों को
िकतने पैसा देना है= क� द्र सरकार अपने �ववेक से तय करता है. �व� आयोग इस म� चूं नहीं कर सकता).
 Finance Commission no longer prescribed formula in this regard. But,
 31st October 2019: The state of Jammu Kashmir was officially split into the union territories of
Jammu Kashmir and union territory of Ladakh.
 Jammu and Kashmir Reorganization Act, 2019 mandates that:
o Whatever amount the former state of J&K was supposed to receive between 31/10/2019
to 31/3/2020 (as per 14th FC formula) …It will be distributed between these two new
union territories on the basis of population ratio and other parameters.
o President of India shall require 15th FC to make award for UT of J&K.
o But, 15th FC report, no separate share is given in verticle / horizontal tax devolutions.
Simply 1% extra kept with Union to look after J&K & Ladakh, compared to 14th FC.
23.6 🧔🧔 → 💸💸💸 (��) GRANTS FROM UNION TO STATES (सं घ से रा�ों को अनुदान)
Apart from the tax devolution, FC would also suggest Union to give grant to the states (grant= NOT
loan, so need not return with interest).
14th FC suggested following types of grants→
1. For All States: Grants for Panchayati Raj Institutions (PRI) and Urban Local Bodies (ULB) are
subdivided into two parts (पं चायती राज व शहरी �ानीय �नकायों के �लए अनुदान दो िह�ों म� �वभा�जत)
a. basic grant (प्राथ�मक) and
b. (10-20%) performance based grants.(प्रदशर्न आधा�रत)
2. For All States: Disaster Management Grants. (आपदा प्रबं धन अनुदान)
3. For 14 States: Post-Devolution Revenue Deficit Grants. (अंतरण-प� राज� घाटा अनुदान)
15th FC suggested following types of grants →
Type Report#1 (2020-21) Report#2 (2021-26)
1) 💸💸💸🏕🏕Local Bodies A) 60cr to Rural A)2.##Lcr Rural
Grants (�ानीय �नकाय अनुदान B) 30cr to Urban B)1.##Lcr Urban
= Total 90k cr =total 4.36Lcr
2) 💸💸💸�Post-Devolution 74kcr 2.94 Lcr
Revenue Deficit Grants
3) 💸💸💸🌬🌬🌬🌬Disaster A) 12kcr in Union ke A) 68 kcr in Union ke Disaster
Management Grants (आपदा Disaster funds funds
प्रबं धन अनुदान) B) 29kcr in State ke B) 1.22 Lcr in State ke Disaster
Disaster funds funds
4) 💸💸💸🍽🍽Sector Specific 7700cr for Nutrition >1 lakh crore for (Sectoral grants
Grants: (�ेत्र-�व�श� अनुदान) with Health, Education, agricultural
💸💸💸� Performance- reforms, rural roads, Judiciary,
based incentives (�न�ादन- Statistics, Aspirational districts)
आधा�रत प्रो�ाहन)
6) 💸💸💸🏰🏰State specific N/A 49599 cr.
grants for tourism, historical
monuments, infrastructure,
water etc.
Type Report#1 (2020-21) Report#2 (2021-26)
7) 💸💸💸�Special Grants: ~6700kcr N/A
(�वशेष अनुदान)
8) Union Govt ke liye Defense N/A 2.38 Lcr
and Internal Security Fund
23.6.1 💸💸💸🏕🏕15th FC: Local Bodies Grants (�ानीय �नकाय अनुदान)
Description
Rural Local Bodies - Out of the total amount:
given to all three tiers ⇒ 50% is Tied Grants (�न�द�) = meant only for specific objectives 1)
in the panchayats, i.e. sanitation 2) water (��ता और पानी)
village, block and ⇒ 50% is Untied/basic (प्राथ�मक) = can be used for any objective
district. And also, for
depending on location. Except salary & establishment (building
5th and 6th Sch. areas
renovation, electricity bill etc.)
From 1/4/2021 they’ll be required to submit audited accounts online
through Panchayati Raj Institutions Accounting Software (PRIAsoft) to
Comptroller and Auditor General (CAG: �नयं त्रक और महालेखा परी�क)
Urban Local Bodies Divided into two parts:
(ULB) & ⇒ ₹“X” cr million plus population-walli cities. (Excluding Delhi &
Cantonment boards Srinagar for being in UT). These grants are mainly to be used for air
quality improvement, water & solid waste management (वायु गुणव�ा म�
शहरी �ानीय �नकाय सुधार, जल और ठोस अप�श� प्रबं धन).
⇒ ₹”Y” cr for cities with <1million pop: 50% untied (basic) grants + 50%
tied for specific objectives 1) drinking water 2) solid waste
management.
From 1/4/2021, ULBs required to 1) reform property tax rates 2) submit
audited accounts to CAG online.
23.6.2 💸💸💸�Post-Devolution Revenue Deficit Grants
Figure 1: हमको और पैसा दो, हमारे राज� घाटे क� भरपाई के �लए!

Suppose (amt in ₹cr) 2020-21
Andhra’s own State Budget: Revenue Expenditure - Revenue Income = 41 kcr
Revenue Deficit (राज� घाटा)
Andhra’s share from Union’s taxes based on horizontal devolution 35 kcr
Andhra’s Post-Devolution Revenue Deficit = 41-35=6 kcr.
So 15th FC will give Andhra extra 6 kcr as Post-Devolution Revenue Deficit Grant (अंतरण-प� राज�
घाटा अनुदान). Only 14 states eligible: Assam, Himachal Pradesh, Manipur, Meghalaya, Mizoram,
Nagaland, Sikkim, Tripura, Uttarakhand, Andhra,Kerala, Punjab, Tamil Nadu, West Bengal.
23.6.3 💸💸💸�15th FC: Special Grants: (�वशेष अनुदान)
Report#1 (2020-21)
⇒ If a state receives less ₹₹ in (15th FC’s devolution + post revenue deficit grants) in 2020-21
compared to 2019-20 (when 14th FC Rangarajan’s formula was in effect),
⇒ Then such State will get Special Grants just to prevent any ‘feeling of injustice / bias’ (अगर 14व� �व�
आयोग क� अपे�ा 15म� कम �मल रहा हो तो अ�ाय / प�पात के आरोप से बचने के �लए �वशेष अनुदान)
⇒ Only 3 states eligible: Karnataka, Telangana and Mizoram. Total ₹6,764 cr for 2020-21
Report#2 (2021-26)
 No such grant announced.

23.6.4 💸💸💸🌬🌬🌬🌬15th FC: Disaster Management Grants (आपदा प्रबं धन अनुदान:)
Disaster Management Act, 2005 → Ministry of Home Affairs (गृह मं त्रालय) looks after the subject.
15th FC: recommend 🧔🧔National Disaster Risk Management Fund �State Disaster
�सफ़ा�रशे (NDRMF: एनडीआरएमएफ/रा��ीय आपदा जो�खम प्रबं धन कोष) Risk Management
Fund (SDRMF)
Internal distribution ⇒ 80% amt for National Disaster Response Fund Same pattern, change
आंत�रक �वतरण (NDRF:एनडीआरएफ/रा�ी� य आपदा सहायता कोष) word from National
⇒ 20% amt for National Disaster Mitigation to ‘State’
Funds (NDMF:एनडीएमएफ/रा��ीय आपदा प्रशमन कोष)

**Notes on SDRMF:
1) How much will an individual state get? Ans= depends on its past disasters, risk exposure (area &
population wise) etc. आपके रा� म� आपदा का जो�खम िकतना है उस िहसाब से कम / �ादा पैसा �मले
2) Respective State Govt is also required to contribute some money in SDRMF.
23.6.5 💸💸💸🍽🍽15th FC: Sector Specific Grants (�ेत्र-�व�श� अनुदान)-Malnutrition

 Report#1 (2020-21): 15th FC only recommended health → Nutrition grant (₹7700+ cr पोषण
अनुदान) to combat malnutrition (कु पोषण). Ministry of Women and Child Development (MoWCD:
मिहला बाल �वकास मं त्रालय) will oversee its utilization.
 Report#2 (2020-21): not mentioned.
23.6.6 💸💸💸🍽🍽15th FC: Sector Specific Grants (�ेत्र-�व�श� अनुदान)-Health
Type Report#2: (2021-26) Amount
Local Bodies Grant (Rural and urban) Local Bodies given 70kcr
₹₹ to convert Primary Health centres
Type Report#2: (2021-26) Amount
पं चायती राज/नगरपा�लकाओं को प्राथ�मक (PHC) into health and wellness centres
�ा� क� द्र को �ा� और क�ाण क� द्र म� (HWCs)
प�रव�तत करने के �लए ट�क भर के पैसा
Sectoral Grant → Health Critical Care hospitals i.e. facilities with 15kcr
नाजुक देखभाल के अ�तालों को बनाने के Intensive Care Unit (ICU) ventilator,
�लए पैसा kidney dialysis etc.
Sectoral Grant → Health Training of Allied Healthcare 13kcr
�चिक�ा सं ल� मानव बल क� तालीम के workforce (lab technicians,
�लए पैसे radiographers, dieticians,
Physiotherapist, ASHA Worker etc)
Sectoral Grant → Health State government to run Doctor 2kcr
�जले के अ�तालों म� डॉ�री तालीम के training courses in district hospital
कोसर् करवाने के �लए पैसा
कु ल �मलाकर Total: 70kcr to local bodies + 30kcr as
1.06 Lcr = approx.
Sectoral Grants 10% of total grants to
Healthcare sector
Additional Recommendations by 15th FC on Healthcare
⇒ Union and State Government together should spend 2.5% of GDP on Healthcare sector by 2025.
(क� द्र और रा� सरकार ने �मलकर �ा� �ेत्र म� सावर्ज�नक खचर् को बढ़ाकर जीडीपी के ढाई प्र�तशत तक करना चािहए)
⇒ All-India Services Act, 1951: (presently we've IAS,IPS,Indian Forest Service) → make 4th All
India service: "All India Medical and Health Service" → UPSC to conduct recruitment. This will
help addressing the shortage of doctor in backward states. आईएएस/आईपीएस क� तजर् पर एक और अ�खल
भारतीय सेवा बनाई जाए "अ�खल भारतीय �चिक�ा एवं �ा� सेवा" तािक �पछड़े रा�ों म� डॉ�रों क� कमी को पूरा िकया जा सके
⇒ Most of the medical colleges and super-speciality hospitals (e.g. Cancer) are concentrated in the
Western and Southern parts of India. Union and State government should make efforts to
address this.(प��मी/द��णी रा�ों के अलावा वाले �व�ार म� भी अ�� मेिडकल कॉलेज| अ�ताल बनाने पर जोर िदया जाए)
23.6.7 💸💸💸🍽🍽15th FC: Sector Specific Grants (�ेत्र-�व�श� अनुदान)- Others(अ�)
Report#2: (2021-26) Amount
कृ �ष �ेत्र म� सुधारों के �लए -नी�त आयोग Implementation of agricultural reforms e.g.
द्वारा प्र�ा�वत कानूनों को पा�रत करना, Passing the agricultural formula suggested by
भूजल सं वधर्न, �तलहन दाल लकड़ी उ�ादों Niti Aayog, Groundwater conservation,
को प्रो�ाहन, कृ �ष �नयार्त को बढ़ोतरी Improving Oilseed pulses wood products, 45kcr
agricultural export, (📑📑Ref: HDT-Pillar#4A)
�ा� �ेत्र Sectoral grants for Health (Learned in previous 30k as
section) sectoral
grant
Report#2: (2021-26) Amount
Note: +A) sectoral grant 30k cr + B) separately
local bodies given 70kcr= total >1 lakh cr but
“Sectoral grants MCQ =count only ₹30k
ग्रामीण सड़कों क� मर�त Maintenance of PMGSY roads (Pradhanmantri 27 kcr
Gram Sadak Yojana) (📑📑Ref: HDT-Pillar#5-
Transport Infrastructure)
�ा�यक सुधार -अ�त�र� �ायालय और Judiciary: ₹₹ for Setting of extra courts and
जजों क� �नयु�� के �लए पैसा- �जसे 5 साल judges to finish the the property cases which are 10 kcr
या उससे अ�धक �वलं �बत सं प��यों के मामलों pending for 5 years or older, Civil cases of
का �नपटारा, ब�ों के यौन शोषण,गं भीर marginalized people, POSCO cases (child sex
अपराध के मामलों का ज�ी �नपटारा abuse) & heinous crimes
उ� �श�ा म� ऑनलाइन पढ़ाई क� �व�ा Higher Education-For 1) developing online 6 kcr
तथा �चिक�ा और इं जी�नय�रंग के कोसर् को learning 2) translating medical engineering
प्रादे�शक भाषा म� अनुवािदत करने के �लए courses in regional languages
�ू ली �श�ा School Education 4.8 kcr
Total >1 lakh cr
These grants also include internal quota for performance based incentives i.e. Better performing
States will be given additional money. (इन सभी अनुदान म� कु छ अंद�नी/आंत�रक कोटा होता है, �जसम� अ�धक अ�ा
प्रदशर्न करने वाले रा�ों को अ�धक रकम �मल सके )
23.6.8 💸💸💸💸💸💸Defence and Internal Security Fund for Union

For whom? Union Government (क� द्र सरकार के �लए)
Where? Public Account of India → Modernisation Fund for Defence and Internal Security
(MFDIS: लोक लेखा �न�ध के अंतगर्त र�ा तथा आंत�रक सुर�ा के नवीनीकरण/आधु�नक�करण के �लए कोष या
�न�ध).
Type Non-lapsable Fund (The money in such fund will not lapse on 31st March, so it can
be used in future without getting another approval from parliament.) �बन�पगत �नधी
Amount ₹ 2.38 Lcr (total for 2021-26)
😰😰Controversy on MFDIS Fund?
⇒ Some State governments are unhappy that the 15th finance commission should stick to its
Constitutional mandate of giving ₹₹ to States & not allot to Union. ESLE less money available for
State Governments' development works. �व� आयोग क� सं वैधा�नक �ज�ेदारी है िक रा�ों क� तरफ पैसा दे, ना िक
क� द्र के िह�े म� पैसा बढ़ाते रहे अ�था रा�ों के पास कम पैसा आएगा
⇒ Since the fund is marked as a non-lapsable fund → Defence ministry may be very involved in
utilising it and the amount will remain on spent. A similar problem is present in "Nirbhaya fund
for women safety". (📑📑Ref: HDT-Pillar# 2D for more) �बन�पगत �नधी म� पैसा खचर् करने म� मं त्रालय सु�ी
�ादा िदखाते ह� इस�लए असल म� लाभ होता नहीं. भूतकाल म� मिहला सुर�ा के �लए बनाए गए �नभर्या फं ड म� ऐसा ही अनुभव रहा है.
23.6.9 🤏🤏 15th FC: Other recommendations to Govt (सरकार के �लए अ� �सफा�रश�)
⇒ Some States have requested special category status. But it’s not part of our mandate/Terms of
Reference. So we’ve nothing to say on this matter. (कु छ रा� “�वशेष श्रेणी का दजार्” मांग रहे ह� लेिकन रा�प� �त
महोदय द्वारा हम� िदए गए �वचाराधीन �वषय म� यह मुद्दा है ही नहीं इस�लए हम इस पर कोई िट�णी नहीं द�ग)े .
⇒ Reform the taxation system → ⏫ tax collection. (प्र�� कर प्रणाली म� सुधार)
⇒ Review the outcomes of all Govt schemes. Merge/abolish non-essential schemes. सभी सरकारी
योजनाओं क� समी�ा कर� और अनाव�क योजनाओं को �वलीन कर�
⇒ We need a law on “Public Financial Management System (लोक �व�ीय प्रबं धन प्रणाली)” it’ll prescribe
the budgeting, accounting, internal control and audit standards to be followed at all levels of
government.
⇒ Govt should follow FRBM Act with full sincerity in letter and spirit. (More in 📑📑Pillar2D: FRBM
Section पूरी �न�ा के साथ एफआरबीएम कानून का पालन ज�री)
23.6.10 ✍ 15th FC Report: conclusion (�न�षर्)
✓ Sustainable Development Goal#10: ⏬ inequality within the country. SDG-Goal#16 requires
nations to build effective, accountable and inclusive institutions at all levels. सतत �वकास ल�:
असमानता को कम करो | लोक प्रशासनके सभी �रो मे सं �ानो को प्रभावी, जवाबदेह और समावेशी बनाओ
✓ In this regard, 15th FC has tried to provide a framework for
○ 1) equitable distribution of revenue 2) incentives tied with performance. ऐसा ढांचा जहा 1)
कर-�वतरण समानता के साथ और 2) प्रो�ाहन प्रदशर्न के िहसाब से �मलेगा
✓ It’ll greatly help to improve India’s human dev+ eco growth. मानव �वकास और आ�थक �वकास मे मदद
23.6.11 👻👻ATMANI → 🧔🧔🧔🧔🧔Helping States → Tax devolution and grants
⇒ Corona = Union’s tax income ⏬⏬ but still under Atma-Nirbhar → Union has given
assurance, “We’ll release Tax Devolution and grants to the states as per the figures announced in
the Budget and Finance Commission report.”
23.7 🕵🕵🕵(🍋🍋🍋🍋⚖�)⏰ FC: GIVING PERMANENT STATUS (�ायी दजार् देना)
Figure 2: CAG-UPSC जेसी कायम चालू रहेने वाली सं �ा बनाओ FC को- तभी ठीक से काम होगा- श��कांता
(Introduction: Origin) Shaktikanta Das, the Governor of RBI and a member of the 15th Finance
Commission (FC), has recommended giving a permanent status to the FC, wherein the old
commission continues to implement & monitor the recommendations till the next commission
starts functioning. (जब तक नया �व� आयोग नहीं बनता पुराने �व� आयोग क� ऑिफस खुली रखनी चािहए)
23.7.1 �👎👎Arguments against giving permanent status to FC (�वरोध म� तकर् )
 Indian economy and Indian union has functioned successfully for over 70 years with this
mechanism, so there is no need for such constitutional amendments and experimentations.
वतर्मान �व�ा यो��प से चल रही है, नए सं वध
े ा�नक प्रयोगो क� कोई ज�रत नही
 Both NITI Aayog and GST Council provide a platform for cooperative federalism (सहकारी सं घवाद
क� चचार् के �लए मं च उपल�).
 Further, we already have the CAG to audit the accounts of the Union and the States.
 Therefore, Giving permanent status to FC= duplication of efforts.(प्रयासों का �थर् दोहराव)
 Even if the FC given a permanent status → states ruled by opposition parties will continue to
allege injustice & partiality, just like they allege with the functioning of Election Commission.
 Then, the Union Finance Ministry’s precious time will be wasted in filing counter-responses to
the States at FC. �व� आयोग पूरा समय रा�ों क� फ�रयाद सुनता रहेगा और क� द्र सरकार उसी के जवाब देने म� लगी रहेगी
23.7.2 �👌👌Argument in favour of giving permanent status to FC
 Election Commission has a permanent status even though elections are to be conducted every 5
years. Previous Lok Sabha’s speaker continues to hold position until new Lok Sabha meets for
the first time. Following this rationale, Shaktikanta Das’s suggestion that “Previous Finance
Commission should continue to function & oversee the implementation of its recommendations
until new FC is formed” is valid. (चुनाव तो 5 साल म� एक बार होते ह� िफर भी चुनाव आयोग क� ऑिफस खुली रहती है)
 Finance Commission recommendations are valid for a block of 5 years. Even if there is a war,
disaster, famine or an economic crisis which may affect the revenue collection of the union vs.
the demands by the States, still, the FC-formula/recommendations cannot be modified/finetuned
in-between the five years. So, even if Union/states are feeling any injustice in the FC-formula,
they have to wait for five years to make pleas to the next Finance Commission.
 If FC has a permanent secretariat/office = staff will keep all the records/ Knowledge bank for
future reference, and a few officers will act as ‘Resource Persons’ to assist the new panel. Then,
there will be more consistency in the FC recommendations. (जानकार �ाफ का तबादला हो जाता है)
 Such permanent body can keep a constant vigil (अ�वरत सतकर् ता) on the Union and State finances &
revenue collections and hold them accountable for any transgressions or lethargy (उ�ं घन / सु�ी).
[Present approach of the union governments is if they are not getting enough taxes, they will simply
borrow more money and changing the FRBM targets/goalposts as per their convenience. More
under 📑📑 Pillar2D:FRBM handout]
 Previously, Union and States designed their five-year plans, and so it made sense to have a ‘five-
year formula for tax distribution’. But now the five-year planning system has been discontinued.
पं चवष�य योजनाओं का दौर ख� हो चुका है, इसी हमने 5-5 वषर् के मान�सकता से �नकलकर �नरंतर �नगरानी रखनी चािहए
23.7.3 � Conclusion: give permanent status to FC or not? (�न�षर्)
⇒ ✅(In-favor) Considering the aforementioned benefits, Finance Commission should be given a
permanent status for better monitoring, accountability, grievance redressal in the matters related
to fiscal federalism. (राजकोषीय सं घवाद के मामलों म� बेहतर �नगरानी, जवाबदेही और �शकायत �नवारण के �लए �व�आयोग
को �ायी दजार् देना लाभकारक होगा.)
⇒ ✋(Against) Considering the aforementioned issues, the present constitutional and institutional
mechanisms are adequate for fiscal federalism; they do not merit any changes for the time being.
(वतर्मान प्रणाली सुयो�, िफ़लहाल कोई प�रवतर्न अनाव�क)
23.8 � FC VS PC VS NITI: WHAT’S THE DIFFERENCE?
� 🍋🍋⚖ Finance �🤴🤴 Planning Commission �🧔🧔 NITI Aayog

Commission (FC) (PC) योजना आयोग National Institution
for Transforming India
Constitutional body Created by executive resolution, so neither constitutional non
statutory. Both headed by Prime Minister as the chairman.
1951: 1st FC setup under KC - 1951: PC set up and over the - 2015: Formed.
Neogy years designed 12 Five Year - Three Year Action Agenda
plans (12th FYP: 2012-2017) (2017-20).
- 2014: Dissolved by Modi - Seven Year Strategy
Government. Document.
- Fifteen Year Vision
Document(2017-32).
- Taxes’ Vertical 1. How much money should It is not in its scope of work to
Devolution and union give to each state for decide how much money
horizontal distribution implementation of Union’s should be given to each state.
among states. centrally sponsored schemes That component is decided by
- + any other matters (CSS)? the Finance Ministry.
referred by the President 2. How much money should - NITI’s primary objective is
in TOR union government give to the to serve as the think tank of
- Each Finance five year plans of the state the Government of India,
Commission arrived at governments? - Helps in policy design.
its own methodology. To answer these Qs, PC would use - Helps in monitoring
E.g. 14th FC: 42% Gadgil Mukherjee formula schemes’ through its
vertical, and 5 factor (designed in 8TH FYP)- based on dashboard e.g. ‘School
formula for horizontal population, per capita income, Education Quality Index’,
distribution. special problems etc. of a state. ‘SDG India Index’, ‘Digital
Transformation Index’
< More about Planning Commission and NITI Aayog in 📑📑Pillar#4>
🔠🔠❓ In India, which of the following review(s) the independent regulators in sectors like telecommunications,
insurance, electricity etc. ? (UPSC Prelims-2019)
1. Ad Hoc Committees set up by the Parliament.
2. Parliamentary Department Related Standing Committees
3. Finance Commission
4. Financial Sector Legislative Reforms Commission
5. NITI Aayog
Answer Codes: (a) 1 and 2 (b) 1 , 3 and 4 (c) 3, 4 and 5 (d) 2 and 5
23.9 🍋🍋(🧔🧔⚖�🙏🙏) SPECIAL CATEGORY STATES? �वशेष श्रेणी के रा�?
Figure 3: हमारा रा� गरीब है, इस�लए हमे �वकास के �लए क� द्र सरकार ने अलग से ढेर सारा पैसा देना चािहए!
- 1952: The National Development Council (NDC: रा��ीय �वकास प�रषद) was set up, with PM, CMs and
other representatives to approve FYP prepared by the Planning Comm.
- Although NDC became obsolete with establishment of NITI Aayog.
- 1969: 5th FC recommended giving extra ₹₹+ tax-relief to certain disadvantaged states. Over the
years, NDC added more states into the Special Category List based on
✓ (i) hilly and difficult terrain (पहाड़ी और किठन भूभाग)
✓ (ii) low population density and / or sizeable share of tribal population (कम जनसं �ा
घन� और / या जनजातीय जनसं �ा का बड़ा िह�ा)
✓ (iii) strategic location along borders with neighbouring countries (पड़ोसी देशों के साथ
सीमाओं के साथ रणनी�तक �ान)
✓ (iv) economic/infrastructural backwardness (आ�थक/अवसं रचना�क �पछड़ेपन)
✓ (v) non-viable nature of state finances. (रा� �व� क� गैर-�निहत प्रकृ �त।)
- Examples: 8 North Eastern states and 3 Himalayan States (JK, Uttarakhand, HP). Although,
Post-370 removal, J&K is no longer in this list.
- 🤩🤩🤩🤩Benefits of Sp.Cat. States? (�वशेष श्रेणी के रा�ों को �ा �रयायते / लाभ �मलते है?)
✓ Industrialists will be given benefits in Union-taxes for setting up factories in these states.
(उद्योगप�त को फै ��ी लगाने पर कर म� छू ट/ �रयायत- तािक वह �पछड़े रा� म� जाने के �लए आक�षत हो )
✓ Union bears higher burden in Centrally Sponsored Schemes (CSS) e.g 90:10 ratio: (क� द्र
प्रायो�जत योजनाएं म� क� द्र सरकार अपनी जेब से �ादा अनुपात म� पैसा देता)
✓ FC & PC would assign more weightage in their formulas to give’em more funds.
- 14th FC: Previous FC assigned extra weightage & funds to Sp.Cat states, but 14th FC stopped
- But, whenever elections are near, W.Bengal, Bihar and Andhra CMs would demand Sp.Cat.
status & blame Union for ‘injustice’. (चुनाव करीब हो तो कु छ रा� नाइं साफ� क� बात करते ह�)
- 15th FC: Some States have requested special category status. But it’s not part of our
mandate/Terms of Reference. (हमारे �वचाराथर् �वषयो मे ये है ही नही!)
- So, at present, Sp.Cat states don’t get additional revenue/grants in FC’s formula. Although,
Union upon its own discretion continues to give them certain benefits in CSS. (वतर्मान �व� आयोग,
इन रा�ों को अलग से कोई पैसा नहीं देते। िकंतु क� द्र सरकार �यं के �ववेक से योजनाओं म� �ादा पैसा दे सकती है।)
23.9.1 🍋🍋(🧔🧔⚖�🙏🙏) Sp.Cat States → Economic Surveys criticised
Figure 4: इतने सालों तक ढेर सारा अनुदान िदया िफर भी �वकास �ों नहीं? - "दान एक श्राप है"- Former CEA
- 📔📔📔📔Economic survey 2016-17: Noted that Sp.Cat states have received lot of funds & grant
from previous FCs and PCs, and yet they have not made any tangible progress in improving
public administration or removing poverty (=” Aid Curse”: सहायता का अ�भशाप). Similar problem
with the States having abundant mineral resources (=“Resource Curse”: ख�नज सं साधनों का अ�भशाप).
- ES 2017-18: Noted that compared to Brazil, Germany and other countries with federal polity,
India’s State Governments and Local Bodies are collecting less amount of tax for two reasons :
- 1) Constitution has not given them sufficient taxation powers. (सं �वधा�नक श��यां कम)
- 2) Even where constitution gave them powers like collection of Agricultural Income Tax,
Land Revenue, Property Tax: The States/Local Bodies are shy of collecting taxes due to
electoral politics. (चुनावी लोकलुभावन के चलते सही मात्रा म� टै� नहीं वसूला)
😰😰Result? Poor quality of Public Schools, Public Transport, Police, Drinking Water and Sanitation.
सावर्ज�नक �ू लों, प�रवहन, पु�लस, पेयजल और ��ता क� खराब गुणव�ा
23.9.2 🍋🍋(🧔🧔⚖�🙏🙏) Sp.Cat States → Hill Union Territory Status for J&K?
While FC no longer give extra weightage to ‘Sp.Category States’ in horizontal tax distribution
formula, but Union give additional ₹₹ for their welfare schemes from Union’s own pocket:
Category (श्रेणी) → Welfare schemes Cost sharing (खचर् क� साझेदारी)
A "Special Category States" (�वशेष श्रेणी के रा�): Depending on the scheme, union
- North-Eastern States, and may contribute 80-90% of the
- TWO Himalayan Hilly States: Himachal Pradesh and scheme cost, rest will be borne by
Uttarakhand# the State.
B - Other States: who are not in above category (UP, Union may bear lower burden
Bihar, etc.) than Sp. Category states e.g.
- Union territory (UT) with legislature: Delhi, 50:50, 60:40 etc.
Puducherry, Jammu & Kashmir.
C - UT without legislature (�बना �वधा�यका के क� द्र शा�सत प्रदेश): 100% funded by Union
Ladakh, Andaman Nicobar etc.
- #
Before removal of Article 370, the State of J&K was previously in Special category.
- But as a UT with legislature, J&K will get lower assistance from Union in the welfare schemes.
So, 2019-Aug: Central Government considering creating a new category ‘Hilly Union Territory
(पहाड़ी क� द्र शा�सत प्रदेश)’ so J&K may continue to received 90:10 funding. <update when done>
23.10� MOCK QUESTIONS FOR UPSC MAINS (250 WORDS EACH)

1. What are the terms of reference of the 15th Finance Commission? Why were some state governments
apprehensive about them? १५व� �व� आयोग के �वचाराथर् �वषय �ा है? कु छ रा� इस �वषयम� आशं कावान �ों?
2. Compare and contrast the horizontal tax devolution approaches of 14th FC vs 15th FC �े�तज कर अंतरण के
�सध्द्धांतों मे 14वा और 15वे �व�आयोग क� समानता व �भ�ता क� तुलना क��जए
3. Enumerate the grants suggested by 15th FC for 2020-21. अनुदानों क� सूची दी�जए।
4. “The constitution of GST Council has reduced the role of Finance Commission as the balancing wheel of
fiscal federalism in India.” Do you agree? Justify your stand. "जीएसटी प�रषद के गठन ने �व� आयोग क� भारत म�
राजकोषीय सं घवाद के सं तुलन म� भू�मका को कम कर िदया है।" �ा आप सहमत ह�? अपने तकर् को उ�चत ठहराएं ।
5. Examine critically the merits of giving a permanent status to the finance commission. �व� आयोग को �ायी दजार्
देने (के सुझाव) क� यो�ता क� गं भीर समी�ा क��जए.
24 🍋🍋🍋🍋🍋 TAXATION → BLACK MONEY & ALLIED ISSUES
Tax Planning / Tax When person invests money in LIC/PPF/Pension funds etc.in such manner
Mitigation that he can claim various deductions legally available in the Income Tax Act.
(कर-�नयोजन) It’s neither illegal nor unethical. (न ही अवैध और न ही अनै�तक)
Black Money It is an income or transaction that is taxable yet NOT reported to the tax
(काला धन) authorities concealed from the tax authority.
कालाधन ऐसी आय/लेनदेन है जो क� कर-पात्र है, िक�ु कर-अ�धका�रयों से �छपाई गई.
Parallel Economy The economy that runs on black money. (समानांतर अथर्�व�ा)
👺👺Tax Evasion When person hides income or transaction from tax authorities, and thereby
(कर अपवं चन) evades paying taxes. It’s illegal.
🤵🤵🤵🤵Tax When person discloses his income and transactions to tax authorities but uses
Avoidance legal loopholes to avoid paying taxes. E.g. Bollywood stars who register digital
(कर प�रहार) media companies in Tax Havens. It may not be illegal in every case, but still
unethical.
🍸🍸Tax Haven Is a country that demands little taxes from foreigners and offers legal
(कर �गर्) loopholes for Tax Avoidance & opportunities for Tax Evasion. E.g.
जहां कर टालने / �छपाने के Liechtenstein, Mauritius, Marshall Islands, Cayman Islands, Panama, Nauru,
Vanuatu etc. These countries are geographically small, & without viable
�लए ब�त अवसर �मलते ह�
economy. So they offer such mechanism to attract foreign investors and
foreign tourists.
👺👺→🤵🤵Money ⇒ When drug trafficking, ransom, corruption and other criminal activity
laundering generates substantial profits, the criminal tries to spend / invest / hide the
(गैरकानूनी तरीके से प्रा� money without attracting attention.
धन को वैध बनाना) ⇒ Money laundering (धनशोधन) is the process of disguising the source of
money, as if it came from a legitimate activity, & then channelize it into
banks, share market and other financial intermediaries.
Hawala ⇒ Hawala is an illegal money transfer / remittance system. Money is paid to
गैर कानूनी �प से एक जगह an agent who instructs an associate in the relevant country or area to pay
से दू सरी जगह पैसा भेजना the final recipient.
Although used by Indian workers in middle east because lower commission
than post-office/bank transfers, + better network in remote villages
Shell firms, They do not have any active business operations. Created with sole objective
Post-box/ of money laundering/tax evasion/avoidance E.g. Mishail Packers and Printers
Letter-box Pvt Ltd. allegedly setup by Misa Bharti Yadav to launder ₹1.2 crores (as per
companies Enforcement Directorate). मात्र कर चोरी के �लए बनाई गई कं प�नयां
Panama Papers International Consortium of Investigative Journalists is a USA based
(2016) Paradise nonprofit organization: released these incriminating documents from certain
Papers (2017) law firms in tax havens & showed how notable people across the world
Mauritius papers engaged in tax avoidance/ evasion.
(2018) Amitabh Bachchan & Aishwarya Rai also named in some them.
Tax Terrorism  Happens when tax authorities put undue pressure on an honest taxpayer
(कर आतं कवाद) to pay more taxes. (ईमानदार करदाता पर टै� अ�धकारी अनाव�क दबाव / उ�ीड़न करे)
🍋🍋🍋🍋🍋🍋🍋: �  2012: Vodafone won a case against income tax department in the supreme
court related to Capital Gains Tax on purchase of Hutch mobile company.
 Afterwards, UPA government amended the Income Tax Act with
retrospective effect and issued fresh notices against Vodafone. So, Modi
called it “UPA’s Tax Terrorism on Corporates”
 2021: Netherland Arbitration Court had ordered Indian govt to pay $1.2
billion to Cairn Energy for tax harassment. Cairn company planning to
get Indian Govt's assets in foreign countries seized for recovering
compensation e.g. Air India planes, etc
TDS/TCS Tax Deduction at Source (TDS) �ोत पर कर कटौती
Tax Collection at Source (TCS) �ोत पर कर सं ग्रह
These are the mechanism to discourage tax evasion. 📑📑Ref:2A: IT Handout
PAN Card 10 letters alphanumeric numbered assigned to all taxpayers in India by
�ाई खाता सं �ाक Income Tax Dept. 📑📑Ref: 2A: GST Handout for more.
24.1 (🍋🍋🍋🍋)�BLACK MONEY → NOTABLE ORGANISATIONS
Enforcement FinMin → Department of Revenue → ED is a Specialized financial

Directorate (ED: प्रवतर्न investigation agency to enforce following laws
�नदेशालय ) 1. Foreign Exchange Management Act,1999 (FEMA)
2. Prevention of Money Laundering Act, 2002 (PMLA)
Directorate of Revenue FinMin → Department of Revenue → CBIC → DRI is an agency against
Intelligence Customs/Narcotics/Wildlife/Arms related smuggling & illegal activities.
(DRI: राज� आसूचना �नदेशालय)
Financial Intelligence It analyses the suspected financial transactions in domestic and
unit (FIU-2004: �व�ीय crossborder levels & reports directly to the Economic Intelligence Council
आसूचना एकक) (EIC: आ�थक आसूचना प�रषद) headed by the FM
Financial Action Task  is a brainchild of G7, Combating Money laundering and terror
Force (FATF-1989: finance. HQ@Paris. India became member in 2010.
�व�ीय कारर्वाई कायर्दल)  Greylist: nations that safe haven for terror financing and money
laundering. E.g. Pakistan, Syria, Yemen, Iceland, Jamaica and
Mauritius, are on the grey list
 Blacklist: nations that are not cooperating in the global fight against
money laundering, terrorist financing. Iran and N.Korea
OECD (1961:आ�थक Organisation for Economic Co-operation and Development
सहयोग तथा �वकास सं गठन) HQ@Paris. Works for International cooperation in the matters of
economy and taxation. Known for Base erosion and profit shifting (BEPS)
Norms. India is not a member of OECD, yet.
24.2 🍋🍋🍋🍋 TAX EVASION (HIDING INCOME / TRANSACTION)
24.2.1 🍋🍋🍋🍋⚖ Prevention of Money Laundering Act (PMLA-2002)
धनशोधन �नवारण अ�ध�नयम

➢ 1998: UN General Assembly (UNGA) declaration on Money Laundering → 2002: India enacts
this law to combat money laundering with search-seizure-arrest-penalty. Main agency?
Enforcement Directorate.
➢ Cases heard @ PMLA Adjudicating Authority (�ाय�नणर्यन प्रा�धकारी) → PMLA Appellate Tribunal
(अपीलीय प्रा�धकरण) → High Court
➢ RBI, SEBI, IRDAI and other regulators to make norms for Banks/NBFCs.
➢ E.g. RBI’s Know Your Customer (KYC) norms and Anti-Money Laundering (AML) standards.
2013: Online Magazine Cobrapost’s sting operation proved ICICI, HDFC and Axis Bank were
flouting norms so RBI Imposed a heavy penalties.
24.2.2 🍋🍋🍋🍋⚖ Undisclosed Foreign Income & Assets Act (UFIA-2015)
अ�ात �वदेशी आय तथा प�रसं प�� अ�ध�नयम

➢ It requires Indian residents to disclose their foreign assets (e.g. bungalow in Dubai, Bank account
in Switzerland), and income coming from foreign sources (e.g. shell company in Cayman Island)
in their income tax forms. (�वदेशी आमदनी और �वदेशी �नवेश क� जानकारी अपने आयकर फॉमर् म� देनी होगी)
➢ Such foreign income will be subjected to 30% income tax. No deduction, exemption or rebate
➢ Violation = Penalty + upto 10 years jail time. If a company is found violating the Act, then every
person responsible to the company shall also be liable for punishment unless he proves that it
was done without his knowledge.
➢ Empowers Union to enter into agreements with other countries for the tax info exchange.
24.2.3 🍋🍋🍋🍋⚖ Benami Transactions Prohibition Act (BTPA- 1988, 2016)
 बेनामी लेनदेन (�नषेध) अ�ध�नयम: 1988’s original act did not achieve much results → amended in 2016.
Main Agency? Income Tax Department.
 Benami refers to properties that buyer registers in the name of his relative, personal staff (Driver,
Gardner) or a non-existent/ fictitious persons (का��नक ��) to avoid tax authorities’ attention.
 E.g. 2018: Misa Bharti Yadav (allegedly) bought farmhouse in the name of her brother-in-law
Nilesh Kumar.
 Cases heard @ PMLA-walli bodies. Violation = Confiscation of property + penalty + Jail
🔠🔠❓MCQ. With reference to the ‘Prohibition of Benami Transactions Act’, find correct statement(s):(Asked in
UPSC-Pre-2017)
1. A property transaction is not treated as a benami transaction if the owner of the property is not aware of the
transaction.
2. Properties held benami are liable for confiscation by the Government.
3. The Act provides for three authorities for investigations but does not provide for any appellate mechanism.
Answer Codes: (a) 1only (b) 2 only (c) 1 and 3 only (d) 2 and 3 only
24.3 (🍋🍋🍋🍋)💼💼 TAX EVASION → FULL-BUDGET-2019 ANNOUNCEMENTS

 Stick: Government provides (indirect tax) credits to exporters for the inputs used in the
manufacturing of export products. However, some villains generate fake invoices to claim such
credits. If the amount is ₹ 50 lakh/> it'll be made a non-bailable and cognizable offence (सं �ेय
अपराध i.e. police can arrest without warrant).
 Cash-based economy = more opportunities for tax evasion and avoidance. So, need to encourage
less-cash economy:
o Carrot: If a businessman has annual turnover more than ₹ 50 crore → No MDR on him
or his customer. RBI and Banks will absorb these MDR costs. We’ll amend Payments
and Settlement Systems Act, 2007 to implement this.
o Stick: 2% TDS on cash withdrawal exceeding ₹ 1 crore in a year from a bank account
from a single user account in post office / bank.
 Stick: (Often, businessman deposits black money in his wife’s account and when/IF raided, wife
feigns ignorance about who deposited money in her account. पता नहीं होने का नाटक करती है) So,
Nirmala S. promised to initiate technical reforms so that no one can deposit money in others’
account without the account holder’s permission.
 Carrot: Sabka Vishwas (Legacy Dispute Resolution) Scheme, 2019 (‘LDS’) <next section>
24.3.1 🍋🍋🍋🍋🍋🍋 Tax (Evasion) disclosure schemes (“surrender = less punish”)
Under such schemes, a tax-evader can declare his undisclosed income, pay the taxes and penalty.
Then, Income Tax Department will not pursue case against him. (Although Police may still pursue
case if income is from narcotics, kidnapping, extortion etc.)
Income Declaration Offer? 45% of the undisclosed income shall be taken away by govt as (tax
Scheme (IDS) 30%+ surcharge 7.5% + penalty 7.5%).
Validity? 2016 June to Sept. ~67,000 cr black money was declared.
Pradhan Mantri - ~50% of the undisclosed income shall be taken away by Govt. as Tax +
Garib Kalyan Yojana Penalty + Pradhan Mantri Garib Kalyan Cess.
(PMGKY) - Further, 25% of the undisclosed income shall be deposited in RBI’s
Launched after
‘Pradhan Mantri Garib Kalyan Deposit Scheme, 2016’. It’ll be a fixed
Demonetization
deposit for 4 years @ ZERO % Interest rate.
Validity?
2016-Dec: - The PM Garib Kalyan cess, and deposit will be used for schemes related to
To 2017-April irrigation,housing,toilets,infrastructure, edu, health etc.
- The scheme was not so successful, hardly ~ ₹ 5000 cr. declared.
🍋🍋🍋🍋🍋🍋🍋🍋 Sabka - > ₹ 3.75 lakh crore tax revenue is locked in the service tax and excise duty
Vishwas L.D.S related cases.
Scheme 2019 - (Full) Budget-2019: Launched Sabka Vishwas (Legacy Dispute Resolution)
In budget-2019 Scheme, 2019 (�ववाद समाधान योजना).
- Businessman accepts his fault, Tax officials gives a ‘discount/relief/waiver’
For
in the penalty/late-fees, and the matter is settled instead of litigating in
Service Tax
& Excise Duty courts for years & years.
24.3.2 🍋🍋🍋🍋🍋🍋 Vivad se Vishwas Scheme for Direct Taxes (💼💼Budget-2020)
Presently, >₹9 lakh cr worth direct tax cases pending before Appellate Forums (अपीलीय मं चों के सम�
लं �बत मामले) viz. IT Commissioner (Appeals) → Income Tax Appellate Tribunals (ITAT: आयकर अपीलीय
�ाया�धकरण ) → HC → SC. So, 💼💼Budget-2020 → “Direct Tax Vivad se Vishwas Bill/Act, 2020”.
⇒ Scope: Appeal related to Income tax or Corporation Tax, pending before a forum as of
31/Jan/2020. Then,
⇒ Taxpayers can settle with IT dept in following manner
o A) If IT dept filled appeal → he has to pay 50% of disputed tax amt
o B) If Taxpayer filled appeal → he has to pay 100% of the disputed tax amt
⇒ In both situations, he'll get a complete waiver/relief from interest+penalty (�ाज और जुमार्ना से माफ�).
⇒ Above scheme is valid upto 31/March/2020, then Atma-Nirbhar Bharat extended it further.
⇒ This scheme is not applicable if:
o person is under prosecution for criminal activities. (अपरा�धक मामले चल रहे हो)
o If black money is hidden in foreign countries. (�वदेश म� काला धन �छपाया हो)
😰😰Controversies? 1) Southern India’s Members of Parliament angry that Hindi scheme name is
used. (2) both honest and dishonest tax payers are treated equally. Even dishonest tax payer can now
settle without paying interest/penalty.(3) Income Tax officials’ job-transfer etc will be linked to how
many cases they solve in this scheme. They’re also asked to work on weekends to fulfill these targets.
= resentment among staff (आयकर कमर्चारीओमे आक्रोश िक उनके तबादले और पदो��त म� इसम� सफलता को को �गन�गे).
24.3.3 👻👻 Tax Ordinance 2020 in ATMA NIRBHAR BHARAT[कर अ�ादेश]
⇒ Vivad se Vishwas Scheme & Sabka Vishwas LDS deadline = extended
⇒ Income tax, TDS, TCS, GST: last date for filling = extended (अं�तम �त�थ को बढ़ाया गया)
⇒ TDS rates ⏬ so tax-payer left with more money for spending → shopping / demand⏫ →
economic revival
24.3.4 🍋🍋🍋🍋🍋🍋 Dispute Resolution Committee (DRC) in 💼💼Budget-2021

⇒ 💼💼Budget-2021 Announced to setup this committee under the Income Tax Act (आयकर कानून के
अंतगर्त �ववाद �नपटान स�म�त)
⇒ Anyone with a taxable income up to `50 lakh and disputed income up to `10 lakh shall be eligible
to approach the Committee. Committee can reduce, waive any penalty or give immunity from
any offence. (गुनाह कबूल कर लो /समझौता करवालो तो कम जुमार्ना भरना होगा / जेल नहीं जाना होगा इ�ािद)
⇒ It will help the small taxpayers to settle tax matters without going through legal expenses & time
wastage in the regular appellate process. (i.e. viz. IT Commissioner (Appeals) → Income Tax
Appellate Tribunals (ITAT: आयकर अपीलीय �ाया�धकरण ) → HC → SC) छोटे करदाता का कोटर् कचहरी म�
मुकदम� बाजी म� समय और पैसे बच जाएगा
⇒ It will be a faceless / online Committee to ensure efficiency, transparency and accountability.
24.3.5 🍋🍋🍋🍋 Tax Evasion → Other Initiatives (अ� कदम)
Banking Cash A 0.1% direct tax levied on cash withdrawals from banks. Started by
Transaction Tax (BCTT: Chidambaram but later withdrawn (2005-09). Objective was to encourage
2005-09) less-cash economy and data mining of transactions.
(Suggested) Banking A proposal by a Pune based think-tank to Baba Ramdev that all the direct
Transaction Tax (BTT) and indirect taxes of the Union and the states should be abolished and
ब�िकंग लेनदेन पर कर replaced with 2% tax on banking transactions. Impracticable because such
experiments were tried and failed in Australia and other countries as
people shifted to using barter system, diamonds and gold for transaction.
2017: Govt clarified they are not considering any such proposal. So
NOTIMP
SC’s special Chairman: Retd. SC Justice MB Shah, and senior tax officials. They
investigation team (SIT) recommended various measures against Black Money hidden in India, in
on Black Money 2014 overseas banks, P-Notes etc. SC ordered Govt to implement its
recommendations.
Operation Clean Money 2017: IT Dept. verified large bank deposits made Post-demonetization.
Project Insight 2017 Income Tax Dept. hired L&T Infotech ltd to develop an integrated
platform for data mining & tracking tax evaders.
(Related) Project Saksham 2016: CBEC/CBIC’s project for digital re-
engineering related to GST. It’s not a ‘drive against black money’ but for
‘Ease of Paying Taxes’.
(Related) Aaykar Setu: CBDT’s mobile app to pay Income Tax.
Restrictions on Cash Budget 2017 → Finance Act, 2017 → if anyone accepts ₹ 2 lakh /> CASH in
Transactions, 2017 a day / in multiple transactions related to one ‘event’, then Income Tax Dept
penalty = 100% of the cash received.
Banks, post office, government organisations are exempted.
Electoral Bonds, 2017 📑📑Ref: Pillar#1C: SEBI/Sharemarket handout
24.4 (🍋🍋🍋🍋🍋🍋)TAX AVOIDANCE (कर प�रहार / कर टालना)
Here, people will not hide the transaction, they’ll blatantly declare transactions in their official
records, but will use legal loopholes (कानूनी-खा�मया) to avoid paying taxes.
24.4.1 🍋🍋🍋🍋🍋🍋 Double Taxation Avoidance Agreement (DTAA) & Round Tripping
दोहरा कराधान प�रहार समझौता
➢ It is a tax treaty signed between two or more countries.
➢ Objective? A taxpayer resides in one country and earns income in another, then he need not pay
(direct) tax twice in two countries for the same income.
➢ e.g. India Mauritius DTAA (1982): If a Mauritius person / company buy shares in India and sells
them at profit, then he need not pay Capital Gains Tax (CGT) in India. Only the Mauritius
government can ask CGT from him. And vice-versa.
➢ Loophole? India has ~10-20% CGT whereas Mauritius has ~0-3% CGT (depending on nature of
asset, how long the buyer kept asset before selling etc). So many Indian Politicians, Businessmen
and Bollywood actors would transfer the money using Hawala to their shell companies in
Mauritius → make those Mauritius Cos to invest back in Indian assets → avoid Indian CGT.
➢ This process is called Round Tripping (राउं ड-�ट��पंग) i.e. money that leaves the country through
various channels and makes its way back into the country as foreign investment.
➢ Similar loophole in India Singapore DTAA. 2016: Modi government amended the treaties = even
Mauritius and Singapore investments in India will be subjected to Indian taxes.
24.4.2 🍋🍋🍋🍋🍋🍋 Tax Avoidance through Non-Resident Status
If a person is 🦁🦁Has to pay his IT on 🐼🐼Has to pay IT on global income e.g.

income coming from India? income coming from the USA/China?
Ordinarily Yes Yes
resident of India
Non-residents Yes No
If India has a double taxation avoidance agreement (DTAA) with other nation, then above things
may differ (e.g. recall erstwhile Mauritius CGT-roundtripping-walla example)
Table 2: 💼💼Budget-2020 changed these definitions
Definition in Indian Tax laws Before Budget- 💼💼Budget-
2020 → 2020
Ordinarily Indian Resident (साधारणतया भारतीय �नवासी) = person 182 days/> in a 120 days/>
who stays in India for → year
Non resident (गैर �नवासी)= person who stays outside India for 182 days/> in a 246 days/>
→ year
⇒ Implications? Person will have to stay out of India for a longer period if he want to be treated as
“Non-Resident” to avoid taxes on his global income.
⇒ 😷😷Corona lockdown / Travel restrictions so non-residents couldn’t leave India even if they
wanted to. So, Finance ministry allowed some temporary relief regarding "Resident" definition &
submission of documents. How exactly? = NOT-HERE-for-CA-Exam
💼💼Budget-2020: A citizen of India (even if he is staying abroad), but if he is not liable to tax in any
other country → he’ll have to pay tax in India. E.g. United Arab Emirates and Bahrain where no
income tax is payable. Then critics started opposing it, so govt made some technical clarifications →
 Bona-fide Indian workers in other countries will not be targeted. (प्रामा�णक �प से वीदेश गए भारतीय
मजदू रों को परेशान ही कर�गे )
 Only the Indian citizens who deliberately shift residence to avoid taxes in India, will be targeted.
(के वल ऐसे भारतीय नाग�रक जो जानबूझकर भारत म� करों से बचने के �लए �नवास �ान बदलते ह�, उ�� ल��त िकया जाएगा।)
✋�How exactly?= NOT-HERE-for-CA-Exam
24.4.3 🍋🍋🍋🍋🍋🍋 Place of Effective Management (POEM: पीओईएम)
 Bollywood Producer “A” forms a shell company in Cayman Islands (because it has a very low
rate of corporation tax). He gives this company international movie distribution rights for his
Indian movie @₹ 10 only.
 Then, Cayman Island company makes ₹ 50 crore profits, but he’d not pay any taxes in India
saying it’s a foreign company making profits from foreign territories, so Income Tax Department
of India has no jurisdiction!
 But, here the Place of Effective Management is India, from where the Bollywood producer was
really taking the decisions of this shell company. (फज� कं पनी के प्रबं धन का वा��वक �ान भारत म� ��त है।)
 So, Budget-2015 introduced the concept of POEM. Such overseas / foreign company will be
subjected to India’s 40% Corporation tax + cess + surcharge.
24.4.4 🍋🍋🍋🍋🍋🍋 Base Erosion and Profit Shifting (BEPS: बीईपीएस)
 Multinational Corporation (MNC) “M” opens fast food outlets in India & makes ₹ 50 crores
profit. By default, it should be subjected to 40% Corporation tax in India.
 But then MNC shows its Indian outlets had taken loan / raw material / patented technology
from MNC’s shell firm in Bahamas (where Corporation tax is 0-2%). So, after deducting these
operating costs, it has zero profit, so in India, it will pay only 18.5% Minimum Alternative Tax
(MAT), instead of 40% Corporation tax.
 Thus, when MNCs shift profit from its source country to a tax-haven to avoid / reduce paying
taxes, its known as “BEPS”. (ब�रा�ी� य �नगम द्वारा मुनाफे को �ानांत�रत करना)
 2019-July: India ratified the OECD’s joint Multilateral Convention to Implement Tax Treaty
Related Measures to Prevent Base Erosion and Profit Shifting (commonly referred to as MLI)
ओईसीडी के ब�प�ीय समझौते पर ह�ा�र िकए ह�
24.4.5 🍋🍋🍋🍋🍋🍋 Transfer Pricing (ह�ांतरण मू�)
 Transfer pricing happens whenever two subsidiary companies that are part of the same
multinational group, trade with each other.
 Suppose Coca Cola’s (Indian Subsidiary company) buys Sosyo Company’s shares or soda
formula at ₹ 10 crores, and then sells it to Coca Cola’s (Cayman Islands subsidiary company) at ₹
10 rupees. Then ₹ 10 is the transfer price.
 Coca Cola (Cayman Islands) further sells Sosyo’s shares / Soda-Formula to other companies at
very high price. Yet, Indian tax authorities will not get any Capital Gains Tax (CGT) even though
Coca-Cola (USA holding company) may be making profit (Capital Gains) of billion$ from this
‘Indian Asset’ (Sosyo).
 2001: Transfer pricing related provisions added in the Income Tax Act. But they were quite
strict leading to ‘tax terrorism’ by IT officials who’d slap notices on every transaction, resulting
into ‘No ease’ of doing business for MNCs.
24.4.6 (🍋🍋🍋🍋🍋🍋) � Authority for Advance Rulings (AAR)
 After above episode, Coca Cola (India) would like to know in advance whether its transfer price
of ₹ “y” or its imported / exported item worth ₹ “z” is agreeable to tax authorities or not? lest it
suffers from notices, raids and litigations afterwards.
 For this purpose, Authority for Advance Rulings (and their Appellate bodies) have been set up
under Income Tax Act, Customs Act and even GST Act (Recall Amul Camel Milk).
 Advance Pricing Agreement (APA: अ�ग्रम मू� �नधार्रण समझौता)= If in previous example, Coca Cola
approached AAR -> agreement signed between taxpayer and a tax authority that “Transfer price
of ₹ y is agreeable to both of us, and will not attract any notices / raids / litigations afterwards.”
 Related terms? Safe Harbour Regime (SHR), Dispute Resolution Panel (DRP), Alternative
Dispute Resolution (ADR). How they work? poor cost benefit for MCQs.
24.4.7 (🍋🍋🍋🍋🍋🍋) � General Anti-Avoidance Rules (GAAR)
Till now we learned how Indians and foreigners avoid tax payment in India through loopholes like
DTAA, POEM, BEPS, Transfer Pricing etc.
 So, UPA/Congress Govt setup economist Parthasarathi Shome panel who suggested General
Anti Avoidance Rules (GAAR: कर प�रवजर्न रोधी �ापक �नयम) → they were added Income Tax Act
 GAAR empowers Income Tax officials to send notices to both Indians and foreigners for
suspected Tax Avoidance. (For Tax evasion, we’ve separate laws- PMLA, UFIA, BTPA)
 But critics alleged GAAR will result in tax terrorism, harassment, no ease of doing biz. So
successive Budgets kept delaying the GAAR- implementation. Finally done on 1/4/2017.
24.4.8 🍋🍋🍋🍋🍋🍋 Angel Tax on Startup Investments (2012)
⇒ Angel investors are the rich people who occasionally invest equity-capital in start-up companies
out of hobby / timepass / profit motive. (Whereas Venture Capital Companies do the same thing
but on regular & serious basis)
⇒ Startup Entrepreneur Sunder Yadav registers a phony “Sunder Construction” as an (unlisted)
Public Limited Company with ₹ 10 Face Value Shares, & sells them to Angel Investor Sadhu
Yadav @a premium price of ₹ 1,000 per share.
⇒ But, even construction sector’s (listed) public ltd co like DLF’s shares selling around ₹ 230.
⇒ Thus, Sundar-startup’s shares are above ‘fair market price (fair market price’)’. So, this is not a
genuine “Angel investment” but rather a facade for laundering Sadhu Yadav’s money from
construction, corruption or extortion business. (काले धन को वैध बनाने क� तरक�ब है)
⇒ So, UPA/Congress’s Budget-2012 required Sunder Construction (the Startup Company) to pay
30% Tax + Penalty on the investment which they received from Angel investor Sadhu Yadav.
⇒ This is dubbed as ‘Angel Tax’. Norms were further tightened by Modi-regime,
⇒ But then controversy that Angel Tax will discourage the growth of startup companies so norms
relaxed- ‘Angel Tax will not apply if Startup’s turnover is less than ₹ “x” crores or if startup was
registered for upto “y” years & other technical ball by ball commentary that is NOTIMP4UPSC.’
⇒ (Full) Budget-2019: IF Start-ups and their investors provide the required declarations and
information, then IT dept will settle the matter.
24.5 🍋🍋🍋🍋🍋🍋🍋: � REFORMS TO REDUCE TAX TERRORISM / HARASSMENT
We learned about the reforms to fight “Tax evasion” → ban on cash transaction of ₹ 2 lakh / >, -
Operation Clean Money etc. So, on one hand, Income Tax Department has to become 😡😡😡😡strict /
coercive to fight against Tax evasion. At the same time, IT dept. also needs to become more
🤝🤝🤝🤝friendly towards honest taxpayers, So, following measures taken→ (कर आतं कवाद उ�ीड़न)
Rajaswa Gyan Sangam Organised by CBDT & CBIC for idea exchange between policy makers
2016 & 2017 and senior tax officers.
2016: Modi gave them RAPID Mantra: R for Revenue, A for
Accountability, P for Probity, I for Information and D for Digitization.
Direct Tax Code 2010 This bill aimed to replace the Income Tax Act, 1961 with simpler
provisions. But, lapsed with 15th LokSabha dissolution in 2014.
Easwar Panel on Direct To simplify the provisions of IT Act, 1961, to remove ambiguities that
Taxes 2015 cause unnecessary litigations & hardships to Taxpayers.
Direct Tax Code - 2017: Setup by CBDT to draft New Direct Tax Legislation (Law) to
Taskforce 2017 replace IT Act 1961.
(Akhilesh Ranjan)
- 2019: submitted report (📑📑Ref: Pillar#2A)
24.5.1 🍋🍋🍋🍋🍋🍋🍋:🧾🧾 Pre-filled online forms for Tax Payers

Income Tax dept extract your financial data from Banks, NBFCs , Stock exchanges, Mutual Funds,
EPFO, Employers’ TDS submissions etc. → provides you with a Pre-filled tax returns containing
your salary income, capital gains from share/bond, bank interests, etc. (पहले से भरा �आ फॉमर् आपको दे द�गे)
1) 🤩🤩Income tax payers’ time and energy saved. He’ll not have to consult Chartered Accountant
for every small matter on how to fill form.
2) 🤩🤩Accuracy of reporting income and paying taxes.
24.5.2 🍋🍋🍋🍋🍋🍋🍋:🧾🧾 Faceless interaction between Tax payers and Tax official
Personal interaction between the assessee and Income Tax official = more chances of harassment /
bribery. So, Government launched following reforms:
1) Cases will be allotted in random computerized lottery basis to IT officials without disclosing the
name, designation or location of the Officer.
Table 3: कर अ�धकारी और करदाता के �ब� मुलाकात/सं पकर् �बना आकलन और अपील कारर्वाई
Year Scheme Nodal Body

2019 Faceless  Example, ssessee received a notice about discrepancy in his reported
Assessment income vs TDS submitted by his banker, then at initial stage assessee
need not visit IT-office, simply give clarification in web-portal.
(फे सलेस: �बना प्र��/�ब� मुलाकात के �नधार्रण)
 National Faceless Assessment Centre (NFAC) in Delhi by senior IRS
officer (Indian revenue service)
 This centre is the sole point of contact between the Department and
the taxpayer
2020 Faceless  So, even in appeal stage, assessee need not physically visit IT
Appeals commissioner / tribunal. It’ll be done online.
Scheme  National Faceless Appeal Centre (NFApC), Delhi headed by senior
IRS officer
 all Income Tax appeals will be finalised in a faceless manner. Except
those related to serious frauds, major tax evasion, sensitive matters,
International tax etc. के वल बड़े और सं गीन मामलों म� ही �ब� सुनवाई होगी
24.5.3 🍋🍋🍋🍋🍋🍋🍋:🧾🧾⏰ Time limit on opening of past cases

Before After 💼💼Budget-2021
(ordinary) Tax 6 years 3 years (=No need to live in fear for very long time) e.g.
assessment case can mismatch in TDS submitted by buyer/employer vs income tax
be re-opened up to _ return form filed by the individual etc. सामा� िक� के कर �नधार्रण/कर
_ years �वसं ग�तयों के मामले �सफर् �पछले 3 साल तक खोला जा सकता है.
Serious tax fraud 10 10 years BUT ONLY IF two conditions are MET
case गं भीर कर धोखाधड़ी के years ⇒ A) If only the the matter is worth ₹50 lakh or more (=Small
मामले taxpayers will be saved from tax terrorism/ harassment)
AND
⇒ B) Approval of the Principal Chief Commissioner required
24.5.4 🍋🍋🍋🍋🍋🍋🍋:🧾🧾 Document Identification Number (DIN: द�ावेज़ पहचान सं �ाक)
Whenever Tax official sends letters to taxpayers regarding search authorisation, summons, arrest
memo, inspection notices etc. All such documents will have computer generated ‘Document
Identification Number’ (DIN).
 2019-Oct: Central Board of Direct Taxes (CBDT) implemented this.
 2019-Nov: Central Board of Indirect Taxes and Custom (CBIC) implemented this.
DIN system benefits?
 It’ll create a digital directory of communication between tax authorities and taxpayers.
Transparency, accountability, efficient and faster clearance of cases, because all the information
available at the click of a mouse.
 If a document doesn’t have DIN number, it’ll be treated invalid. Thus, DIN system will prevent
the corrupt tax officials from sending fake notices to harass/blackmail taxpayers for bribes.
Sidenote: Director Identification Number (DIN): Director of every company is required to obtain
this number from the Ministry of Corporate Affairs under the provisions of Companies Act. It helps
monitoring the company act provisions related to “1 person can’t be director in more than ‘x’ number
of companies” etc.
24.6 📯📯🍋🍋📜📜 TAXPAYERS’ CHARTER IN 💼💼 BUDGET-2020 (करदाताओ का अ�धकारपत्र)
A citizens’ charter (नाग�रक अ�धकारपत्र) is a document of commitments made by a government agency

to the citizens in respect of the services being provided to them.
⇒ e.g Dept of Post's citizen charter reads, "we'll deliver speed post anywhere in India by 4-5 days
→ELSE complain online to this website & we'll solve it → if not solved in 90 days then complain
to Postmaster General → then to Chief Postmaster General.”
⇒ Traditionally tax administrations paid limited attention to taxpayer service. पुराने जमाने म�/पारंप�रक �प
से कर-अ�धकारी "करदाता को अ�� सेवा देना" अपनी �ज�ेदारी नहीं समझते थे.
⇒ However, Modern times → ⏫demand for better services to the taxpayers → Govts across the
world, started framing charters and bill of rights for the taxpayers. हालांिक आधु�नक �व� म� इस प्रकार के
अ�धकार पत्र और कानून बनाए गए ह�
1986 UK charters for taxpayers (करदाताओं का अ�धकार पत्र) → more updated 2009
1991  1991: citizen charter system started in UK by PM John Major
 1997: citizen charter introduced in Indian union ministries/departments.
(नाग�रकों का अ�धकार पत्र)
1988 USA Taxpayers’ Bill of Rights (करदाताओं के अ�धकारों का �वधेयक/कानून)
2007 Canadian taxpayers’ Bill of Rights
2020 💼💼 Indian Budget-2020: CBDT will declare a Taxpayers’ Charter. So, Tax payer
will easily know what services / complaint redressal mechanisms (�शकायत �नवारणतं त्र)
are available to him= ⬇taxpayer’s harassment (करदाता का उ�ीड़न)
24.6.1 📯📯🍋🍋📜📜 (Indian) Tax Payers' Charter released in 2020-Aug
It promises following things to taxpayers: करदाताओं को वादा करता है
1. You'll be treated in an impartial,courteous, professional manner. �न��, �वनम्र और पेशेवर तरीके से �वहार
2. You'll be treated/ presumed to be honest, unless there is a reason to believe otherwise. आपको
ईमानदार माना जाएगा।
3. We will provide complete and accurate information about rules & complaint mechanism etc a
timely fashion.�नयम/�शकायत दजर् कराने स��ी जानकारी
4. We will collect only correct amount of tax.
5. We will respect your privacy and confidentiality �नजता व् गोपनीयता का स�ान
6. We will hold our officers accountable for their wrongful actions. अ�धका�रओ को गलत काय� क� सजा द�गे
7. You can appoint a representative / tax lawyer to file replies/complaints//cases on your behalf.
मामले दजर् करने के �लए एक प्र�त�न�ध / कर वक�ल �नयु� कर सकते ह�।
8. We'll reduce cost of compliance (e.g. number of forms to be filled, photocopies to be submitted
etc) अनुपालन क� लागत कम कर�गे
9. +many other points but we have sufficient content for 250 words
It expects following things from taxpayers: Be honest, Pay taxes in time, Keep accurate records, be
informed, respond to notices in time when notices are given. (करदाताओं से �न� अपे�ा करता है क� वे ईमानदार
रह�, समय म� करों का भुगतान कर�, सटीक �रकॉडर् रख�, सू�चत रह�, समयसर नोिटस का जवाब द�)
24.6.2 ✍ 📯📯🍋🍋📜📜 Conclusion: Tax Payers' Charter
Thus, taxpayers' charter will help in building trust between a tax payer and the tax administration
while reducing harassment and litigation. (करदाताओं का चाटर्र/अ�धकारपत्र आने वाले समय मे करदाता और कर प्रशासन
के बीच �व�ास/सौहादर् बढ़ाने मे तथा, उ�ीड़न और मुकदमेबाजी को कम करने मे मदद करेगा)
24.7 🍋🍋🍋: �� TAX OMBUDSMAN IN 📔📔📔📔 ECONOMIC SURVEY 2021
‘Ombud’ is a Swedish term and refers to a person who acts as the representative or spokesman of
another person. 1809: The institution of Ombudsman was first created in Sweden- to look into
citizens grievances (लोकपाल/लोक प्रहरी- नाग�रकों क� �शकायतों के �नवारण के �लए)
✅Homework: Laxmikant chapter 61 on Lokpal and Lokayukta
24.7.1 🍋🍋🍋: ��Tax ombudsman: Indian experience

2003 Direct Tax Ombudsman In India Started (प्र�� करों के �लए कर-लोकप्रहरी/�शकायत �नवारण अ�धकारी)
2011 Indirect Tax Ombudsman In India Started (अप्र�� करों के �लए)
2019 Above posts were abolished (दोनों पदों को समा� कर िदया)
24.7.2 😰😰problems in previous Ombudsman system (2003-19)?
⇒ Above ombudsmen were tax officers, Who were given additional responsibility by the
government to inquire into grievances/ complaints against other tax officers. They did not have
independence from Senior officers/ministers. There was no separate law to empower them. (वे
�यं भी कर-अ�धकारी थे, कानूनन �प से कोई सता नहीं दी गई थी, इस�लए अ� अ�धका�रयों के �खलाफ �न�� प से जांच या
सजा कर नहीं पाते)
⇒ They could only settle the complaint through advice/mediation between the citizens and tax
officials. (मात्र सलाह/सुलह द्वारा �नपटान)
⇒ They could only offer a token compensation upto ₹5,000 to victim (पीिड़त को मुआवजे म� ब�त मामूली
रकम दे पाते) Thus, failed to deliver any result and both the posts were abolished in 2019.
At present, Direct tax/Income Tax assessee can complain to
Mode Organisation 😰😰Challenges?

Physical Aaykar Sewa Kendras Under Income It falls within the Income Tax Department so
Tax Department difficult to ensure impartiality. (यह इकाइयां आयकर
Online e-nivaran portal Under Income Tax �वभाग के अंदर ही है, इस�लए �न��ता मु��ल)
Department
Online CPGRAMS Portals (Central Public It looks into Complaints against all types of
Grievance Redress and Monitoring ministries and departments so long delay in
System) Under Ministry of resolution. (सभी मं त्रालयों क� सभी िक� क� �शकायत� देखता
personnel and training. है इस�लए काफ� देरी से जांच होगी)
24.7.3 🍋🍋🍋: ��Tax Ombudsman: Global experience with Independent

USA, Canada, Australia, Canada, UK, France, Brazil, South Africa etc Countries have separate
laws/mechanisms for setting up a tax ombudsman. So they can function independently without
undue pressure & without conflict of interest. (e.g. If the tax ombudsman's promotion/salary bonus
depends on the whims of IRS officer/Finance Minister then he'll not act impartially.) �बना िकसी के दबाव
म� या �बना िकसी िहतों के टकराव म� �न�� प से अपना कायर् कर सक� ऐसे कानूनी प्रावधान/सुर�ा दी गई
24.7.4 🍋🍋🍋: �� Tax Ombudsman: Conclusion / way forward (�न�षर्/आगे का रा�ा)

⇒ Tax Terrorism / Non-resolution of tax grievances discourage the taxpayers from being honest in
future. This encourages tax evasion, black money and parallel economy.
⇒ International experience suggests a tax ombudsman, with powers to investigate, punish &
compensate, is necessary for enforcing taxpayers' charter. (अंतररा�ी� य अनुभव से प्रतीत होता है िक करदाता के
अ�धकार पत्र का अनुपालन वा��वक �प से करने के �लए एक कर-लोक प्रहरी होना चािहए- �जसके पास जांच, सजा और मुआवजा
देने क� सता हो)
⇒ Need of the hour is to set up this institution through a separate law, nitive powers, so as to ensure
its impartiality and independence and effectiveness. (अग्रता क्रम से सरकार ने एक अलग कानून द्वारा इसे बनाना
चािहए तािक �न�� तं त्र और प्रभावी �प से कायर् हो सके .)
24.7.5 🍋🍋🍋: Reducing Tax Terrorism / Harassment: online portals/Apps

Aaykar Setu - 2017: CBDT’s mobile app for Income Tax, TDS refunds etc.
Ease in paying Customs 1. Indian Customs Electronic Gateway (ICEGATE) webportal for e-
Duty services related to the Customs duty.
: 2. ICEDASH webportal: public can view daily data on customs
Portals/Apps by CBIC
clearance at seaports and airports. (launched 2019-Nov)
3. ATITHI mobile app: for international travelers to file the customs
declaration in advance (e.g. ‘we are leaving or coming with “x” gms of
gold/diamonds/electronics etc on which y% customs duty is
applicable/exempted’). So, they don’t have to waste time at airport
queues in filing such declarations. (launched 2019-Nov)
Transparent Taxation - 2020-Aug: PM Modi launched this webportal/online platform with
Honouring the Honest following components:
पारदश� कराधान- ईमानदार का ⇒ Taxpayers’ Charter.
स�ान करना
⇒ Automated Random/lottery allocation of investigation cases.
⇒ Faceless assessment & Faceless appeal. No requirement of physical
interface between taxpayers and the Income Tax department.
Turant Customs ⇒ By Central Board of Indirect Taxes and Customs (CBIC)
⇒ Turant Customs initiatives= Faceless, Paperless, and Contactless
Processes / Application Forms, Assessment, Appeal etc for importers
and exporters
⇒ It is to be implemented phase wise across India by 2021.
24.8 🍋🍋🍋🍋🍋🍋TAXATION → GLOBAL TREATIES, AGREEMENTS & INDEXES

24.8.1 🍋🍋🍋🍋🍋🍋 Tax Information Exchange Agreement (TIEA: कर सूचना �व�नमय समझौता)
➢ India has signed such agreements with multiple countries. It enables mutual sharing of
information to detect tax avoidance and tax evasion. Example,
➢ 2019: India has notified a tax information exchange agreement (TIEA) with the Marshall Islands.
➢ On Indian side, CBDT is the the nodal agency for such agreements.
24.8.2 🍋🍋🍋🍋🍋🍋 USA’s Foreign Account Tax Compliance Act (FATCA-2010)
�वदेशी खाता कर अनुपालन अ�ध�नयम
➢ USA’s FATCA Act requires foreign financial Institutions (such as Indian Banks, Pakistani
Insurance Companies, Chinese Mutual Funds etc) to report the assets held by Americans.
➢ This helps US Tax authorities to detect tax avoidance / evasion by Americans
24.8.3 🍋🍋🍋🍋🍋🍋 Global Financial Secrecy Index (वै��क �व�ीय गोपनीयता सूचकांक)
➢ Prepared by London based Think Tank ‘Tax Justice Network (TJN)’.
➢ It uses 20 indicators to measure the countries on their financial secrecy, opportunities for Tax
Avoidance, BEPS etc. 2020 Ranking: 1st rank Cayman Islands>USA> Switzerland,….India (47).
➢ Its report says India is losing over $10 billion in taxes each year due to MNC’s tax abuse.
24.9 💸💸BLACK MONEY → DEMONETISATION (�वमुद्रीकरण)
Definition? Demonetization is the wholesale withdrawal of currency notes from circulation. (मुद्रा-
चलन म� से कु छ खास िक� क� नोटों को हटा देना)
 RBI Act 1934: Every banknote is a legal tender. However, RBI Central Board can recommend
the Government of India to notify specific currency note(s) should no longer be treated as legal
tenders. Then FinMin → Department of Economic Affairs makes official gazette notification.
 1946: ₹ 500 Notes demonetized; 1978: ₹ 1000, ₹ 5000, ₹10000 Notes demonetized.
 2016-Nov-8th: Public was ordered to deposit the (old) Mahatma Gandhi series currency notes ₹
500 and ₹ 1,000 (henceforth called “Specified Bank Notes: SBN”) into Banks and post-offices
latest by 30th December 2016. And all the banks and post offices where ordered to deposit such
SBN into RBI.
 Specified Bank Notes (Cessation of Liabilities) Ordinance:
- From 31st December 2016, RBI Governor not required to honour “I promise to pay…”
or exchange the SBN. Except for NRIs: deadline little bit relaxed, with certain caveats.
- Public prohibited from keeping SBN, except for research or numismatics or museum-
and that too in limited amount. This ordinance became Act in 2017.
 India is not the only country in the world to do demonetisation. Sweden ( 2013), European
Union ( 2016) and even Pakistan (2015) has done it for their currency notes.
24.9.1 💸💸Why Demonetise ₹ 500 & 1000?
 Demonetization is usually done in the aftermath of hyperinflation, war & regime-change.
 India did it to combat Corruption, Black money, Counterfeiting and Terror finance .
भ्र�ाचार, काला धन, जाली नॉट,आतं क का �व�पोषण
 We had 12.04% Cash to GDP ratio, one of the highest in the world. Currency printing &
transportation cost alone was 1.7% of GDP.
 “Soil rate” is the rate at which notes are considered to be too damaged to use and returned to the
RBI. (�बगड़े/फटे �ए नोटों को �रजवर् ब�क म� बदलवाना)
 For ₹ 500 & 1000 SBN-notes, soil rate was much lower than the currency notes of ₹ 10 to 100.
(implying that 500-1000 SBN were used more for ‘storing black money’, rather than using in
transactions.)
 So, experts made mathematical comparison of the foreign countries’ economic development,
soil rates of their foreign currency notes etc. and arrived at a figure ₹ 3 lakh crores of Indian
black money is stored in SBN (=2% of GDP).
 So if SBN were demonetised, the black money holders will not return their currency notes into
banks (fearing IT-RAIDS) and thus black money will be destroyed. (काला धन �यं तबाह हो जाएगा)
 But in reality, ~99.30% of the SBN were returned back into the banking system, so hardly ₹
10,720 crore of black money was destroyed by the demonetisation of 2016.
24.9.2 💸💸How did 99.30% SBN returned into banking system?
If the mathematical modelling was correct, then only 80% of the SBN should have returned back, &
20% SBN (presumed to be Black Money) should not have returned. But, Black money owners used
following tricks to deposit their SBN in bank accounts:
1. Businessmen / Politicians used their drivers, cooks, gardeners, personal staff members and
relatives as ‘money mules’. This is evident from exponential rise in the deposits in Pradhan
Mantri Jan Dhan bank accounts. (धनं ख�र/टट्ट� के �प म� इ�ेमाल िकया)
2. SBN were given out as “loans” to poor & as advance salaries to workers.
3. Agents who tied up with corrupt bankers who exchanged SBN without KYC verification.
4. SBN deposited in Cooperative Banks as back-dated Fixed Deposits, because Cooperative Banks
didn’t use Core Bank Solution (CBS) so it was possible to temper records.
5. SBN deposited in banks and then shown as income from sale of (fictitious) grain stock etc. So,
IT-dept can’t demand tax on it (and most state governments not levy tax on agricultural income
due to populism/vote bank politics). (फज� तरीके से आए को कृ �ष �ोत से आया �आ बताया)
6. SBN deposited in shell companies & shown as income from (fictitious) sale and invoices.
7. SBN donationed to trust, temples & political parties with backdated receipts (and those entities
are exempted from Income Tax on their income.)…. And so on
24.9.3 💸💸99.30% SBN returned, but Demonetization not failed experiment because:
✓ Those who could not return their SBN, have lost their black money (₹ 10,720 crore)
✓ Those who used poor people are money mules- must have paid some commission to them. So
even if government did not get tax from black money, atleast poor people benefited. Thus,
indirectly demonetization helped in redistribution of wealth.
✓ Further, Operation Clean money, IT-dept issued notices to the suspicious bank accounts where
large amount of money was deposited. Such shell firms & their benami properties are seized.
✓ With Project Insight & Op. Clean Money: IT dept fetched ₹ 1.30 lakh crore in taxes and penalty,
attached ₹ 7000 crore worth Benami properties, ₹ 1600 crore worth foreign assets & de-
registered ~3.40 lakh shell firms. (says the Int-Budget-2019).
✓ The number of PAN card registration, IT returns, registrations under excise / VAT / GST have
greatly ⏫⏫ in the aftermath of demonetisation which proves that crooked people have
learned lesson. More than 1 cr. new IT assesses added in 2017.
✓ Tax collection ⏫⏫ from ~₹ 6 lakh crores (2013) to ~₹ 12 lakh crores (2018).
24.9.4 💸💸Demonetization: Impact as per Economic survey 2016-17
Area 😢😢 Short Term Challenges 🥰🥰 Long Term Benefits (दीघर् अव�ध के फायदे)
Banking Administrative challenges on Growth in the deposits → more loans can be given
the bankers to exchange the @cheaper interest rate, Less Cash economy &
banned notes, long queues associated benefits.
Real Estate Sale of houses ⏬ (मकानों क� Prices & rents of houses should ⏬.
�बक्र� म� �गरावट) Migrants will benefit.
Economy Job loss in cash-intensive
Less-cash economy, digitization and formalization
at large sectors like diamond of economy, Bizmen getting GST registrations →
polishing, farm laborer, further surveillance → forced to show employees
MSME (बेरोजगारी) on paper → EPFO & ESIC benefits to worker.
Growth Slow down (�गरावट) Improvement (आ�थक वृ�द्ध दर म� बढ़ोतरी)
SELF-Study for Mains: Economic survey 2016-17 Vol1ch3, table 2 “impact of demoneti..”
24.10 📘📘📘📘ECONOMIC SURVEY ON TAXATION AND FISCAL CAPACITY (�व�ीय �मता)
The Economic Surveys of 2015, 2016, 2017 have repeatedly observed that
- Democracy is a contract. Taxation is the economic glue that binds government and citizens into
this contract. (लोकतं त्र एक अनुबंध है, कराधान एक आ�थक गोंद)
- But, whenever govt delivers poor quality of service in public schools, hospital etc. → middle
class & rich citizens will “EXIT” towards the pvt school & hospitals → Then they feel ‘moral
right’ to evade / avoid taxes, bcoz, they are no longer using public services.
- Result? hardly 4% of Indian voters are taxpayers (23% is desirable, as per our level of
development against BRICS nations. भारत के के वल 4% मतदाता करदाता है)
- Govt gets less taxes → poor fiscal capacity → poor services → vicious cycle continues and
results in ⏬ of govt’s accountability towards citizens. (सरकार क� जवाबदेही कम होती है)
24.10.1 🍋🍋🍋🍋 Tax: GDP – why low in India (भारत का कर:जीडीपी अनुपात खराब �ों है?)
1) Lack of civic sense among people that paying taxes is a basic duty. (देश के प्र�त कतर्� क� भावना नहीं)
2) Presence of informal sector, parallel economy, cash based economy provides ample
opportunities of hiding income. (नगदी आधा�रत अनौपचा�रक अथर्तंत्र)
3) Low per capita income, high level of poverty. Concentration of income in the hands of few
people- who are greedy to engage in tax evasion & avoidance. (देश क� �ादातर सं प�� चु�नदं ा लोगों के हाथों
म� क� िद्रत, जो �यं क� लालच म� कर जमा नहीं करते)
4) Election funding → source of corruption → black money. Politician-Builders-Mafia nexus.
5) Due to political considerations, state govts and local bodies do not levy all the taxes authorised
by the constitution e.g. tax on agricultural income. So our (direct) tax base is narrow. [Tax base:
कराधार means the total value of all the persons/income/property, etc. on which tax is charged.]
6) Loopholes in the tax laws encourage tax avoidance (कर कानूनों म� खा�मयां)
7) Direct taxes like wealth tax, gift tax and estate duty suffered from loopholes, lax monitoring and
evasion. They didn’t yield much revenue. Hence even referred as ‘paper taxes’, and had to be
abolished ultimately. (कागजी कर �जनसे वा�व म� नाम मात्र क� आमदनी होती थी)
24.10.2 🍋🍋🍋🍋 Tax: GDP 📘📘📘📘 ES19: “Use Behavioural Economics to improve Tax Compliance”
 Plato said, “What is honoured in a country, is cultivated there.” Indians join military because 1)
salary 2) because serving in the armed forces is considered ‘honourable’. (स�ाननीय)
 So, we should use the principles of Behavioral Economics to enhance tax compliance We’ve to
modify the social norm from “evading taxes is acceptable” to “paying taxes honestly is
honorable.” ((�ावहा�रक अथर्शा� के �सद्धांतों द्वारा कर अनुपालन म� बढ़ोतरी कराएं . कर भरना एक स�ाननीय कतर्� बने)
 Tax Morale: it is the motivation of taxpayers to pay taxes. (कर सं बंधी नै�तक मनोबल)
 When tax morale is ⏬ → motivation for tax evasion ⏫.
Table 4: Tax Morale is affected by two types of fairness
Fairness Vertical Fairness Horizontal Fairness
�न��ता (उ�ार्धार �न��ता �ै�तज) (�ै�तज �न��ता)
Tax Payer’s What I pay in taxes is commensurate There should not be a great difference
thought to the benefits I receive as services in the taxes paid by the ‘similar’
process → from the Government. sections of society.
His Tax He sees taxpayers' money wasted in If a salaried employee and a
morale is public expenditure (like Mayawati’s shopkeeper are earning ₹8 lakhs per
lowered when elephant statutes) instead of better annum, still the salaried employee is
→ quality of water, road, education or forced to pay more taxes than this
electricity. shopkeeper, because
- TDS on salary whereas shopkeeper
underreports his sales in cash
payment.
- Shopkeeper shows less profit
through fictitious business
expenditures.
Solution(s)  under-constructions projects  SMS, billboards highlighting self-
should show signboards “Your tax employed individuals who pay
money at work” good amount of tax.
 Reminding tax payers that public  Public shaming of individuals who
goods can only be provided in don’t pay taxes. It’ll scare other
return for tax compliance. Most tax-evaders that the probability of
people in your local community their detection has increased.
pay their taxes on time.  Avoid Tax Amnesties. Give
stringent punishment to tax
evaders.
Further, CEA Subramanian K. suggested:
 Top 10 highest taxpayers within a district → They should be given VIP-treatment such as faster
boarding privileges at airports, special “diplomatic” type lanes at immigration counters, fast-lane
on roads and toll booths, etc.
 Highest taxpayers over a decade → Important places should be named after them e.g. roads,
trains, schools, universities, hospitals and airports.
 In Hinduism, Islam and Christianity - unpaid debt is considered a sin. So, advertisements should
highlight how tax evasion is a violation of such “spiritual/religious norms”.
 Ease in Paying Taxes: Pre-populated Income Tax forms with easy to understand terms. Even if a
person’s tax liability is ZERO, he should be required to fill Income Tax form.
 Automated TDS as and where possible and timely release of Tax refunds.
@Hindi-Medium-Mains candidates: refer ES2018-19 Vol1 Ch.2 page52’s bullet
2.33 upto page 55’s box 5 to get the clean & formal vocabulary
24.10.3 🍋🍋🍋🍋 Tax: GDP: 15th Finance Commission on how to improve it?
⇒ Expand the scope of TDS/TCS to cover more number of transactions and find the tax
evaders. (�व�वध प्रकार के लेनदेन को टीडीएस/टीसीएस के दायरे म� लाया जाए तािक कर चोरी पर �नगरानी रखी जा सके )
⇒ 40% of the people who filed Income Tax forms in 2019-20 did not pay any income tax. Because
either: आयकर का फॉमर् भरने वाले 40% लोग असल म� आयकर नहीं जमा करते �ोंिक.
o the taxable income was very low (आयकर यो� आय ब�त कम है)
o they are hiding / underreporting some of the income (आयकर फॉमर् म� कु छ आमदनी को छु पाया जा
रहा है)
o because of tax-deduction & tax rebates. (वह �व�वध प्रकार के टै� िडड�न, टै� �रबेट का लाभ लेकर
अपने आयकर दा�य� 0 कर देते ह�)
o So, Government needs to address this. इस�लए �व�ा म� सुधार ज�री
Income Tax Rate Minimum Maximum Income Tax Rate Minimum Maximum
UK 20 45 Brazil 7.5 27.5

USA 10 40 Japan 5 45
Sweden 20 25 China 3 45
Australia 19 45 India, Indonesia 5 30
⇒ Article 276: Presently Constitution does not allow the state government to demand more than
₹2500 rupees per year as professional tax. Union government should amend the constitution to
increase the limit. 14th FC recommended ₹12,000 per year. (रा� सरकारों को �वसाय कर वसूलने क�
सं �वधान म� जो सीमा दी गई है उसे ढाई हजार से बढ़ाकर 12000 प्र�त वषर् िकया जाए)
⇒ Presently GST has four slabs 5-12-18-28. Rationalize it into just three slabs for more efficient
administration & relief to taxpayers (जीएसटी क� दरों क� सं �ा को कम िकया जाए)
o Merit rate (5%)
o Standard rate (by merging 12-18% slabs into a single figure may be 15-17%)
o Demerit rate (28-30%)
⇒ Govt should ⏬ the overreliance on indirect taxes (e.g. raising excise/VAT on petrol-diesel).
Increase the coverage of direct taxes of Union and State. (सरकार ने �व� प्रबं धन के �लए परो� करो पर अपनी
�नभर्रता को थोड़ा कम करना चािहए, प्र�� करो का �ाप बढ़ाना चािहए)
24.11 🍋🍋TAXATION: MISC. TERMS
Laffer Curve - American economist Arthur Laffer: if (direct) tax rates are ⏫ above a
(लफ़र वक्र): certain level, then tax revenue collection will ⏬ because higher tax rates
discourage people from working and/or encourage them to evade tax.
- So, tax-cuts could lead to ⏫tax revenue collections.
- 💼💼Modi Budgets from 2017 onwards: The lowest Income Tax slab was cut
from 10% to 5%; The corporation tax on small sized companies was also
brought down from 30 % to 25% in a phased manner.
- 💼💼Budget-2020: new optional Income tax slabs.
- 💼💼USA Budget-2017: Corporation tax cut down from 35 % to 15%
Tax buoyancy - If GDP grew by x%, then how much % Income tax collection will grow?
(कर उ�ावकता): - E.g. if income tax collection growth rate is 11% when GDP growth rate is
10%, then Income Tax’s tax buoyancy is 1.1
Tax elasticity If first income tax slab increased from say 5% to 15%, then in absolute terms how
(कर ल�चलाता): much more IT-revenue will be generated?
24.11.1 🍋🍋 Net Tax Revenue of the Govt (शुद्ध कर राज�)
Sr. Budget → Revenue Receipts → Tax 💼💼Budget 2020-21 💼💼Budget 2021-22
Receipts (Approx.)
A Union’s Direct taxes, incl. cess and ~ 13 lakh crores 11.0 Lakh Cr
surcharge
B Union’s Indirect taxes incl. cess and ~ 11 lakh crores 10.9 Lakh Cr
surcharge.
- For Union: direct taxes income
is >> indirect taxes.
- But if we summed all the taxes
of union, state and local bodies
then indirect taxes income >>
direct taxes.
C Union territories without legislature: ~7500 crores 7000 cr
their direct and indirect taxes: �वधानमं डल
रिहत सं घ रा� �ेत्र
D Gross Tax Revenue (=A+B+C) सकल कर ~24 lakh crores 22 Lcr
राज�
E Minus the Tax devolution to States (कर (-)~8 lakh crores (-) 6.65 Lakh Cr
ह�ांतरण) as per the Finance
Commission
F Minus Contributions to National (-)~3500 crores (-) 6100 cr
Disaster Response Fund in Home
ministry**
D-E- Net Tax Revenue of Union (शुद्ध कर ~ 16 lakh crores 15 Lakh Cr
F राज�) +D-E-F=
**Public Account → National Disaster Response Fund (रा��ीय आपदा प्र�तिक्रया कोष) is a statutory fund under Disaster Management Act,
2005. Previously, called National Calamity Contingency Fund (NCCF).
24.11.2 🍋🍋 Revenue Shortfall (राज� म� कमी)
Budget Estimates: बजट अनुमान BE-2020-21 Presented RE-2020-21 Shortfall: BE Minus RE
Revised Estimates सं शो�धत अनुमान on 1/2/2020 Presented on 1/2/2021 Amount in Crores
Corporation Tax (�नगम कर) 681000 446000 😰😰235000
Income Tax (आयकर) 638000 459000 😰😰179000
Customs Duty (सीमा शु�) 138000 112000 😰😰26000
Excise Duty (उ�ाद शु�) 267000 361000 😰😰No Shortfall, excess
collection of 94kCr
GST 690500 515100 😰😰175400
Total = Gross Tax Revenue 2423020 1900280 😰😰522740
इतना कमाने क� उ�ीद थी वा�व म� इसके आसपास इतना �आ राज� घाटा
⇒ Budget 2020 is presented on 1/2/2020 for the next financial year starting from 1st April 2020 to
31st March 2021. So, FinMin could have only made projections /estimations about how much
taxes will be collected during 1/4/20 to 31/3/21.
⇒ But throughout the year, based on the advance tax-collection figures & monthly GST collection
figures, FinMin will have to re-adjust the estimates.
⇒ 1/2/2021: Budget 2021 is presented for next FY-2021-22. Along with that, Govt will present
revised estimates for previous Financial Year (2020-21).
⇒ From the table we can see Gross Tax collection is less than expected (24 MINUS 19) = ~5.## lakh
crore is ‘Revenue Shortfall’, mainly because GST & Corporation Tax collection are much less
than expected due to slowdown in economy.
24.11.3 � Mock Questions for UPSC Mains (250 words each)

1. (Asked in GSM3-2013) Money laundering poses a serious threat to country’s economic
sovereignty. What steps are required to be taken to control this menace? मनी लॉ��ंग देश क� आ�थक
सं प्रभुता के �लए एक गं भीर खतरा है। इस खतरे को �नयं �त्रत करने के �लए �ा कदम उठाए जाने क� आव�कता है?
2. Despite being a trillion dollar economy, India's tax to GDP is quite low. Suggest ways to remedy
this contrast. िट��लयन डॉलर क� अथर्�व�ा होने के बावजूद, भारत का कर:जीडीपी अनुपात काफ� कम। इस �वषमता को हल
करने के उपाय सुझाए.
3. Discuss the significance of taxpayers charter and tax ombudsman in the tax administration of
India. (भारत के कर-प्रबं धन म� करदाताओं के अ�धकार पत्र और कर-लोकप्रहरी/�शकायत �नवारण अ�धकारी के मह� क� चचार्
क��जए)
24.12 📥📥📥📥📥📥 BUDGET → REVENUE PART → RECEIPTS → NON-TAX RECEIPTS
🚆🚆🚆🚆 Notable sources of Non-Tax revenue (In descending order) 2021-22

✓ Interest receipts (�ाज प्रा��यां received on Union’s loans to states, railways, CPSE, ~1.1 lakh cr.
foreign countries.) is a revenue receipt. [Had those borrowers repaid loan-
principal, then that portion is ‘Capital Receipt.]
✓ Dividends and profits received from CPSE, PSBs, RBI. [Had Union sold its
shares to a third party (disinvestment / privatization) → that’s ‘Capital Receipt’].
Union’s income from (Dividend & Profits) >> from Interests.
Income from selling various goods & services such as railways, postal services, selling ~1.2 lakh cr.
of India Yearbook-, Yojana-Kurukshetra magazines, fees that CISF charges for giving
protection to Private Airports, auction of spectrum & mining rights, selling of
commemorative coins etc.
Grant in Aid (अनुदान)/ Donations received by Union. 747 cr.
[Had Union received ‘loan’, it’ll be ‘Capital Receipt’.]
Similar Non-tax revenue earned by UT without Legislature ~ 2500 cr.
Sum of Above= Total Non-Tax Revenue Receipts कर-�भ� प्रा��यां ~2.## lakh cr.
Total Revenue Receipts= NET Tax receipts (~15.## lcr) + Non-Tax receipts (~2.## lcr)= ~17.##lcr.
Figures are not important, but the fact that revenue budget: the tax receipts >> non-tax
25 📤📤⏰ BUDGET → REVENUE EXPENDITURE (राज� खचर्/ �य)
- Expenditures spent on day to day functioning of the organs of the state =
- salaries & pensions, stationery, electricity bill, phone bill etc.
- in Executive, Judiciary, Legislature, Constitutional & Statutory bodies.
- Expenditures that do not create income generating assets or permanent assets or financial assets.
- Thus, money SPENT on loan-interests, subsidies, scholarships, grants etc. counted here
Notable Revenue Expenditures (In descending order) 2021-22
Interest to be paid on previous loans is Revenue Expenditure. [Whereas Union repays 8.1 Lcr
loan-principal, its ‘Capital Expenditure’]
- Grant-in-Aid (अनुदान) to States & Local Bodies for Disaster Management, 5.5 Lcr
Panchayati Raj Development etc. as per Finance Commission recommendations.
Additionally, Govt also gives grants to poor foreign countries for improving
diplomatic relations. (अंतररा�ी� य �र�ो को के �लए अनुदान)
- Grant = Amt doesn’t have to be returned with Interest. (Whereas If Govt gave
‘loans’ to States/CPSE/Foreign Countries then it’s an income generating financial
asset = counted under Capital Expenditure).
Subsidies: Within them descending order (Approx. Figures for 2021-22) 3.7 Lcr
1. 🌽🌽Food subsidies: ₹ 2.4 lakh cr.
2. 🌽🌽🌽Fertilizer (Urea > Others): ₹ 80,000 cr
3. ⛽Fuel (LPG > Kerosene): ₹ 13,000 cr
4. Interest Subsidies on loans: Farmers (highest), MSME, Affordable Housing, LIC
Vay Vandana Yojana etc.: ₹26,000 cr.
5. Other (Price stabilization fund, Cotton & Jute etc.): 7000 cr.
�Defence revenue expenditure (e.g. soldier salaries, fuel for tanks) 2.2 Lcr
�Pension to retired employees (zigzag in last 3 years) 2.1 Lcr
➢ Economic services related revenue expenditure (Agriculture, energy, transport, --some
communication, Science technology) figures
Not imp
➢ Social services’ revenue expenditure ( health, education, social security):
➢ Expenditure on Administrative machinery (Police, Jail, External Affairs etc.),
Elections, Parliament, Judiciary:
➢ Revenue expenditures of UT without Legislature:
Total Revenue Expenditure कु ल राज� �य (approx.) 29.##Lcr
Total Revenue Receipts (Tax + Non Tax Receipts) कु ल राज� प्रा��यां (approx.) 17.##Lcr
⚠ Revenue Deficit = Revenue Receipt MINUS Expenditure 11.40Lcr
Estimated nominal GDP for 2021-22 is ₹ 222 lakh crores. So Revenue Deficit as a 5.1%
percentage of GDP = (11.40 divided by 222) x 100=
🔠🔠❓ As per the Budget 2019-20, the maximum subsidy expenditure was likely to be on _ _ _ (UPSC-CDS-2020-ii)
(a) urea subsidy (b) petroleum subsidy (c) food subsidy (d) fertilizer subsidy
25.1 📤📤⏰(🌽🌽⛽) REVENUE EXPENDITURE → SUBSIDIES

Tax (₹ ~15 lakh crores in Budget 2021) Subsidies (₹ ~ 3.7 lakh cr in Budget 2020)
Tax is a compulsory contribution imposed by A subsidy is a benefit given to an individual or
State. Refusal to pay the tax is punishable. firm by the government to reduce some type of
कर= रा� द्वारा लगाया जाने वाला कर एक अ�नवायर् योगदान है। burden. A person may refuse to accept the
करचोरी एक दंडनीय अपराध subsidy, he will not be punished.
Tax doesn’t promise specific and direct A specific benefit is promised e.g. 6000 to
goods/services to the taxpayer. (Mukesh farmers, idli@₹ 1 rupee in Amma Canteen
Ambani’s car will still suffer from potholes) (Tamilnadu).
25.1.1 📤📤⏰(🌽🌽⛽) Types of subsidies with selected examples

1. Given in direct cash (or bank transfer): PM KISSAN 6k for farmers, LPG Pahal ~200 per
cylinder. नगद म�.
2. Given in kind: free school bags, uniform and books to the poor children, free medicines in
public hospitals, free insurance. मु� व�ु या सेवा के �प म�
3. Indirect subsidies (परो�): cheap fees in government colleges, cheap kerosene, cheap urea, cheap
crop insurance premium etc. Here govt. is paying some money to an organization so they may
provide goods/services @cheap rate to the beneficiary.
4. Implicit Subsidies (अंत�निहत): Govt supresses the supply so to ⏫ the prices to help a sector. E.g.
Indian govt banned import of American chicken/poultry/eggs. So, shortage of chicken helps
local Indian poultry industry to demand high prices from public. Here Indian poultry receiving
‘implicit subsidy’ (from public), even though Govt is not paying them money. (More in
📑📑Pillar#3B -> WTO)
5. Cross-Subsidization (क्रॉस सहा�यक�करण): To keep rail travel cheap for the poor people, Railways
keeps the passenger tickets lower than its input cost. To compensate this loss, Railways keeps
freight (goods transport) prices higher. This is called “Cross subsidization” (More in 📑📑Pillar#5
Infra → Railways)
6. Regulatory (�नयामक) subsidies: e.g. if State Electricity Regulatory Commission directs companies-
that electricity to farmers must NOT to be beyond ₹ “x” per unit.
7. Procurement (खरीद) subsidies: e.g. FCI purchasing at food grains from farmers at minimum
support price (MSP). (More in 📑📑Pillar#4A -> AGRO)
8. Interest (�ाज) subsidies / subvention: govt pays “x%” interest on agriculture, MSME, affordable
housing loans.
25.1.2 � � Impact of Subsidies (स��डी का प्रभाव: सकारा�क एवं नकारा�क)
 � Merit Goods (लाभदायक व�ुऐ)ं : Healthcare, education, scientific research, LPG, solar panels,
wind mills etc. Here subsidies can increase the positive externalities. (Cheap LPG → poors don’t
use firewood → more trees & less indoor pollution.)
 � But subsidies on diesel, kerosene =negative externalities (नकारा�क बाह्यता) on environment.
 � Urea subsidies to industries → cheap urea to farmers → excessive consumption → soil &
water pollution, algae-blooms. (यू�रया उवर्रक का अ�ा�धक उपयोग जमीन पानी म� प्रदू षण)
 � Subsidy leakage: When ghost beneficiaries (non-existent persons propped up by corrupt
officials), and ineligible (rich) people are receiving subsidy. (स��डी �रसाव, धांधली और गबन)
25.1.3 📘📘📘📘 Past Economic Surveys on subsidy delivery (आ�थक सव��णों के उपाय)
📘📘📘📘 Economic survey 2014-15:
✓ We should use Jandhan Aadhar Mobile (JAM) trinity to reduce the subsidy leakage.
✓ Direct benefit transfer (DBT: प्र�� लाभ ह�ांतरण) can’t be a panacea in every case, because
males of the house may waste DBT-money on liquor & tobacco. So, in some cases,
Biometrically Authenticated Physical Uptake (BAPU) mechanism will be better i.e.
beneficiary goes to a grain / fertilizer shop and uses his Aadhaar & fingerprint to purchase
subsidized goods. (बॉयोमीिट�क �प से प्रमा�णत करके लाभाथ� को व�ु देना)
➢ The present subsidy delivery mechanism suffers from two errors:
○ Inclusion Error (समावेश त्रुिट): Non-poor (=affluent) are receiving ~40% of subsidies.
○ Exclusion Error (बिह�रण त्रुिट): real poor are not getting subsidies due to corruption
✓ So better to abolish all type of subsidies and directly deposit a specific sum of money into
beneficiary’s bank account to help him buy goods/services from open market = Universal
Basic Income (सावर्�त्रक बु�नयादी आय) (UBI): 📑📑More in Pillar#6.
25.1.4 📘📘📘📘 ES19: Use ‘Behavioural economics (�वहार अथर्शा�)’ to ↓ subsidy bill
To ⏬Govt’s subsidy burden: Above Poverty Line (APL: गरीबी रेखा से ऊपर) households shd be
encouraged to voluntarily surrender LPG subsidies using following tools of Behavioral economics:
 People have a strong tendency to go with the status quo. So, ‘Default ticked option’ in LPG
registration forms should be ‘I wish to give up the subsidy’, so a person will be ‘forced’ to untick
the option to avail the subsidy benefit.
 Similarly, income tax forms should contain extra-fields with pre-ticked options like ‘I want to
give up LPG subsidy’.
 The online /SMS-based ‘subsidy giving up process’ should be quick and hassle-free. It should
not take more than a few minutes. Because every additional minute required to complete the
formalities= increases the chances that person will drop out in the middle of the process.
 People act positively when they see others act positively, and particularly when they can relate to
such individuals. So, online “scroll of honour” should show name/photos/social media-profiles
of others in their area who gave up subsidies.
 Advertisements to highlight that “Rich people are helping in poverty removal by giving up
subsidies.“
 When people are watching a movie with social message (such as Padman, Toilet Ek Premkatha
etc), it should contain ad asking people to give up full / partial subsidy.
 Once a person gives up subsidy, he should be shown the photos of poor people benefitting from
his act / or a video with a beneficiary saying ‘thank you’.
@Hindi-Medium-Mains candidates refer ES2018-19 Vol1 Ch.2 bullet 2.26 to

2.31 to get clean & formal vocabulary for answer writing.
25.1.5 ��🕵🕵🕵National Recruitment Agency (NRA: रा��ीय भत� एज�सी)

 Present: multiple recruitment exams conducted by multiple agencies at different points of time
throughout the year..
 Future: NRA will conduct Common Eligibility Test for recruitment to Non-Gazetted personnel
in Government and PSBs. → SSC and IBPS will conduct Mains exams for respective posts →
time and cost saved for both candidate and recruiting agencies.
 💼💼Budget-2020: we’ll set up NRA & open a (computerized) test centre in every district.
 ✋Self-Study-Topics for GSM2/GSM4: 1) Lateral entry in IAS. 2) Three years tour of duty in
Army. Source? Internet / Current Affairs PDF/Lectures.
25.2 📤📤⏰🥳🥳 REVENUE XPDR → SALARIES→ 7TH PAY COMMISSION (वेतन आयोग)
Setup by Finmin → Dept of Expenditure. 1st: Srinivasa Varadachariar (1946). 7th: (Retd) Justice
AK Mathur (2014). Its recommendations became effective from 1/1/2016. Major highlights were:
✓ New system of “Pay Matrix” instead of previous system of pay band and grade pay.
✓ Regulatory bodies salaries increased: Chairman ₹ 4.50 lakh / month, members ₹ 4l.
✓ Minimum pay in Central service increased to ₹ 18k / per month (Group-D).
✓ Maximum pay: ₹ 2.25 lakh per month for Apex scale (e.g. Secretary of a Dept.), and ₹ 2.50l (for
Cabinet Secretary)
✓ It adopted Dr. Aykroyd formula to computing wages at periodic interval (formula tracks the
changes prices of the commodities used by a common man). So, critiques believe there will not
be an 8th Pay Commission because salaries will be updated automatically at regular interval,
using this formula.
✓ It abolished various type of ‘interest free allowances’ e.g. Purchase of bicycle etc.
✓ It continued ‘interest-bearing advances’ for purchase of computer, house building (upto ₹ 25
lakhs). [= employee can borrow money from dept but he will have to return it with interest.]
✓ Various reforms for defence and CAPF services. (सश� सेना /क� द्रीय पु�लस बल के �लए सुधार)
✓ stronger rules in Modified Assured Career Progression (MACP) system so lazy officials don’t
get promoted. (आलसी और �नक�े अफसरों क� पदो��त को रोका जाए)
25.2.1 🥳🥳 Pay Commission: Associated terms
- Dearness Allowance (DA: महंगाई भ�ा): It’s given by an employer to protect the employees against
rise in inflation. In government services, both working employees and retired pensioners are
given dearness allowance.
- House Rent Allowance (HRA: मकान िकराया भ�ा): rent allotted by the employer for employee's
accommodation (house).
- Gratuity (ग्रे�ुटी): It’s a lump sum amount “x” given by an employer to the employee for
rendering services continuously for “y” number of years. Usually given at retirement. Norms
governed under Payment of Gratuity Act, 1972
- One Rank One Pension (OROP): 2015- Modi govt. promised equal pension to military
personnel retiring in the same rank with the same length of service, regardless of the date of
retirement. Although, Ex-servicemen unhappy about the base year & calculation formula.
25.3 👻👻📤📤⏰�🥳🥳 SALARY REFORMS IN ATMANIRBHARAT 2.0 (OCT 2020)

To ⏫shopping/market demand during the festival season, FinMin launched two schemes:
25.3.1 👻👻⏰�🥳🥳 Atma-Nirbhar 2.0: Festival Advance Scheme (�ोहारों म� एडवांस रकम)
 Govt will give ₹10,000 as interest-free advance to govt employees. Employee need to repay it
back in maximum 10 instalments.
 Govt will not give this ₹₹ in cash form. but in form of a prepaid SBI Rupay Card known as "SBI
Utsav Card". This card can be used like a debit card, for making purchases e.g. billpayment,
ECommerce websites etc. (📑📑Ref: HDT-Pillar#1A1)
25.3.2 👻👻⏰�🥳🥳 Atma-Nirbhar 2.0: LTC Cash Voucher Scheme
 Basically gives tax-free allowance, if employees do shopping instead of travel.
 Leave Travel Concession (LTC: छु ट्टी यात्रा �रयायत)= Govt pays ₹₹ to Govt employees for vacation
travelling, subject to certain limits e.g. ₹"X" every "Y" years etc. (e.g. a senior officer may be
eligible for ₹36,000 LTC every four years)
 BEFORE Corona? If he show the travel bills, he'll get ₹ from govt. if he doesn't travel, he'll get ₹0.
Post-Corona Economic Revival =Govt gives him another option →
 If you (govt employee) do not want to travel, then
 Do shopping of goods/services which attract 12% or higher GST (e.g. TV, fridge, mixer etc).
 Shopping bill must be a minimum ₹"Y" (where Y=3 times "X")
 Employee pays shopping bill using digital methods (card, e-banking etc) or cheque etc
 Then submit the bills/invoice of purchase → Govt will pay employee ₹"X" & it will not be
counted under the employee's taxable income** (भले यात्रा न क�, िकंतु शॉ�पगं िकया तो एलटीसी का पैसा द�गे
और उस रकम पर इनकम टै� म� छु ट्टी)
 🤩🤩Benefit? It will ⏫the demand/consumption = Economic Revival.
 Who is covered? Employees in Union, State Govt, Govt companies, Public Sector Banks
 Private sector employees are also covered (IF their boss is paying the LTC money.) Govt will not
demand income tax on that amount.**
 ✋Further technical norms and rules not important for the scope of the exam.
**above tax benefit, if you're in the 'old income tax slabs 5-20-30 walle. If in new optional slabs- you
can't claim such deductions/reliefs.
25.4 (📥📥<📤📤)⏰⚠ REVENUE DEFICIT (राज� घाटा: 5.1% OF GDP)
⇒ When govt spends more than its income in revenue account, it incurs …
⇒ Revenue deficit = Revenue expenditure – Revenue receipts. (�य �ादा आमदनी कम)
⇒ Since most of revenue expenditure is ‘committed’ (like Interest repayment on previous loans,
staff-salaries & pensions which Govt can’t ‘avoid’), so difficult to ⬇ the revenue deficit.
⇒ So, when revenue deficit ⬆, govt forced to borrow more money or ⏬ expenditure in the
capital part (= less new schools, bridges and hospitals) → ⏬ human dev, and lower economic
growth (less new bridges → ⬇ demand of steel/cements → ⬇ growth in those sectors).
25.5 (📥📥<📤📤)⏰⚠ EFFECTIVE REVENUE DEFICIT (प्रभावी राज� घाटा: 4.1% OF GDP)
- We’ve counted Grant-in-Aid to States / Local Bodies as ‘Revenue Expenditure’, but some
portion of that ₹₹ may have been spent by the States / Local Bodies for building Panchayat-
Bhavans, Disaster Management Training Institutes, Cranes & Bulldozers for Disaster rescue
operations etc. which are actually “Capital Assets”. (पूंजीगत सं प��यां)
- Therefore, Budget 2011 (Chidambaram) introduced a new concept:
- Effective Revenue Deficit = Revenue Deficit (~₹11 lakh cr) MINUS Grants to various bodies
which were spent for creation of Capital Assets (₹2 lakh cr)
- ERD= ~9 lakh crores (4.1% of GDP) for 2021
NEXT 📥📥📥📥 BUDGET → CAPITAL → RECEIPTS & Expenditure
- To be continued…. Next Handouts
2A) ✅ Direct Indirect Taxes 2B) ✅ Black Money, 15th FC

2C) ✅ Subsidies, Salaries, Revenue Expenditure 2D) Disinvestment, Deficit, FRBM Act,
Fiscal Council, Budgeting-Railway budget, plan-non plan budget, & scheme types etc.

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2B: Finance Commission, Black Money & 2C: subsidies, revenue expenditure

23 🍋🍋 (🧔🧔⚖���) TAXATION → FINANCE COMMISSION

23.2 🕵🕵🕵(🍋🍋 🧔🧔⚖�) FIFTEENTH FC COMPOSITION (SETUP IN 2017-NOV)

Chairman N.K. Singh (Retd. IAS, Ex-Member of Parliament)

Ladakh’s security & other needs.

👪👪 Population (as per Census-2011: आबादी): More population = more ₹₹ 15%

23.5.1 🍋🍋 [�⚖� �]15th FC: Horizontal devolution: States’ share

Figure 1: हमको और पैसा दो, हमारे राज� घाटे क� भरपाई के �लए!

 No such grant announced.

Funds (NDMF:एनडीएमएफ/रा��ीय आपदा प्रशमन कोष)

23.6.5 💸💸💸🍽🍽15th FC: Sector Specific Grants (�ेत्र-�व�श� अनुदान)-Malnutrition

23.6.8 💸💸💸💸💸💸Defence and Internal Security Fund for Union

� 🍋🍋⚖ Finance �🤴🤴 Planning Commission �🧔🧔 NITI Aayog

23.9 🍋🍋(🧔🧔⚖�🙏🙏) SPECIAL CATEGORY STATES? �वशेष श्रेणी के रा�?

23.10� MOCK QUESTIONS FOR UPSC MAINS (250 WORDS EACH)

Enforcement FinMin → Department of Revenue → ED is a Specialized financial

धनशोधन �नवारण अ�ध�नयम

अ�ात �वदेशी आय तथा प�रसं प�� अ�ध�नयम

24.3 (🍋🍋🍋🍋)💼💼 TAX EVASION → FULL-BUDGET-2019 ANNOUNCEMENTS

24.3.2 🍋🍋🍋🍋🍋🍋 Vivad se Vishwas Scheme for Direct Taxes (💼💼Budget-2020)

24.3.4 🍋🍋🍋🍋🍋🍋 Dispute Resolution Committee (DRC) in 💼💼Budget-2021

If a person is 🦁🦁Has to pay his IT on 🐼🐼Has to pay IT on global income e.g.

24.5.1 🍋🍋🍋🍋🍋🍋🍋:🧾🧾 Pre-filled online forms for Tax Payers

Year Scheme Nodal Body

24.5.3 🍋🍋🍋🍋🍋🍋🍋:🧾🧾⏰ Time limit on opening of past cases

A citizens’ charter (नाग�रक अ�धकारपत्र) is a document of commitments made by a government agency

✅Homework: Laxmikant chapter 61 on Lokpal and Lokayukta

24.7.1 🍋🍋🍋: ��Tax ombudsman: Indian experience

Mode Organisation 😰😰Challenges?

24.7.3 🍋🍋🍋: ��Tax Ombudsman: Global experience with Independent

24.7.4 🍋🍋🍋: �� Tax Ombudsman: Conclusion / way forward (�न�षर्/आगे का रा�ा)

24.7.5 🍋🍋🍋: Reducing Tax Terrorism / Harassment: online portals/Apps

24.8 🍋🍋🍋🍋🍋🍋TAXATION → GLOBAL TREATIES, AGREEMENTS & INDEXES

UK 20 45 Brazil 7.5 27.5

24.11.2 🍋🍋 Revenue Shortfall (राज� म� कमी)

24.11.3 � Mock Questions for UPSC Mains (250 words each)

🚆🚆🚆🚆 Notable sources of Non-Tax revenue (In descending order) 2021-22

25.1 📤📤⏰(🌽🌽⛽) REVENUE EXPENDITURE → SUBSIDIES

25.1.1 📤📤⏰(🌽🌽⛽) Types of subsidies with selected examples

@Hindi-Medium-Mains candidates refer ES2018-19 Vol1 Ch.2 bullet 2.26 to

25.1.5 ��🕵🕵🕵National Recruitment Agency (NRA: रा��ीय भत� एज�सी)

25.3 👻👻📤📤⏰�🥳🥳 SALARY REFORMS IN ATMANIRBHARAT 2.0 (OCT 2020)

2A) ✅ Direct Indirect Taxes 2B) ✅ Black Money, 15th FC

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23 🍋🍋 (🧔🧔⚖��) TAXATION → FINANCE COMMISSION