Measures by Government to Curb Inflation
- Monetary Policy – Expansionary monetary policy
- Fiscal Stimulus – tax rate reduced from 12% to 10%
- Sectoral support package – It was granted to IT and BPO as the tax rebate
As a result, growth picked up but inflation started to increase, in 2010 RBI started contractor monetary policy.
Some quick terms of Inflation
- Disinflation – Decrease in the rate of Inflation, a situation in which price level output and employment reduce.
- Deflation – Persistence fall in price level it leads to negative inflation which leads to recession
- Stagnation – inflation accompanied by recession
- Inflationary gap – It is a situation in which aggregate demand is more than the productive capacity of an economy.
- Suppressed/Repressed Inflation – It is a situation in which AD is more than AS, but government prevents price level from rising through direct price control method. E.g. Ceiling Price
- Open Inflation – It is a situation in which price level increases without any price suppressive measures, by the government.
- Structural Inflation – It is caused due to structural deficiency of an economy like scarcity of capital, infrastructure bottlenecks.
Terms on Value of Inflation
- Creeping inflation – creeping inflation is actually what the government needs to keep a stable economy–it doesn’t have an adverse effect unless wages do not follow.
- Walking/ trotting inflation – Moderately high inflation
- Running/Galloping inflation – Very high inflation
- Runaway/hyperinflation – Extremely high inflation, where monetary system collapse.
- Core Inflation – Based on the prices of only those commodities whose prices are non-volatile, does not take into account prices of fuel.
- Headline inflation – Based on the prices of all goods group of the commodity.
What is Taxation?
- A means by which governments finance their expenditure by imposing charges on citizens and corporate entities.
- Governments use taxation to encourage or discourage certain economic decisions. For example, reduction in taxable personal (or household) income
- By the amount paid as interest on home mortgage loans results in greater construction activity, and generates more jobs.
What is Surcharge?
- A fee or other charge that is added to the cost of a good or service. A surcharge is typically added to an existing tax, and may not be included in the stated price of a good or service.
- It may be a temporary measure to defray the cost of increased commodity pricing, such as with a fuel surcharge, or it may be permanent. A surcharge does not have to be imposed by the government.
What is the objective of taxation?
- During the 19th century, the prevalent idea was that taxes should serve mainly to finance the government.
- In earlier times, and again today, governments have utilized taxation for other than merely fiscal purposes.
- One useful way to view taxation is resource allocation and income redistribution.
- Income redistribution is meant to lessen inequalities in the distribution of income and wealth.
- Another objective is stabilization—implemented through tax policy, government expenditure policy, monetary policy, and debt management—is that of maintaining high employment and price stability.
What is Cess?
- The alternative term for a tax. The term is still frequently used in a few countries including Britain, Ireland, to indicate a local tax, Scotland, to indicate a land tax, and India, applied as a suffix to a indicate a category of tax
- For example – Property cess, Clean energy cess and education cess
Ways of Imposition of Tax
- Ad valorem tax – Charge levied as a percentage of the value of the item it is imposed on, and not on the item’s quantity, size, weight, or other such factors. Value added tax (VAT) and, generally, import duties are ad valorem taxes.
- Specific tax – A levy assessed by an authority that is based on a certain product amount, but not on its price. A specific tax is typically incurred by a business in a set amount that is determined by the number or weight of products or taxable items.
Difference between the direct tax and indirect tax
|Direct Taxes||Indirect taxes|
|1. The burden of direct tax cannot be shifted
2. Direct taxes are usually regarded as progressive
3. Example –
· Income of a person
· Wealth tax
· House tax
· Corporation tax or Profit Tax
· Minimum alternate tax
· Alternate minimum tax
· Dividend distribution tax
· Capital gain tax (on increase in the value of the asset)
· Stamp duties – Buy and selling of assets
· Security transaction tax – Paid by both buyers and sellers
· Commodity transaction tax – Forward trading
|1. The burden of indirect tax can be partially or wholly shifted
2. Indirect taxes are regarded as regressive (everyone bears the same burden )
· Excise imposed on the production
· Sales tax – On the distribution of (i) turnover tax – Annual, (ii) CST – Central sales tax
· Custom duties or tariffs – Tax on import and exports
· Service tax – Entertainment tax, toll tax and entry tax.
· Vat – Value added tax, central vat and state level vat
· GST – Goods and service tax