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Indian Economy - Prelims Questions DPP - 21

1. With reference to Securities Transaction Tax, Which of the statements given above is/are
consider the following statements: correct?
1. The securities transaction tax is a direct tax. (a) 1 only (b) 2 only
2. Short-term shares are held for a period of (c) Both 1 and 2 (d) Neither 1 nor 2
less than 6 months
4. With reference to 15th Finance Commission,
Which of the statements given above is/are consider the following statements:
correct?
1. The Census of 1971 was taken as the
(a) 1 only (b) 2 only benchmark for the devolution of funds by
(c) Both 1 and 2 (d) Neither 1 nor 2 the 15th Finance Commission.
2. The 15th Finance Commission
2. Consider the following statements:
recommended 41% of the divisible pool be
1. Recommend regarding 'vertical and devolved to the States.
horizontal devolution' of net proceeds of
Which of the statements given above is/are
taxes to the President.
correct?
2. Recommend the President to provide grants (a) 1 only (b) 2 only
in aid to the state government
(c) Both 1 and 2 (d) Neither 1 nor 2
3. Recommend financial support to
5. With reference to the Input Tax Credit (ITC)
Panchayats and municipalities
under Goods and Services Tax (GST), consider
How many of the statements given above are the the following statements:
functions of the Finance Commission? 1. It is the tax paid by a person which is
(a) Only one (b) Only two available as a deduction from tax to be
(c) Only three (d) None payable by them under GST.
2. It is available only at the final stage of
3. With reference to the Tax Devolution, consider
production.
the following statements:
3. It helps in removing the cascading effect of
1. Vertical devolution deals with the tax and reduces the price of final products.
devolution of funds between the Union and
How many of the statements given above are
the States.
correct?
2. Horizontal Devolution deals with the (a) Only one (b) Only two
division of funds amongst States.
(c) All three (d) None
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Answer

1. (a) 4. (b)
2 (c) 5. (b)
3. (c)

Hints and Solutions
1. (a)
Option (a) is correct:
❖ Statement 1 is correct: The central
government of India levies and collects
the securities transaction tax, which is a
direct tax. The most notable aspect of a
securities transaction tax is that it is only
levied on share transactions conducted
through a recognized stock exchange in the
country.
❖ Statement 2 is not correct: Financial
instruments held for less than 12 months
or one year are considered short-term
shares in India. Short-term capital gain
refers to any capital gain/profit that an
individual gets on the sale of short-term
capital assets. This includes any gain on
depreciable assets.
2. (c)
Option (c) is correct:
Functions of the Finance Commission: Term
of Reference (TOR)
❖ Distribution of Tax Proceeds: It submits
recommendations regarding 'vertical and
horizontal devolution' of net proceeds of
taxes to the President.
➢ Vertical Devolution: Division
between center and States/union
territories.
➢ Horizontal Devolution: Division
amongst States. (Hence, statement 1
is correct)
❖ Grants-in-Aids: Providing the grants-in-
aid of to the State Government under
Article 275 of the constitution of India.
(Hence, statement 2 is correct)
❖ Support for Panchayats and
Municipalities: It suggests measures to
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augment the resources of a State's
Consolidated Fund. These resources are
intended to supplement the financial
capabilities of Panchayats and
Municipalities within the State. (Hence,
statement 3 is correct)
3. (c)
Option (c) is correct:
❖ Statement 1 is correct: The Finance
Commission makes recommendations for
the vertical and horizontal devolution of net
proceeds of the Union tax revenue between
the Centre and the States. Vertical
devolution deals with the division of
resources between the Union and the
States.
❖ Statement 2 is correct: Horizontal
devolution is the devolution or sharing of
resources between different states. It has
been a key concept in equalizing the
differences in fiscal capacity. This has been
used by the Governments to help address
equity and economic efficiency issues.
4. (b)
Option (b) is correct:
❖ Statement 1 is not correct: The 14th
Finance Commission considered the
Census of 1971 as the benchmark for the
devolution of funds by the 14th Finance
Commission. This was done to prevent
unjust favour to the North Indian States
where the growth in the population
increased at a larger pace post-1971 in
comparison to the Southern states. The 15th
Finance Commission took the Census of
2011 as the benchmark for the devolution of
funds between states.
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❖ Statement 2 is correct: The 15th Finance

Commission recommended maintaining
the vertical devolution at 41% for the
devolution of funds to the states from the
divisible pool. The 14th Finance
Commission recommended the share to
be 42%.

5. (b)
Option (b) is correct:
❖ Statement 1 is correct: ITC is the tax
already paid on inputs or input services, and
it can be deducted from the tax payable on
the output.
❖ Statement 2 is not correct: ITC is
available at every stage of production, not
just the final stage.
❖ Statement 3 is correct: ITC indeed helps
in eliminating the cascading effect of
taxes by allowing taxpayers to claim credit
for taxes paid on inputs, which ultimately
lowers the price of final products.

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