Mrunal’s Economy Mains QEP: Pillar2AB- Budget, Taxation, FC, Black Money

Table of Contents
21 💼🍋 Pillar #2: Budget for Mains.........................................................................................................154
👜
21.1 Definitions / Meaning- Fiscal Policy and Budget.......................................................................154
👜
21.2 Budget is bigger than economic horoscope of a nation.............................................................155
👜
21.3 Budget is medical report for country’s financial health.............................................................155
🍋
22 Taxation कराधान................................................................................................................................. 156
🍋
22.1 Tax reforms in recent years (कर सुधार)..........................................................................................156
🍋
22.2 Tax Expenditure / Revenue Forgone (कर व्यय/परित्यक्त राजस्व)......................................................157
22.2.1 🍋 Tax expenditure: how it helps the country? ( देश को कै से फायदा करता है)............................................................157

22.2.2 🍋👎 Tax expenditure: negative aspects ( नकारात्मक पहलू)......................................................................................158

22.2.3 🍋👋👟Conclusion: Tax Expenditure / tax breaks ( निष्कर्ष).................................................................................158

22.3 Taxation → GST.................................................................................................................................159

22.3.1 Definition / Origin of GST.......................................................................................................................................159
22.3.2 GST theory.................................................................................................................................................................159
22.3.3 GST technological solutions to reduce tax evasion..............................................................................................159
22.3.4 🍋🛒😢 GST: Charms ( फ़ायदे)..................................................................................................................................160

22.4 🍋🛒😢 GST: Challenges (चुनौतियां)....................................................................................................160

22.4.1 🔢😢High Rates and Multiple Slabs ( )......................................................................................160
उच्च दर और कई स्लैब
22.4.2 🤹‍♂️😢Frequent changes harming long term business planning...........................................................................161
22.4.3 📉💸 Random Fall in collection ( ).......................................................................................................161
आमद में कमी

22.4.4 🤯Inconvenience to Small Traders ( )........................................................................161

छोटे व्यापारियों के लिए असुविधा

22.4.5 🍋😥 GST – compensation- new demands by States (2024 )......................................................162

क्षतिपूर्ति मुआवजा

✍️
22.5 GST: Conclusion Template (सार/निष्कर्ष).......................................................................................162
22.6 ✍️🎺Mock Q for Mains from TAXES..............................................................................................162
23 Finance commission (वित्त आयोग)...........................................................................................................164
23.1 FC – an Introduction (एक परिचय)........................................................................................................164

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 23.1.1 15th vs 16th FC: Terms of Reference (TOR: विचारार्थ विषय)..................................................................................164
23.1.2 15th FC: performance indicators for grants (अनुदान के लिए प्रदर्शन सूचकांक).............................................................166

23.1.3 ✍🏻15th FC: Conclusion ( )...............................................................................................................................168

निष्कर्ष

23.1.4 ✍️ 15 FC Report: conclusion (

th
- -
निष्कर्ष उनके रिपोर्ट की सराहना की बहु बढ़िया रिपोर्ट बनाया है )......................................168
23.2 FC = Statistical job?.............................................................................................................................169
23.3 ( 🕵️‍♂️ 🍋🧔⚖️👨‍🦲 ⏰
) FC: Giving Permanent Status (स्थायी दर्जा देना).....................................................169
23.3.1 🤦‍♂️👎Arguments against giving permanent status to FC ( )...............................................................170
विरोध में तर्क

23.3.2 🙋‍♂️👌Argument in favour of giving permanent status to FC ( ).............................................................170

पक्ष में तक

23.3.3 ✍🏻 Conclusion: give permanent status to FC or not? ( )..............................................................................171

निष्कर्ष

23.4 🍋⚖️ Vertical Fiscal Imbalance- Meaning (ऊर्ध्वाधर वित्तीय असं तुलन)..................................................171
23.4.1 🍋⚖️ Vertical Fiscal Imbalance : Factors Responsible.........................................................................................171
23.4.2 🍋⚖️😥 Vertical Fiscal Imbalance : Negative outcomes ( नकारात्मक परिणाम। )......................................................172
23.4.3 🍋⚖️✍️ Conclusion: ( )...................................................................................................................................172
निष्कर्ष

✍🏻
23.5 Mock Questions for Mains: Finance Commission....................................................................173
😈
24 Black Money (काला धन, कर चोरी).........................................................................................................173
24.1.1 (DATA) voters vs tax payers...................................................................................................................................173
24.2 🍋🥛 Tax: GDP – why low in India (भारत का कर:जीडीपी अनुपात खराब क्यों है?)......................................174
24.3 📘📘Economic Survey on taxation and fiscal capacity ( वित्तीय क्षमता).............................................174
24.4 😈 Definitions related to Black Money.............................................................................................175
24.4.1 🤵‍♂️🍸 Tax on the rich / billionaires ( ).................................................................................................176
अमीरों पर कर

24.5 ⚰️🍋 Wealth Tax / Inheritance Tax / Estate Duty..........................................................................177

24.5.1 ⚰️🍋 Wealth Tax: Past XP & its Abolition............................................................................................................177
24.5.2 ⚰️🍋👍 Arguments in favor of wealth/inheritance tax........................................................................................177
24.5.3 ⚰️🍋✋🚨 Arguments against wealth/inheritance tax.........................................................................................178
24.5.4 ⚰️🍋 Conclusion on wealth tax / inheritance tax.................................................................................................179
24.6 😈 Money laundering & PMLA Act..................................................................................................179
24.7 😈 Money Laundering / PMLA Challenges.....................................................................................180
24.7.1 😰 Money Laundering: Global Challenges ( वैश्विक चुनौतियां).................................................................................180

24.7.2 😰Money Laundering: Legal Challenges ( कानूनन चुनौतियां)....................................................................................180

24.7.3 😰Money Laundering: Technological Challenges ( प्रौद्योगिकी की चुनौतियां)...........................................................181

24.8 😈 Money laundering is bad why? (देश के लिए क्यों खराब है).................................................................181
24.8.1 😈 Threat to national security ( )........................................................................................181
राष्ट्रीय सुरक्षा के लिए खतरा

24.8.2 😈 Threat to human development ( )................................................................................181

मानव विकास के लिए खतरा
24.8.3 😈 Conclusion- money laundering.........................................................................................................................182
24.9😈 Black Money: Timeline of Major Events.....................................................................................182
24.9.1 😈 Black Money notable initiatives........................................................................................................................182
24.10 🍋🍋🍋🕵🏻: 🙇🏻 Tax Terrorism / Harassment.................................................................................183
24.11 📯🍋📜 Taxpayers’ Charter in 💼 Budget-2020 (करदाताओ का अधिकारपत्र).....................................184
24.11.1 📯🍋📜 (Indian) Tax Payers' Charter released in 2020-Aug............................................................................184
24.12 🍋🙇🏻: 🧜‍♂️🦸‍♂️Tax ombudsman: Indian experience .........................................................................185
24.12.1 😰problems in previous Ombudsman system (2003-19)?.................................................................................185
24.12.2 🍋🙇🏻: 🧜‍♂️🦸‍♂️Tax Ombudsman: Global experience..............................................................................................186
24.12.3 🍋🙇🏻: 🧜‍♂️🦸‍♂️ Tax Ombudsman: Conclusion / way forward ( / )............................................186
निष्कर्ष आगे का रास्ता

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24.13 Demonetization (विमुद्रीकरण यानी कि नोटबं दी)........................................................................................186
24.13.1 Demonetization – a failed experiment?...............................................................................................................186
💸
24.13.2 How did 99.30% SBN returned into banking system?...................................................................................186
💸
24.13.3 99.30% SBN returned, but Demonetization not failed experiment because: ..............................................187
💸
24.13.4 Demonetization: Impact as per Economic survey 2016-17..........................................................................188
24.13.5 🗳️🚨👨🏻‍⚖️
SC bans electoral bonds (2024-Feb)......................................................................................................188
24.14 🫡 Behavioural Economics: Improving tax collection..................................................................188
24.14.1 🍋🥛 Tax: GDP: 15th Finance Commission on how to improve it?................................................................191
24.14.2 👋👟Conclusion- Black Money............................................................................................................................192
24.14.3 ✍🏻 Mock Questions for UPSC Mains (250 words each)...................................................................................192
21 💼🍋 P ILLAR #2: BUDGET FOR MAINS

21.1 👜D EFINITIONS / MEANING- FISCAL POLICY AND BUDGET

- ‘Fiscal’ is a word derived from Greek. Means ‘basket’ and symbolizes the public purse. Fiscal
Policy is the set of Govt. decisions regarding taxation, expenditure, subsidies and other financial
operations. (कराधान, व्यय, सब्सिडी और अन्य वित्तीय सं चालन हेतु सरकार द्वारा लिए गए निर्णय)
– Budget is an annual financial statement containing estimated revenues and expenditures for the
next financial year. Budget is the primary tool used by Govt to implement its fiscal policy.

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 (अनुमानित राजस्व और व्यय का वार्षिक वित्तीय विवरण, जिसकी मदद से सरकार राजकोषीय नीति को लागू क्रियान्वित है).
– (Significance) Using fiscal policy, Govt influences the savings, investment and consumption in
an economy, to accomplish certain national goals such as income redistribution, socio-economic
welfare, economic development and inclusive growth. (बचत, निवेश और खपत को सरकार को प्रभावित
करती→ आय का पुनर्वितरण, सामाजिक-आर्थिक कल्याण, समावेशी विकास हो सकता है)

21.2 👜B UDGET IS BIGGER THAN ECONOMIC HOROSCOPE OF A NATION

बजट देश की आर्थिक कुं डली से भी बड़ा है

HOROSCOPE BUDGET
predict your future annual financial statement tells about the future income, expense and
deficit of the government.
cannot change the can change/improve the economic future of the country, through taxation
future, it can only (under finance Bill) and public expenditure (through appropriation Bill).
predict it. Then you elaborate with examples, I will not spoonfeed you every thing, it
will not help in your mental growth required for the mains answer
writing.
IMF/World Bank/ Moody’s Rating agency also Give predictions about the
India’s GDP growth. But they cannot change the trajectory unlike budget.
21.3 👜B UDGET IS MEDICAL REPORT FOR COUNTRY’S FINANCIAL HEALTH
Self explanatory: but if not understood then watch: https://youtu.be/uRKep3M1iTE

Health Indicator Budget Statements

Excess blood sugar not good / excess subsidy / revdi culture / revenue deficit not good. It
diabetes may taste sweet to some voters, but harms economic health.
During the Diarrhoea, food does Revdi/freebie culture/freebies = diarrhoea, money does not
not stay long enough in the stay long enough in the creation of infrastructure / job
intestine so body cannot absorb creation. Capital expenditure, infrastructure ke long gestation
the nutritions. projects are better for economic health.
Low White Blood Cell (WBC) weaker section need to be protected from poverty destitution
count : more chances of through adequate spending on education, health, financial
infection, less change of self- inclusion, insurance, pension, disaster management related
healing. schemes.
Body Mass Index (BMI): Obesity minimal government required. Disinvestment helps shading
not good. excess weight. ES found after disinvestment, the profitability
of the company improves.
BMI: food intake should be Income tax should not be so high that it encourages black
moderate. money and discourages investment/incentive to work.
Blood Report: Anaemia if not if not enough money spent on education, skill, IPR then youth
enough Hb/iron then blood can’t can’t bring demographic dividend.

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 Health Indicator Budget Statements
carry oxygen to organs
Constipation: food not digested in many schemes / funds, money remains unspent till end of
properly. Causing new disease March, then it doesn’t help in human development. e.g.
Nirbhaya Fund
Junk food / excess eating is not Unregulated Fiscal stimulus can cause overheating problem in
good for health. economy. (Ref Pillar4-GDP or this Youtube Video)
You can draw even more parallel comparisons, but I think this is more than enough for filling up the
word limit.

👋👟Conclusion? Thus, just like a doctor can diagnose a patient’s health by looking at the medical
report, an economist can diagnose / predict a nation’s economic health, financial well-being, &
human development potential by looking at its budget (इस प्रकार, जैसे एक डॉक्टर चिकित्सा रिपोर्ट को देखकर रोगी
के स्वास्थ्य का निदान कर सकता है, एक अर्थशास्त्री बजट को देखकर राष्ट्र के आर्थिक स्वास्थ्य, वित्तीय कल्याण और मानव विकास क्षमता का
निदान / भविष्यवाणी कर सकता है।)

22 🍋T AXATION कराधान

We won't waste time on learning theory and current about the budget tax, etc. We already done that
in prelims. We'll prepare selective topics that I find useful / important. क्योकि ये बाबूराव का स्टाइल है।

22.1 🍋T AX REFORMS IN RECENT YEARS (कर सुधार)

- Dividend Distribution Tax (DDT), Wealth Tax, Angel Tax, and equalization
Deleted some
levy (google tax) have been abolished. (लाभांश वितरण कर, सं पत्ति कर, एं जल-टेक्श,
taxes
एक्विलाइएशन लेवी को हटा दिया)
- GST introduced (2017)
- Crypto currency : 30% Capital Gains Tax and 1% TDS. (पूंजीगत लाभ कर)
Added some
- A variety of cess and surcharges (उपकर और अधिभार) have been introduced, e.g.
taxes
Health and Education cess, social welfare surcharge, Agriculture
Infrastructure and Development Cess, and Road & Infrastructure Cess.

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 - Corporation tax & income tax have been reduced. (निगम कर और आयकर में कटौती)
- A new income tax regime (NTR) has been introduced that allows tax saving
Reduced some
without locking money in long-term investments and keeps more disposable
taxes
income in the hands of people.
- Stamp duty on shares and bonds has been rationalised.
BLACK - Refer to separate section on it, given in this same handout.
MONEY
22.2 🍋T AX EXPENDITURE / REVENUE FORGONE (कर व्यय/परित्यक्त राजस्व)
(Definition) When the government provides tax breaks, exemptions, and deductions to a) boost
some sectors of the economy or b) to provide some type of relief to the taxpayers, then the
government suffers a monetary loss. This monetary loss is called Tax expenditure / revenue forgone.
(जब सरकार किसी क्षेत्र को प्रोत्साहन देने के लिए या करदाता देने के लिए करों में छू ट देती है तो अंततः सरकार का जो आर्थिक नुकसान
होता है उसे कर व्यय कहते हैं)

Some notable examples include:

– Tax holidays given in SEZ, GIFT City, to startup companies.
– Reduced capital gains tax if a person sells a home to buy a new home.
– Income tax benefits for loans taken for the purchase of a first home.
2017: reduced the Income tax rate

Income Tax आयकर Before After-2017 reform

Lowest Slab (सबसे छोटी स्लेब) 10% 5%
2019 and 2024: reduced the corporation tax on companies.

Corporation Tax निगम कर Before After Reform

Existing Indian Company (पहेले से विद्यमान भारतीय कं पनी) 30% 22%
New Indian Company setup on / after 1/Oct/2019 30% 15%
👛
Foreign companies profit in India ( Budget-24-July) 40% 35%
Impact of Corporation tax reduction: ₹1.45 trillion revenue forgone in 2019–20.

2020: introduced the new income tax regime (NTR) then 2023: made further reforms in it. NTR also
allows some of the Income Tax payers to save money compared to old tax regime. Consequently, a
person with upto ₹7 lakh rupees annual income has to pay practically ₹0 as income tax.

22.2.1 🍋 Tax expenditure: how it helps the country? (देश को कै से फायदा करता है)
– Increasing disposable income in the hands of taxpayers leads to increased demand, production,
GDP, and job creation. (खर्च करने योग्य आय बढ़ाता है)
– If a company has to pay less tax, it can utilize the saved money for business expansion, factory
development, recruitment, etc. (कं पनी बचे हुए पैसों को व्यापार विस्तार में, रोज़गार निर्माण में लगा सकती है।)

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– Providing tax breaks to foreign companies could encourage them to establish headquarters in
India, such as in Gift City (Ref Pill3-Prelims). (विदेशी कं पनियों को भारत में मुख्यालय बनाने का प्रोत्साहन)
– Women empowerment: Some state governments provide a reduction in stamp duty if the land
property is registered in the name of a female/wife/mother, etc. This also promotes female
empowerment and reduces the risk of forced eviction after domestic violence. (महिला सशक्तिकरण भी
होता है, जब राज्य सरकार ऐसे नियम बनाती है कि महिला के नाम पर पंजीकृ त किए गए मकान पर कम स्टैम्प ड्यूटी लगेगी।)
– Pollution control: Tax benefits are given on the purchase of e-vehicles. (प्रदूषण नियंत्रण,ई-वाहन)
– Reducing share market volatility: Suppose you sell a share at a profit, how much capital gains tax
do you have to pay? (शेयर बाजार में अस्थिरता कम करता है)
HOLDING PERIOD OF EQUITIES (SHARES) CGT TAX ON PROFIT
IF SOLD WITHIN 12 MONTHS OF PURCHASE 20% Short-Term Capital Gains (STCG)
IF SOLD WITHIN AFTER 12 MONTHS 12.5% Long-Term Capital Gains (LTCG)
Since the long-term capital gains tax is lower than STCG, it encourages the investor not to sell shares
unnecessarily before one year, which automatically reduces the price volatility in the Sharemarket.

22.2.2 🍋👎 Tax expenditure: negative aspects (नकारात्मक पहलू)

– Reduces the revenue collection & fiscal capacity of the union. Increases the revenue deficit / fiscal
deficit. (आमदनी को कम करता है, घाटे को बढ़ाता है.)
– Government will have to cover up the deficit through other sources of income, but there are
challenges with excess fiscal deficit. (अत्याधिक राजकोषीय घाटा समस्याए पैदा कर सकता है.)

22.2.3 🍋👋👟Conclusion: Tax Expenditure / tax breaks (निष्कर्ष)

– Although tax expenditure causes a financial loss to the government. However, it indirectly
encourages economic growth, job creation, infrastructure development, women’s empowerment,

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 and other positive impacts on the nation.
– But, we must avoid excessive tax breaks as it weakens the fiscal capacity of the union.
– The real test of policymakers lies in finding a calibrated balance between both ends. (देश के आर्थिक
वृद्धि और मानव विकास के लिए करों में छू ट देना जरूरी लेकिन एक हद से ज्यादा छू ट दे दी तो सरकार को वित्तीय नुकसान भी होता है.
इसलिए एक उचित मध्यम मार्ग ढूंढना ही नीति निर्माताओं की असल कसौटी है.)

22.3 TAXATION → GST

22.3.1 Definition / Origin of GST
- (Meaning) GST is a destination based indirect tax on consumption of goods and services. (जीएसटी
वस्तुओं और सेवाओं के खपत-स्थान पर आधारित अप्रत्यक्ष कर है।)
- (Origin) It was introduced on 1st July 2017, after the 101st constitutional amendment act.
- The GST has replaced several earlier indirect taxes that were levied by the union and states.
Notable examples are service tax, excise duty, entertainment tax, and VAT.
- (Significance) GST provides input tax credit (ITC) to the supplier/merchant, and thereby a)
reduces cascading effect of taxes and b) reduces the scope/motivation for tax evasion.

22.3.2 GST theory

- What are the functions of GST Council? What is iGST/CGST/SGST, what is zero rated export,
etc done in Prelims Handout
22.3.3 GST technological solutions to reduce tax evasion
- E-Way bill / E-invoicing
- Geotagging of the firms and cargo vehicles.
- Cross-referencing the transactions through Aadhar-PAN link.
- GSTN portal gives free downloadable accounting softwares for the small traders.
- HSN/SAC codes for the goods and services will making bills.

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22.3.4 🍋🛒😢 GST: Charms (फ़ायदे)
Note: Following matters already explained enough in Prelims Handout.

22.4 🍋🛒😢 GST: C HALLENGES (चुनौतियां)

22.4.1 🔢😢 High Rates and Multiple Slabs (उच्च दर और कई स्लैब)

➢ In, Singapore GST only 7%, Australia GST only 10%.
➢ But in India, Whereas in India we’ve too many SLABS: 5-12-18-28% slabs. ( ✋ignore
hairsplittery/pedantry over diamond etc ke 0.125% CGST walle slabs.) Critics argue, we need to
reduce the number of GST tax labs.
➢ Many daily necessities are in 18% GST slab. Indirect taxes regressive in nature & harm
purchasing power of poor. (गरीबों की खरदी शक्ति को कम करता है)
➢ Petrol, diesel, electricity: not subjected to GST regime yet, So, businessman cannot claim GST-
input credit on them. Even when crude oil prices are ⬇ in the international market, the Union
and State governments ⏫ Union excise and state VAT on the petroleum fuels just to earn more
revenue, which further aggravates the inflation and business cost. (विश्व बाजार में कच्चा तेल सस्ता होने पर
सरकार ज्यादा आमदनी के लिए उत्पाद शुल्क और वेट की दर बढ़ा देती है।)
➢ Farmers demand they should be given rebate for the GST paid on inputs.

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22.4.2 🤹‍♂️😢Frequent changes harming long term business planning
 Frequent changes in GST rates makes it difficult for the companies to plan long term business
strategies. (जीएसटी की दरों में बार बार बदलाव के चलते, उधयोगपति लंबी समयावधि के लिए रणनीति नहीं बना पाते।)
 E.g. In 2019-Sept, GST on Caffeinated beverages ⬆ from 18% → 28%. This will ⬇ sales. If any
soft-drinks company had invested in factory expansion → it would suffer. 😰
 15th Finance Commission Chairman NK Singh has also criticized frequent changes in GST rates.
https://youtu.be/hMAA4sVnx7Q?si=Bgc-CCtjA4PULsiT

22.4.3 📉💸 Random Fall in collection (आमद में कमी)

 Protectionism (सं रक्षणवाद) by USA, EU and China = they’re imposing more duties on Indian
exports→ Indian exports become expensive for foreigners → sales ⬇ → manufacturing and
service sector production declined → GST ⬇(More in 📑Pillar#3)
 Automobiles, consumer durables (TV, fridge etc), real estate ⬇ due to variety of reasons.
 Unscrupulous traders setup phony shell companies and generate fake invoices to claim input tax
credit through Circular Trading. (How it works?=Modus operandi NotIMP.)
 As a result, States are complaining that GST compensation cess amount is not released in a
timely fashion by the Union Government. → State funded welfare schemes suffer. 😰
 This problem has aggravated further during/after Corona pandemic (2020)
22.4.4 🤯Inconvenience to Small Traders (छोटे व्यापारियों के लिए असुविधा)
➢ 😭 In GSTN webportal, the traders have to deposit the GST on monthly basis, upload various
forms & invoice details, generate e-way bills. While govt has tried to keep these online forms/
mechanisms as simple as possible, but since many small traders are not proficient with
computer, excel / accounting software, internet, digital payments- GST-compliance creates
inconvenience to them, and forces them to hire full time accountants, ⏫ cost of operations.
○ 😾 (Counter: Even in erstwhile VAT system they had to upload similar things online so,
it’s not entirely new or alien system imposed upon them. Besides, they can opt for the
GST composition scheme where they have to upload things on quarterly basis instead of
monthly basis. GSTN portal also provides free accounting software to small traders so
they don’t have to spend ₹ in buying proprietary software like Tally)
➢ 😭 GSTN server crashes often so traders can’t upload things on time, and then they’ve to pay
penalty for crossing monthly deadlines. (सर्वर में बार बार तकनीकी ख़राबी आ जाती है)
○ 😾 (Counter: GST Council has reduced the late-fees, GSTN portal has been given
technical upgrades to reduce the glitches/outages.)

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➢ GST officers engage in harassment of the traders for the purpose of bribery, by threatening to
arrest them even for small mistakes.
○ Many small mistakes/non-compliances have been decriminalised / only penalty need to
be paid. Thereby, reducing the nuisance power of the officers in giving threats of arrest.
➢ 😭 Malaysia scrapped GST in 2018 due to popular uproar against it, So it will not be successful in
India either! (मलेशिया में जन आक्रोश के चलते GST को हटा दिया गया तो भारत में भी ये नहीं चलेगा।)
○ 😾 (Counter: Malaysia had subjected all the goods and services to a flat rate of 6% and
the opposition parties were blaming it for the inflation, and there were many political
dimensions to the entire controversy. Whereas in India, we have kept many daily
necessity goods at 0% to 5% GST. RBI has been successful in keeping the inflation within
2-6% CPI limit. GST is implemented through Constitutional Amendment so even if
Rahul Gandhi promises to “UNDO” this Gabbar Singh Tax, he’ll have to go for another
Constitutional Amendment to scrap the GST which is not so easy.)
22.4.5 🍋😥 GST – compensation- new demands by States (2024 क्षतिपूर्ति मुआवजा)
• Originally, GST compensation cess for States was set to end in June 2022.
• However, it has been extended until March 2026 due to Corona-related challenges.
• 2024: Now some state govts are demanding
• (A) this cess should be made permanent even beyond 2026. (इस सेस को क़ायमी कर दो) OR
• (B) this cess should be merged/integrated within the GST; e.g., the highest 28% GST slab
could become 30%. (टेक्श में ही सम्मिलित/मिश्रित कर दो) But such actions will ultimately increase the
burden of taxes on customers, thereby harming sales esp. in automobile industry. (लेकिन दोनों
ही स्थिति में एक ग्राहक पर बोझ बढ़ेगा, और ऑटोमोबाइल क्षेत्र की कं पनियों को हानि होगी।)

22.5 ✍️ GST: C ONCLUSION TEMPLATE (सार/निष्कर्ष)

(if asked to examine critically the challenges or obstacles in GST) Any new change is accompanied
by difficulties and problems at first. A tax reform as comprehensive as GST is bound to pose certain
challenges not only for the government but also for business community, tax authorities and even
common. But ultimately, <write any of below benefits> स्वाभाविक है किसी भी बड़े सुधार से शुरू शुरू में असुविधा
1. With the aforementioned features / benefits, GST will help India progress towards “ONE
NATION, ONE TAX, ONE MARKET”. एक राष्ट्र एक कर एक बाजार OR
2. Indeed, the introduction of GST is truly a game changer for Indian economy as it has replaced
multi-layered, complex indirect tax structure with a simple, transparent and technology–driven
tax regime. OR बहु-स्तरित, जटिल अप्रत्यक्ष कर सं रचना को एक सरल, पारदर्शी प्रौद्योगिकी-चालित कर व्यवस्था के बदल दिया
3. Thus, GST eliminates cascading of taxes, ⏬ operational costs, thereby ⏫ ease of doing business
and catalysing Indian economy. करों का सोपानी प्रभाव, लागत में कटौती, व्यापार में सुगमता, अर्थतंत्र उद्दीपन

22.6 ✍️🎺M OCK Q FOR MAINS FROM TAXES

1) Budget is an indicator of financial health of a country which is reflected in the statement of

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 income and expenditure. (बजट किसी देश के वित्तीय स्वास्थ्य का सं के तक है, जो आय और व्यय के विवरण में प्रतिबिंबित
होता है।)
2) Budget is more than the economic horoscope of the nation (बजट देश की आर्थिक कुं डली से भी बड़ा है)
3) (PYQ-GSM3-2018) Comment on the important changes introduced in respect of the Long-term
Capital Gains Tax (LCGT) and Dividend Distribution Tax (DDT) in the Union Budget for 2018.
कें द्रीय बजट 2018 के दीर्घकालिक पूं जीगत कर (एलसीजीटी) और लाभांश वितरण कर (डीडीटी) के सं बं ध में पेश किए गए महत्वपूर्ण
परिवर्तनों पर टिप्पणी करें। → ✋Note we NEED not prepare due to poor cost:benefit of preparing for
chartered accountant, knowledge. Q given is only for observation. After 2018, they have not
asked such a chartered accountant question.
4) (PYQ-GSM3-2013) What is meaning of the term tax-expenditure? Taking housing sector as an
example, discuss how it influences budgetary policies of the government. (कर-व्यय / परित्यक्त राजस्व
शब्द का अर्थ क्या है? आवास क्षेत्र को एक उदाहरण के रूप में लेते हुए, चर्चा करें कि यह सरकार की बजटीय नीतियों को कै से प्रभावित
करता है।)
5) (PYQ-GSM3-2020) Explain the rationale behind the Goods and Services Tax (Compensation to
States) Act of 2017. How has COVID-19 impacted the GST compensation fund and created new
federal tensions? (वास्तु एवं सेवा कर (राज्यों को क्षतिपूर्ति) अधिनियम, 2017 के तर्काधार की व्याख्या कीजिए l कोविद-19 ने
कै से वस्तु एवं सेवा कर क्षतिपूर्ति निधि (जी.एस.टी.कॉम्पेन्सेशन फन्ड) को प्रभावित और नये सं घीय तनावों को उत्पन्न किया है?) Ans.
Prelims Handout Back2Back loans
6) (PYQ-GSM2-2017) Explain the salient features of the constitution (One Hundred and First
Amendment) Act, 2016. Do you think it is efficacious enough ‘to remove cascading effect of taxes
and provide for common national market for goods and services’? १०१ वे सं विधानिक सं शोधन अधिनियम,
2016 की मुख्य विशेषताओं को स्पष्ट करें। क्या कि करों के सोपानी प्रभाव को हटाने और आम राष्ट्रीय बाजार बनाने के लिए यह
पर्याप्तरूप से प्रभावकारी है? Ans. Prelims Handout.
7) (PYQ-GSM3-2019) Enumerate the indirect taxes which have been subsumed in the Goods and
Services Tax (GST) in India. Also, comment on the revenue implications of the GST introduced
in India since July 2017. (उन अप्रत्यक्ष करों को गिनाइए जो भारत में वस्तु एवं सेवा कर में सम्मिलित किये गए हैं | भारत में
जुलाई २०१७ से क्रियान्वित (जी. एस. टी) के राजस्व निहितार्थों पर भी टिपण्णी कीजिए |) Ans. Prelims Handout.
8) Examine critically the apprehensions surrounding the GST compensation to the States. What
measures have been taken by the Union Government in this regard. (राज्यों को जीएसटी मुआवजे देने
सं बं धित आशं काओं की जांच करें। इस में कें द्र सरकार द्वारा क्या उपाय किए गए हैं?)
9) “Is GST a boon or a bane?” examine critically from State governments’ perspective. "क्या जीएसटी
एक वरदान या अभिशाप है?" राज्य सरकारों के दृष्टिकोण से गंभीर रूप से जांच करें।
10) “Is GST a boon or a bane?” examine critically from the small traders’ perspective. छोटे व्यापारी
11) With respect to ease of doing business in India, discuss the importance of following (1) E-Way
Bill System (2) Authority for Advance Ruling. भारत में व्यापार करने में आसानी के सं बं ध में, निम्नलिखित के महत्व
पर चर्चा करें (1) ई-वे बिल प्रणाली (2) अग्रिम फै सलों के लिए प्राधिकरण (Hint: given in prelims handout)

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23 FINANCE COMMISSION (वित्त आयोग)

23.1 FC – AN INTRODUCTION (एक परिचय)

- Fiscal Federalism refers to the division of responsibilities of i) taxation and ii) expenditure
between the different levels of the government. (राजकोषीय सं घवाद: कें द्र और राज्यों के बीच कराधान और खर्च की
जिम्मेदारियों का आवंटन/बटवारा/विभाजन)
- 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.. राज्य की कराधान शक्तियां कम है इसलिए वित्त आयोग कें द्र के करो से हिस्सा दिलाता 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.
23.1.1 15th vs 16th FC: Terms of Reference (TOR: विचारार्थ विषय)
Given in prelims-HDT (PCB12).

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23.1.2 15th FC: performance indicators for grants (अनुदान के लिए प्रदर्शन सूचकांक)

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 🏻
23.1.3 ✍ 15th FC: Conclusion (निष्कर्ष)
 Some state governments do not like such performance benchmark. They contend it is their
constitutional right to get the money. (कु छ राज्यों का मानना है की उन्हें बिना शर्तों के बिना प्रदर्शन मानदंड ओके पैसा
मिलना चाहिए क्योंकि वे उनका सं वैधानिक अधिकार है)
 But, Economic Survey 2016-17 had observed ‘aid-curse’ ('सहायता-अभिशाप') 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 वित्त आयोग ने दशकों तक पिछड़े राज्यों को पैसा देते किन्तु
कु शासन के चलते गरीबी उन्मूलन व् आर्थिक वृद्धि नहीं हुई. )
 The 15th FC terms of reference and conditional grants aimed 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 वित्त आयोग
प्रदर्शन आधारित प्रोत्साहन और जवाबदेही की बात करता है वो आवकार्य प्रशं सनीय है, भारत के मानव विकास और आर्थिक वृद्धि के
लिए, ये कड़वी दवा हमने पीनी होगी)
✋Error in Answer Writing: Don’t digress to unsolicited Babu-Shona type suggestions & overthinking
like “Southern states should help Northern states in their family planning programs.”
OR

23.1.4 ✍️ 15 th
FC Report: conclusion (निष्कर्ष- उनके रिपोर्ट की सराहना-की बहु बढ़िया रिपोर्ट बनाया है)
✓ Sustainable Development Goal#10: ⏬ inequality within the country. SDG-Goal#16 requires
nations to build effective, accountable and inclusive institutions at all levels. (सतत विकास लक्ष्य:
असमानता को कम करो | लोक प्रशासनके सभी स्तरो मे सं स्थानो को प्रभावी, जवाबदेह और समावेशी बनाओ)

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✓ 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-वितरण समानता के साथ और 2) प्रोत्साहन प्रदर्शन के हिसाब से मिलेगा
✓ It’ll greatly help to improve India’s human dev+ eco dev. मानव विकास और आर्थिक विकास मे मदद

23.2 FC = STATISTICAL JOB?

(PYQ-PubAD) Finance Commission in India performs the job of statistical aggregation. Comment
(भारत में वित्त आयोग सांख्यिकीय एकत्रीकरण का कार्य करता है)

- First of all, I don’t fully agree with the statement because the work of finance commission is
much more than mere statistical aggregation.
- Yes, it has to collect the data related to following indicators for designing, i) tax-devolution
formulas and ii) grants formulas. Such as
Indicator is used in designing tax devolution
Indicator is used in designing grants
formula
- GSDP, poverty - Frequency of natural disasters
- Population, total fertility rate - Revenue deficit of the state
- Tax collection / tax efforts - Education, judicial case pendency, rural
- Area, Environment ecology roads etc.
- Number of ULB / panchayats
- healthcare indicators.
👋👟Conclusion? Thus, finance commission has to collect variety of statistical data sets before
recommending tax devolution formula and grants. So, we can say it performs the job of statistical
aggregation.

23.3 🕵️‍♂️(🍋🧔⚖️👨‍🦲)⏰ FC: G IVING PERMANENT STATUS (स्थायी दर्जा देना)

Figure 1: CAG-UPSC जेसी कायम चालू रहेने वाली सं स्था बनाओ FC को- तभी ठीक से काम होगा- शक्तिकांता
(Introduction: Origin) Shaktikanta Das, the Governor of RBI and a member of the 15th Finance
Commission (FC), had 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 वित्त आयोग नहीं बनता पुराने वित्त आयोग की ऑफिस खुली रखनी चाहिए)

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23.3.1 🤦‍♂️👎Arguments against giving permanent status to FC (विरोध में तर्क )
 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.
(वर्तमान व्यवस्था योग्यरूप से चल रही है, नए सं वेधानिक प्रयोगो की कोई जरूरत नही )
 Both NITI Aayog and GST Council provide a platform for cooperative federalism (सहकारी सं घवाद
की चर्चा के लिए मंच उपलब्ध).
 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 व्यर्थ 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. (वित्त आयोग पूरा समय राज्यों की फरियाद सुनता रहेगा और कें द्र सरकार उसी के जवाब देने में लगी रहेगी)
23.3.2 🙋‍♂️👌Argument in favour of giving permanent status to FC (पक्ष में तक)
 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 में एक बार होते हैं फिर भी चुनाव आयोग की ऑफिस 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 स्टाफ का तबादला हो जाता है)
 Such permanent body can keep a constant vigil (अविरत सतर्क ता) on the Union and State finances &
revenue collections and hold them accountable for any transgressions or lethargy (उल्लंघन / सुस्ती).
[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.
पंचवर्षीय योजनाओं का दौर खत्म हो चुका है, इसी हमने 5-5 वर्ष के मानसिकता से निकलकर निरंतर निगरानी रखनी चाहिए

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23.3.3 ✍ 🏻 Conclusion: give permanent status to FC or not? (निष्कर्ष)
 ✅(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 में बेहतर निगरानी, जवाबदेही और शिकायत निवारण के लिए वित्तआयोग
को स्थायी दर्जा 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.
(वर्तमान प्रणाली सुयोग्य, फ़िलहाल कोई परिवर्तन अनावश्यक)

23.4 🍋⚖️ V ERTICAL FISCAL IMBALANCE- MEANING (ऊर्ध्वाधर वित्तीय असं तुलन)
• A fiscal imbalance occurs when a government’s future debt obligations don’t align with its
future revenues.
• A vertical fiscal imbalance occurs when income does not match expenditures for different
government levels, i.e., Union, States, Local Bodies. (जब सरकार की अलग अलग स्तर पर आमदनी और
ख़र्च के बीच असं तुलन हो तो ऊर्ध्वाधर वित्तीय असं तुलन का निर्माण होता है.)
• It makes the States heavily dependent on the Union government for funds. (राज्यो की कें द्र पर
निर्भरता बढ़ती है.)
23.4.1 🍋⚖️ Vertical Fiscal Imbalance : Factors Responsible
Union States

Due to electoral implications, most states do not

impose taxes on agricultural income, even for large
N/A
farmers. (चुनावों की चिंता में राज्य सरकार कृ षि आय पर आयकर लेती
नहीं।)

The Union earns over 20 lakh crore from Constitution prohibits States from demanding more
direct taxes such as income tax and than Rs. 2500 as professional tax per year. (राज्यो के
corporation tax. (आयकर और निगम कर जैसे व्यावसायिक कर पे सं वैधानिक मर्यादाएं है कि ढाई हज़ार रुपये से ज़्यादा ले
प्रत्यक्ष करों से कें द्र सरकार मोटी रक़म कमाता है।) नहीं सकते।)

The Union earns over ₹ 2 lakh crore from States do not have this power. (आयात निर्यात पर सीमा शुल्क
customs duty on imports and exports. लगाने का हक़ के वल के न्द्र का है।)

Union’s cess, surcharge not shared with

the states. Over the years, the Union has
Problems related to the timely release of GST
created multiple cesses and surcharges to
compensation cess by the Union. (जीएसटी मुआवजे के साथ
capture a significant chunk of revenue for
विविध समस्याए है। )
itself. (कें द्र विविध उपकर और अधिभार में से राज्यों को
हिस्सा नहीं देता।)

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23.4.2 🍋⚖️😥 Vertical Fiscal Imbalance : Negative outcomes (नकारात्मक परिणाम।)
• Neglect of civic infrastructure, roads, schools, hospitals, etc. (सड़क विद्यालय अस्पताल जैसी बुनियादी
सुविधाओं की कमी / अवहेलना)
• Lengthy court litigations between unions and the states regarding taxation powers. (कराधान की
सत्ताओ के बारे में कें द्र और राज्यों के बीच मुकदमेबाज़ी।)
• e.g. (A) Do state governments have a right to tax mining activity? Can we consider royalty as
a tax? (क्या खनन पे राज्य अलग से कर/टैक्स माँग सकता है?)
• (B) Do state governments have the same right to charge cess on companies producing
hydroelectricity? (जल विद्युत पैदा करने वाली कं पनियों पर क्या अलग से राज्य कर माँग सकता है?) (Ref: Prelims
Pillar#2A2/GST for more.)
• Such litigations create business uncertainty for companies in the mining and hydroelectricity
sectors and also affect foreign investor sentiment. (यह ऐसी मुक़दमेबाज़ी से व्यापार में सुगमता कम होती है,
विदेशी निवेशक प्रोत्साहित नहीं होता।)
• Delays in the recruitment of employees in the state services. Staff shortages are damaging the
efficiency of public administration, especially for grassroots functionaries such as Aasha
workers, primary teachers, forest guards, constables, etc. (राज्य सेवाओं में नियमित रूप से भर्ती प्रक्रिया
नहीं हो पाती, प्रशासनिक कार्य दक्षता कम होती है।)
• Shortage of police personnel → Rising incidents of rapes, atrocities on SC/ST, etc. ( पुलिस बल
की कमी के चलते बलात्कार, कमजोर वर्गों पे अत्याचार में बढ़ोतरी।)
• Recruitment of contractual (non-permanent) staff on very low fixed salaries. Wages are not
revised/increased for a very long time, even after rising inflation. Then the employees have to
go on strikes/protests/court litigations. e.g. (अस्थाई कर्मियों को बहुत कम वेतन पे रखा जाता है, बिना आंदोलन
और मुकदमेबाजी के उनकी तनख़्वाह/वेतन में बढ़ोतरी नहीं होती।)
Approx. salary Before After (2024)
Gujarat Teachers ~ ₹ 16,000 ~ ₹ 21,000
Telangana Aasha workers ~ ₹ 7500 ~ ₹ 10,000
With such a low salary, it is difficult to imagine a government employee working with full motivation
and a corruption-free mindset= direct negative consequences on good governance and a corruption-
free administration. (इतने कम/मामूली वेतन पे रखे गये सरकारी कर्मी से भ्रष्टाचार-मुक्त आचरण की उम्मीद/अपेक्षा मुश्किल है।)
23.4.3 🍋⚖️✍️ Conclusion: (निष्कर्ष)
• As per the 7th schedule of the Indian Constitution, the responsibility of law and order, public
health, and agriculture rests with the States.
• Education is in the concurrent list, but, due to the large population of India, States are
responsible for doing the heavy lifting by running government schools and colleges.
• Without adequate fiscal resources, it is difficult for the States to deliver high-quality services
in these areas of health, education, and policing.
• Need to address the problem of Vertical Fiscal Imbalance on war footing for SDG goals.
(क़ानून-व्यवस्था, सार्वजनिक-स्वास्थ्य, कृ षि और शिक्षा की ज़्यादातर ज़िम्मेदारी राज्य सरकारों के सर पर है। बिना पर्याप्त वित्तीय सं साधनों के
बाद वे इसे नहीं उठा पाएं गे और सतत् विकास लक्ष्यों को हासिल करने में बाधा खड़ी होगी।)

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–
23.5 ✍ 🏻M OCK QUESTIONS FOR MAINS: FINANCE COMMISSION
1) (PYQ-PubAD) Finance Commission in India performs the job of statistical aggregation.
Comment (भारत में वित्त आयोग सांख्यिकीय एकत्रीकरण का कार्य करता है)
2) (PYQ-GSM2-2021) How have the recommendations of the 14th FC enabled the States to
improve their fiscal position? [भारत के 14वें वित्त आयोग की सं स्तुतियों ने राज्यों को अपनी राजकोषीय स्थिति सुधारने में
कै से सक्षम किया है ?] [We’ll not solve it because 14th FC too outdated.]
3) Compare and contrast the horizontal tax devolution approaches of 14th FC vs 15th FC क्षेतिज कर
अंतरण के सिध्द्धांतों मे 14वा और 15वे वित्तआयोग की समानता व भिन्नता की तुलना कीजिए (Ref: Prelims handout)
4) Enumerate the grants suggested by 15th FC. अनुदानों की सूची दीजिए।
5) Examine the rationale behind adding performance based indicators in the grants given by the
15th finance commission. (15वें वित्त आयोग द्वारा दिए गए अनुदान में प्रदर्शन आधारित सं के तक जोड़ने के पीछे के तर्क की
जांच करें।)
6) “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 परिषद के गठन ने वित्त
आयोग की भारत में राजकोषीय सं घवाद के सं तुलन में भूमिका को कम कर दिया है।" क्या आप सहमत हैं? अपने तर्क को उचित
ठहराएं ।)
7) Examine critically the merits of giving a permanent status to the finance commission. वित्त आयोग
को स्थायी दर्जा देने (के सुझाव) की योग्यता की गंभीर समीक्षा कीजिए.
8) Discuss the factors and consequences of Vertical Fiscal Imbalance in India. (भारत में ऊर्ध्वाधर वित्तीय
असं तुलन के कारकों और परिणामों की चर्चा करे।)

24 😈B LACK MONEY (काला धन, कर चोरी)

(DATA#1) Since 2016, India’s Tax : GDP has remained mostly stagnant at 11%. It is lowest among
the BRICS Nations. Hardly 2.3% of Indian voters are income tax payers. (भारत का 11% कर:जीडीपी अनुपात
बहुत कम/मामूली है अन्य देशों के मुक़ाबले। मुश्किल से 2% मतदाता ही आयकर भरते है।)

(DATA source: GOOGLE AI) Brazil Russia India China South Africa
% of voters who pay income tax 20% 35% 2.3% 7.1% 24%
Tax to GDP Ratio (approx) 28% 17% 11% 22% 25%
24.1.1 (DATA) voters vs tax payers
Indicator Crores
Total population more than 140 crores
Total Voters 96.8 crores (2024-May)
Income Tax returns (ITR) form filers 8.18 crores (2023-Dec) = roughly 8% of voters
Income Tax Payers 2.23 crores (2023-March) = 2.3% of voters.

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 (Recall Prelims-Pillar2A1 for more on bcoz 70% of ITR filers have zero tax liability- due to
NTR-OTR) tax rebates (NTR-upto 7 lakh; OTR-upto 5 lakh)

24.2 🍋🥛 T AX: GDP – WHY LOW IN INDIA (भारत का कर:जीडीपी अनुपात खराब क्यों है?)
1) Lack of civic sense among people that paying taxes is a basic duty. (देश के प्रति कर्तव्य की भावना नहीं)
2) Presence of informal sector, parallel economy, cash based economy provides ample
opportunities of hiding income. (नगदी आधारित अनौपचारिक अर्थतंत्र)
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 की ज्यादातर सं पत्ति चुनिंदा लोगों के हाथों
में कें द्रित, जो लालच में 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 में खामियां)
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 जिनसे वास्तव में नाम मात्र की आमदनी होती थी)
8) Too many exemptions/ high level of rebate e.g. practically 0% income tax for annual income
upto ₹7 lakh under the New Tax Regime (NTR)

24.3 📘📘E CONOMIC SURVEY ON TAXATION AND FISCAL CAPACITY (वित्तीय क्षमता)

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. (लोकतंत्र एक अनुबं ध है, कराधान एक आर्थिक गोंद है)

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- 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 2.3% of Indian voters are pay Income Tax (23% is desirable, as per our level of
development against BRICS nations. भारत के के वल 2.3% 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 की जवाबदेही कम होती है)
24.4 😈D EFINITIONS RELATED TO BLACK MONEY
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 की कर-पात्र है, किन्तु कर-अधिकारियों से छिपाई गई.
Parallel Economy The economy that runs on black money. (समानांतर अर्थव्यवस्था जो काले धन पर चलती है)
👺Tax Evasion When person hides income or transaction from tax authorities, and thereby
(कर अपवंचन evades paying taxes. It’s illegal. (कराधान योग्य आय या लेन देन को सरकार से छिपाना)
कर-चोरी)
🤵🍸Tax Avoidance When person discloses his income and transactions to tax authorities but uses
(कर परिहार legal loopholes to avoid paying taxes. E.g. Bollywood stars who register digital
media companies in Tax Havens. It may not be illegal in every case, but still
कर-टालना)
unethical. (कराधान योग्य आमदनी या लेनदेन को सरकार से छिपाना नहि, लेकिन क़ानून मे छिद्रों के
इस्तेमाल द्वारा कर को टालना जाना। )
🍸Tax Haven Is a country that demands little taxes from foreigners and offers legal
(कर स्वर्ग) loopholes for Tax Avoidance & opportunities for Tax Evasion. E.g.
Liechtenstein, Mauritius, Marshall Islands, Cayman Islands, Panama, Nauru,
एसा देश जहां कर टालने /
Vanuatu etc. These countries are geographically small, & without viable
छिपाने के लिए बहुत अवसर
economy. So they offer such mechanism to attract foreign investors and
मिलते हैं
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 प्राप्त 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.
Organizations  Enforcement Directorate (प्रवर्तन निदेशालय), Income Tax Department,
Financial Action Task Force (Grey List), etc.

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24.4.1 🤵‍♂️🍸 Tax on the rich / billionaires (अमीरों पर कर )
India Counter Argument
A 2% wealth tax on all the billionaires of the world
India abolished wealth tax (2016) would generate nearly $250 billion from less than
सं पत्तिकर को हटा दिया गया था 3,000 individuals- says an organisation European
Union Tax Observator. (2023)
India abolished Estate duty (Inheritance Samsung Group Chairman Lee Kun-hee dies. His

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 India Counter Argument
tax) in 1985 family members had pay a world-record inheritance
विरासत-कर को हटा दिया गया था tax of $10.3 billion to the Govt of South Korea (2010)
Tax on agriculture income falls under Megastar Billionaire Amitabh Bachchan (registered as
the domain of state government but they farmer in Uttar-Pradesh) should be subjected to such tax
usually do not charge it to keep farmers on his agricultural income. (अमिताभ जैसे अमीर किसानों की कृ षि
happy. आय पर तो कर लगना चाहिए.)

24.5 ⚰️🍋 W EALTH TAX / INHERITANCE TAX / ESTATE DUTY

(Origin) During the 2024 Lok Sabha election campaign, there have been debates around
1) conducting a wealth survey and undertake an exercise to redistribute the same. (सं पत्ति सर्वेक्षण करेंगे
और लोगों में उसके पुनर्वितरण के लिए क़दम उठाएं गे)
2) introducing an inheritance tax similar to USA. (अमेरिका की भाँति एक विरासत-कर लाएं गे)
data:
- A 2% wealth tax on all the billionaires of the world would generate nearly $250 billion from less
than 3,000 individuals, says the organization European Union Tax Observatory (2023).
- Samsung Group Chairman Lee Kun-hee died. His family members had to pay a world-record
inheritance tax of $10.3 billion to the Government of South Korea (2010).
24.5.1 ⚰️🍋 Wealth Tax: Past XP & its Abolition
Estate Duty /inheritance Wealth-tax Gift Tax
tax/death tax विरासत कर सम्पति-कर भेंट-कर
From 1953 onwards: when when owner is alive, he
From 1958: Gift tax
property owner dies, his legal has to pay this tax.
whenever person received
What? heirs pay this tax. Rate: 1% wealth tax on
gift valued more than
Rates: 5%-40% depending on assets of Rs 30 lakh and
Rs.”X”.
value of property/estate above
Abolished Budget-1985 Budget-2015 Budget-1998
when? (FM VP Singh) (FM Arun Jaitley) (FM-Yashwant Sinha)
Reason for abolishing these taxes?
• The revenue collection was very low, and the administrative cost of collection was very high.
so they were called 'paper-taxes'. (काग़ज़ी कर, जिसमें न कोई ख़ास आमदनी नहीं, और इसे वसूलने का प्रशासनिक
ख़र्चा काफ़ी ज़्यादा।)
• Scope of evasion by undervaluation of property. (सम्पति का मूल्य कम दिखा के कर चोरी।)
24.5.2 ⚰️🍋👍 Arguments in favor of wealth/inheritance tax
• In the last decade, minimum wages have not increased corresponding to the level of
inflation, so imposing more taxes on the middle class will only destroy their purchasing
power. A wealth tax on the rich is justified because we cannot increase the income tax on the

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 middle class. (विगत दशक में महँगाई के अनुपात में न्यूनतम वेतन में ख़ास बढ़ोतरी नहीं हुई है इसलिए मध्यम वर्ग पर ज़्यादा
आयकर उचित नहीं होगा अमीरों पर ज़्यादा टैक्स लगाना ज़रूरी।)
• The poor pay indirect taxes such as GST/VAT/Excise. We should not increase their hardship
by increasing these taxes further. (ग़रीब पहले ही अप्रत्यक्ष करों में दबा है)
• In the USA, UK, and Australia, rich people are subjected to a tax slab of ~40%. In India, they
are subjected to 30%. So we should increase it. (प्रथम विश्व में अमीरों पे उच्चतम 40%आयकर लगता है भारत
में 30% ही लगता है।)
• The Government of India requires more financial resources to expand facilities of higher
education, health, infrastructure, etc., so it needs to collect more taxes. (उच्च शिक्षा स्वास्थ्य बुनियादी
और सं रचना आदि के लिए सरकार को अधिक वित्तीय सं साधनों की ज़रूरत है)
24.5.3 ⚰️🍋✋🚨 Arguments against wealth/inheritance tax
• Socialist models of income/wealth redistribution have failed miserably in Argentina,
Venezuela, Cuba, etc. They discourage private entrepreneurship → low production →
inflation, unemployment, outward migration towards the USA, etc. Therefore, private
property rights need to be respected. (सं पत्ति और आय का पुनः वितरण करने के लिए समाजवादी मॉडल जिन जिन
देशों में अपनाए गए वे असफल हुए हैं चाहे आर्जेन्टीना वेनेज़ुएला या क्यूबा क्योंकि वहाँ पर निजी उद्यमी हतोत्साहित होते हैं,
उत्पादन में गिरावट, महंगाई में बढ़ोतरी, बेरोज़गारी, विदेशों में पलायन बढ़ता है)
• Previous governments have already removed estate duty, wealth tax and gift tax because of
the difficulty in their collection and the scope for evasion. So there is no need to restart the
failed experiments. (पिछली सरकारों ने वैसे भी इन घरों को हटा दिया था क्योंकि इसमें आमदनी कम होती थी और
करचोरी ज़्यादा. ऐसे प्रयोग जो पहले ही और सफल हो चुके हैं उन पर पुनः विचार की ज़रूरत नहीं है।)
• Past failure in imposing land ceiling—because landowners redistributed the land among
their children/relatives/benami persons to avoid getting into the ceiling limit—indicates
similar mischief is likely. Yes, today with the facilities of digital surveillance, cross-
referencing of Aadhar/PAN vs. landownership, etc., it is difficult for a person to evade/avoid
tax, but it will still increase the number of litigations in court. (एक ज़माने में जब लोगों की ज़मीन
मालिक की पर सरकार ने सीलिंग /उच्च सीमा लगाने की कोशिश की, तब भी ज़मीन मालिकों ने अपनी सं पत्ति को रिश्तेदारों में/
बेनामी लोगों में बाँट दिया, और क़ानूनी दाँव पेच लगाके ख़ुद को बचा लिया था।)
• Even in the USA, the rich manage to evade such wealth/inheritance tax by setting up trust
funds and transferring assets into them. (अमेरिका में भी अमीर लोग एक अलग ट्रस्ट बना कर उसमें अपनी
सं पत्ति को स्थानांतरित कर के इस टैक्स/कर से बच जाते है।)
• A person already paid tax on their income when they were alive. After their death, if the
same income is taxed again, then it’s double taxation on the same income, which is not
justified. (हम अपने जीवन काल के दौरान व्यक्ति ने अपनी आय पर आयकर भर दिया है, और सम्पति में निवेश किया है।
अब दोबारा उसके मरने पर उसी सं पत्ति पर टैक्स माँगा जाए तो ये दोहरा कराधान है, उचित नहीं है।)
• Laffer Curve: A high level of direct taxes will either make people lazy/demotivated to work
harder / encourages tax evasion. (प्रत्यक्ष कर की उच्च दरें लोगों को आलसी बनाती है, मेहनत करने के लिए
प्रोत्साहित नहीं करती. कर चोरी के लिए प्रोत्साहित करती है)

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 • If rich people are taxed heavily, they may change citizenship to tax-haven nations, as many
Indian businessmen and film stars have already done. (अमीर भारत की नागरिकता त्यागकर विदेशी कर-
स्वर्गों की नागरिकता अपना लेंगे। कई उद्योगपति और फ़िल्म सितारों ने ये पहेले ही किया हुआ है।)
• Violates Adam Smith’s Canon of Certainty: because when a person will die is not certain. So
it does not help the government in projecting the annual revenue and budgeting exercise.
(व्यक्ति तब मरेगा और तब उसकी सं पत्ति पर हमें टैक्स मिलेगा इसकी कोई निश्चितता नहीं । इसलिए यह कर सरकार को भविष्य
के आयोजन में मदद नहीं करती। यह कर ऐडम स्मिथ की आदर्श कराधान की ‘निश्चितता के सिद्धांत’ का उल्लंघन करता है।)
• Without addressing the core issues of corruption, subsidy leakage, and shoddy quality of
infrastructure/public works (e.g., Bihar bridges collapse, Delhi airport pillar collapse, etc.),
the money collected through such inheritance/wealth tax will only line/fatten the pockets of
politicians, bureaucrats, and contractors. (जब तक भ्रष्टाचार, सब्सिडी रिसाव और सड़क पुल निर्माण में घटिया
सामान के प्रयोग को रोका नहीं जाएगा। तो इस प्रकार के टैक्स से मिले धन से के वल राजनेता, अफ़सर और ठेके दारों की जेबें ही
भरेंगी। देश/ग़रीब का कोई कल्याण नहीं होगा।)
• Tax on agricultural income falls under the domain of state governments, but they usually do
not charge it to keep farmer-voters happy. Megastar billionaire Amitabh Bachchan
(registered as a farmer in Uttar Pradesh) should be subjected to such tax on his agricultural
income first! (वोट बैंक को ख़ुश रखने के चक्कर में राज्य सरकारें जो अमीर किसानों पर आयकर नहीं लेती, पहले वो काम तो
शुरू करें।)
24.5.4 ⚰️🍋 Conclusion on wealth tax / inheritance tax
• Favour: Considering the above factors, we should impose taxes on the wealth and
inheritance of the rich to deal with the problem of rising inequality in the country. We can
adopt the model suggested by Economist Thomas Piketty, i.e., (1) 2% wealth tax on people
earning over ₹10 crore, (2) 33% inheritance tax upon their death. (हाँ उक्त दलीलों को ध्यान में रखते
हुए और देश में बढ़ती हुई और समानता को देखते हुए इसे लागू करना चाहिए। 1000,00,000 से अधिक रुपये कमाने वाले
अमीरों पर २% वेल्थ-टेक्स/सं पति कर और उनकी मृत्यु पे ३३% विरासत कर लगाना चाहीए- जैसा कि अर्थशास्त्री थॉमस पिके टी
ने सुझाव दिया।)

• Against: Considering the above challenges & failed experiments in the past, we should
explore other ways to expand both the tax base and the revenue collection first, before
imposing such new taxes. (उक्त चुनौतियां और भूतकाल में विफल हुए प्रयोगों को देखते हुए हमने इस प्रकार के नई दरों
को लागू करने से पहले अन्य तरीक़ों से कर-आमदनी को बढ़ाने की कोशिश करनी चाहिए।)

24.6 😈M ONEY LAUNDERING & PMLA ACT

- (Definition) money laundering is the process of converting black money into white. (काले धन को
वैध या सफ़े द बनाने की क्रिया को धन शोधन कहते हैं)
Prevention of Money Laundering Act (PMLA) 2002, aims to combat it using following ways:

- PMLA increases the power of enforcement directorate, financial intelligence unit and other
agencies.
- PMLA requires the financial institutions (Bank NBFC etc) to report suspicious transactions to

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 the respective financial regulators (RBI, SEBI etc) / government. (सं दिग्ध लेनदेन के बारे में सूचना देनी होगी)
- Allows Indian government to enter in international agreements against money laundering.
- Minimum 3 years to max 10 years jail. And then as per Representation of the People Act (RPA
Act)- 2 year jail = person is banned from contesting elections for six years. (न्यूनतम 3 साल की जेल यानी
अपने आप ही वो भविष्य में 6 साल तक चुनाव नहीं लड़ पाएगा)
- Confiscation / attachment of the property. (सं पत्ति की जब्ती)

24.7 😈M ONEY LAUNDERING / PMLA CHALLENGES

24.7.1 😰 Money Laundering: Global Challenges ( वैश्विक चुनौतियां)

- Financial action task force was setup to combat money laundering and tax evasion.
- 2008: Pakistan was first added in the grey list of FATF (and then again in 2018)
- And accordingly, it was subjected to certain international sanctions / restrictions until it fixed its
legal-administrative loopholes that allowed money laundering / terror finance.
- 2022: Pakistan removed from grey list after complying with all the regulations of FATF.
- Thus over a decade of international pressure was required to just fix one country that was
supporting money laundering. And there are still many other countries / tax havens left in the
grey list and black list. (एक दशक तक अंतरराष्ट्रीय दबाव बना रहा तब जाकर पाकिस्तान ने धन शोधन और आतंकी
वित्तपोषण के खिलाफ़ सख्ती दिखाई)
- Tax haven nations provide opportunities for money laundering. Coordinated global action
required but many multinational companies themselves are beneficiaries of tax haven, so they
could be doing some lobbying / political funding in the developed nations to avoid strict
sanctions. (बहुराष्ट्रीय कं पनियां खुद ही कर-स्वर्ग में मुख्यालय बनाती है तो इसमें आश्चर्य नहीं होगा कि विकसित देशों में वे
राजनीतिक पक्षों को चुनावी फं डिंग देकर ऐसे कर-स्वर्ग देशों के खिलाफ़ हो रही सख्त कार्रवाई को धीमा करवातें होंगे)

24.7.2 😰Money Laundering: Legal Challenges (कानूनन चुनौतियां)

- If the accused person runs away to foreign country difficult to get him extradited ( विदेश से प्रत्यार्पण)
- Cases drag for years / Accused person runs away to foreign country / dies in jail before revealing
real masterminds e.g. Abdul Karim Telgi. ( न्यायिक विलंब)

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- income tax act exempts political parties, religious bodies and charitable institutions from paying
income tax. → it creates an ecosystem for money laundering through donation.
- Nexus/need of black money to win election = deter political parties to be as a strict against
money laundering compared to strictness with terrorism. (चुनाव जीतने के लिये काले धन की जरूरत)

24.7.3 😰Money Laundering: Technological Challenges (प्रौद्योगिकी की चुनौतियां)

- Crypto currency transactions difficult to trace. (Although now crypto-companies also required
to report suspicious transaction to the government, but difficult to enforce this on the companies
located outside India.)
- Darknet / self deleting encrypted messages / iPhone auto-erase / variety of chatting apps etc.
have made the communication more easy for the criminals and difficult for the law enforcement.
(गुप्त मैसेज प्रणालियाँ)

24.8 😈M ONEY LAUNDERING IS BAD WHY? (देश के लिए क्यों खराब है)
24.8.1 😈 Threat to national security (राष्ट्रीय सुरक्षा के लिए खतरा)
- Augments the power of terrorist, criminals and corrupt people.
- Revenue loss to exchequer = Government cannot spend enough on infrastructure, health,
education, human development schemes. Consequently, (सरकार शिक्षा स्वास्थ्य आदि दुरुस्त न कर पाए)
- Unemployed Youth in Naxal/LWE/JK/NE areas easy prey to anti-India propaganda = threat to
India’s sovereignty, national integrity, security. (बेरोजगार युवाओं को देश के खिलाफ़ भड़काया जाए)
Literacy Census-2011
All India 74%
Manipur 79%
Mizoram, Sikkim, Nagaland, Tripura over 80%
- So North East youth is educated, but there is lack of jobs / biz opportunities → pushes some of
them towards the Anti-India Propaganda / extremism / migrate towards other cities/nations.
24.8.2 😈 Threat to human development (मानव विकास के लिए खतरा)
- low tax collection = low quality of education and infrastructure in government schools and
hospitals → middle-class family becomes more reliant on private sector and then middle class
feels cynical about paying taxes and look for opportunity to do tax evasion for themselves. (मध्यम
वर्ग मी निराशावाद)
- low tax collection = teachers recruited on fixed salary contracts and made to do many other tasks
such as election, NSO surveys, welfare scheme registration, vaccination drives etc. Since the
government cannot recruit dedicated employees for each of these tasks. = Quality of education
surfers. (पैसों की किल्लत के चलते शिक्षकों से अनेकों काम करवाया जाए इसलिए शिक्षा का स्तर गिरता है)
- WHO recommends India to spent 5% of GDP on healthcare. Yet we struggle to reach even 2.5%

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- Human development index cannot improve. Vicious cycle of poverty continues.
24.8.3 😈 Conclusion- money laundering
- Thus, Money laundering presents a significant challenge to India’s national security, the
government’s fiscal capacity, and citizens’ human development. The government has
implemented commendable/appreciable legal and administrative reforms to combat this issue.
However, the battle is not yet won, and we must continue to make every effort to address it
thoroughly. (मनी लॉन्ड्रिंग भारत की राष्ट्रीय सुरक्षा, सरकार की वित्तीय क्षमता और नागरिकों के मानव विकास के लिए एक
महत्वपूर्ण चुनौती प्रस्तुत करती है। सरकार ने इस समस्या से निपटने के लिए सराहनीय/प्रशं सनीय कानूनी और प्रशासनिक सुधार लागू
किए हैं। हालाँकि, लड़ाई अभी जीती नहीं गई है, और हमें इसे पूरी तरह से सं बोधित करने के लिए हर सं भव प्रयास जारी रखना चाहिए)

24.9 😈B LACK MONEY: TIMELINE OF MAJOR EVENTS

Vodafone-CGT Case @SC 2012
Undisclosed Foreign Income & Assets Act 2015
Benami Transactions Prohibition Act 2016
Google Tax 2016
Demonetization 8 Nov 2016
Direct Tax Code (DTC) Task Force 2017
GAAR 1 Apr 2017
GST starts 1 Jul 2017
⏬
Corporation Tax (25-30% → 15-22%) 2019
PM CARES Fund 2020
Vivad se Vishwas Scheme for Direct Taxes 2020
DIVIDEND DISTRIBUTION TAX abolished 2020
Income tax: Optional Slab (=NTR-OTR system) 2020
15th FC 1 Apr 2020
Tax Payers' Charter Aug 2020
- Global Minimum Tax 2021

- Retrospective tax abolished (Vodafone/Cairn)

Bitcoin pe 30% CGT, 1% TDS 2022
Abolition of Angel Tax, Google Tax 2024-Jul
24.9.1 😈 Black Money notable initiatives
To combat tax evasion To combat tax avoidance
(Refer to Prelims Handout for more) (Refer to Prelims Handout for more)
- Prevention of money laundering act 2002 (धनशोधन General Anti-Avoidance Rules
निवारण अधिनियम) (GAAR) to give Additional powers to
the Income Tax officials.
- Undisclosed Foreign Income & Assets Act (UFIA-
2015) (अज्ञात विदेशी आय तथा परिसं पत्ति अधिनियम)

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 To combat tax evasion To combat tax avoidance
(Refer to Prelims Handout for more) (Refer to Prelims Handout for more)
- Benami Transactions Prohibition Act (BTPA- 1988,
2016) ((बेनामी लेनदेन (निषेध) अधिनियम:)
Demonetisation-2016 & Operation Clean money Retrospective Tax (but undone after
Vodafone / Cairn case)
TDS and TCS on various transactions Global Minimum tax on companies
engaged in Base erosion and profit
shifting (BEPS)
Limits on cash transactions:
1) Ban on Transactions of 2 lakh /or above in cash
2) 2% TDS if More than ₹1 crore cash withdrawn from
your own account.
Electoral bonds to reduce the influence of cash in
election
Tax Information Exchange Agreement with Switzerland
and other countries.

24.10 🍋🍋🍋🕵🏻: 🙇🏻 T AX TERRORISM / HARASSMENT

 (Definition) Tax Terrorism / Harassment happens when tax authorities put undue pressure on
an honest taxpayer to pay more taxes or imposes disproportionate amount of penalty or jail for
minor offenses. Critiques have used this word in context of Vodafone & Cairn cases. (ईमानदार
करदाता पर टैक्स अधिकारी अनावश्यक दबाव / उत्पीड़न करे- उसे कर आतंकवाद या कर उत्पीड़न कहते हैं)
 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.
Legal reforms  Authority for Advance Rulings on GST and Transfer Pricing.
 Abolished Retrospective Tax Amendment (related to Vodafone/CAIRN
CGT Demand)
 Ease in Paying taxes: variety of apps / portals : Aaykar Setu, ICEGATE
(Customs), ATITHI Mobile App (Customs) etc.
ICT reforms
 Faceless assessment and appeal.
 Document Identification Number (DIN: दस्तावेज़ पहचान सं ख्याक)

Surrender / - Vivad se Vishwas Scheme for Direct Taxes

settlement - Sabka Vishwas L.D.S Scheme for indirect taxes, namely Service tax and
Schemes: excise duty.
- Dispute Resolution Committee under Income Tax Act.
Misc.  Tax payer’s charter (करदाताओ का अधिकारपत्र) (Refer to Next Section)

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  Rajaswa Gyan Sangam workshops organised by CBDT & CBIC for idea
exchange between policy makers and senior tax officers. (विचार/सुझावों के आदान
प्रदान के लिए)
 2016: Modi gave them RAPID Mantra: R for Revenue, A for Accountability,
P for Probity, I for Information and D for Digitization.
 Tax Ombudsman (Refer to next section)

24.11 📯🍋📜 T AXPAYERS’ CHARTER IN 💼B UDGET-2020 (करदाताओ का अधिकारपत्र)

A citizens’ charter (नागरिक अधिकारपत्र) 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 में/पारंपरिक रूप
से कर-अधिकारी "करदाता को अच्छी सेवा देना" अपनी जिम्मेदारी नहीं समझते थे. घमं ड और बेरुख़ी से काम करते 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. हालांकि आधुनिक विश्व में इस प्रकार के
अधिकार पत्र और कानून बनाए गए हैं
1986 UK charters for taxpayers (करदाताओं का अधिकार 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.
(नागरिकों का अधिकार पत्र)
1988 USA Taxpayers’ Bill of Rights (करदाताओं के अधिकारों का विधेयक/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 (शिकायत निवारणतंत्र)
are available to him= ⬇taxpayer’s harassment (करदाता का उत्पीड़न)
24.11.1 📯🍋📜 (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. निष्पक्ष, विनम्र और पेशेवर तरीके से व्यवहार
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.नियम/शिकायत दर्ज कराने सम्बन्धी जानकारी

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4. We will collect only correct amount of tax. (के वल सही राशि ली जाएगी। ज़बरन ज़्यादा राशि नहीं ली जाएगी।)
5. We will respect your privacy and confidentiality निजता व् गोपनीयता का सम्मान
6. We will hold our officers accountable for their wrongful actions. अधिकारिओ को गलत कार्यो की सजा देंगे
7. You can appoint a representative / tax lawyer to file replies/complaints//cases on your behalf.
मामले दर्ज करने के लिए एक प्रतिनिधि / कर वकील नियुक्त कर सकते हैं।
8. We'll reduce cost of compliance (e.g. number of forms to be filled, photocopies to be submitted
etc) अनुपालन की लागत कम करेंगे- फ़ालतू में दस्तावेज़ो की दर्जनों कॉपी निकालके फ़ॉर्म के साथ जोड़ने पड़े- एसे तमाशे बं द करेंगे.
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 निम्न अपेक्षा करता है की वे ईमानदार
रहें, समय में करों का भुगतान करें, सटीक रिकॉर्ड रखें, सूचित रहें, समयसर नोटिस का जवाब दें)

24.12 🍋🙇🏻: 🧜‍♂️🦸‍♂️T AX OMBUDSMAN: INDIAN EXPERIENCE

‘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- नागरिकों की शिकायतों के निवारण के लिए)

2003 Direct Tax Ombudsman In India Started (प्रत्यक्ष करों के लिए कर-लोकप्रहरी/शिकायत निवारण
अधिकारी)
2011 Indirect Tax Ombudsman In India Started (अप्रत्यक्ष करों के लिए)
2019 Above posts were abolished (दोनों पदों को समाप्त कर दिया)

😰
24.12.1 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 स्वयं
भी कर-अधिकारी थे, कानूनन रूप से कोई सता नहीं दी गई थी, इसलिए अन्य अधिकारियों के खिलाफ निष्पक्ष रूप 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 निपटान)
 They could only offer a token compensation upto ₹5,000 to victim. Thus, failed to deliver any
result and both the posts were abolished in 2019. (पीड़ित को मुआवजे में बहुत मामूली रकम दे पाते)
At present, Direct Tax Payer 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 विभाग के अंदर ही है, इसलिए निष्पक्षता मुश्किल)
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

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 Mode Organisation 😰Challenges?
System) Under Ministry of resolution. (सभी मं त्रालयों की सभी किस्म की शिकायतें देखता
personnel and training. है इसलिए काफी देरी से जांच होगी)

24.12.2 🍋🙇🏻 🧜 🦸 : ‍♂️ ‍♂️Tax Ombudsman: Global experience

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.) बिना किसी के दबाव
में या बिना किसी हितों के टकराव में निष्पक्ष रुप से अपना कार्य कर सकें ऐसे कानूनी प्रावधान/सुरक्षा दी गई

24.12.3 🍋🙇🏻 🧜 🦸
: ‍♂️ ‍♂️Tax Ombudsman: Conclusion / way forward (निष्कर्ष/आगे का रास्ता)
 Tax Terrorism / Non-resolution of tax grievances discourage the taxpayers from being honest in
future. This encourages tax evasion, black money and parallel economy. (ईमानदार करदाता के साथ
अन्याय हो तो वह भविष्य में कर भरने के प्रति उदासीन हो जाता है)
 International experience suggests a tax ombudsman, with powers to investigate, punish &
compensate, is necessary for enforcing taxpayers' charter. (अंतरराष्ट्रीय अनुभव से प्रतीत होता है कि करदाता के
अधिकार पत्र का अनुपालन वास्तविक रुप से करने के लिए एक कर-लोक प्रहरी होना चाहिए- जिसके पास जांच, सजा और मुआवजा
देने की सता हो)
 Need of the hour is to set up this institution through a separate law, punitive powers, so as to
ensure its impartiality and independence and effectiveness. (अग्रता क्रम से सरकार ने एक अलग कानून द्वारा
इसे बनाना चाहिए ताकि निष्पक्ष स्वतंत्र और प्रभावी रूप से कार्य हो सके .)

24.13DEMONETIZATION (विमुद्रीकरण यानी कि नोटबंदी)

 2016: ₹500 and ₹1000 notes demonetized. 2023: SC upheld the legality of this demonetization.
Refer to Prelims Handout or Win23 series.
 2023: ₹2000 notes gradual withdrawal by September 30, 2023.
 Let’s go back and focus on demonetization of 500-1000 notes.
24.13.1 Demonetization – a failed experiment?
According to government, ₹ 3 lakh crores of Indian black money is stored in 500-1000 Notes (=2%
of GDP).

After the demonetisation, ideally this much black money should have been destroyed but 99% of
these specified bank Notes (SBN) came back in the system. So, how is it possible?

💸
24.13.2 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:

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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 खच्चर/टट्टू के रूप में इस्तेमाल किया)
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). (फर्जी तरीके से आए को कृ षि स्त्रोत से आया हुआ बताया)
6. SBN deposited in shell companies & shown as income from (fictitious) sale and invoices.
7. SBN donation to trust, temples & political parties with backdated receipts (and those entities are
exempted from Income Tax on their income.)…. And so on

💸
24.13.3 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).

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✓ 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).
24.13.4💸Demonetization: Impact as per Economic survey 2016-17
Area 😢 Short Term Challenges 🥰 Long Term Benefits (दीर्घ अवधि 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 की Prices & rents of houses should . ⏬
बिक्री में गिरावट) 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 (गिरावट) Improvement (आर्थिक वृद्धि दर में बढ़ोतरी)
Self-Study for Mains IF YOU'VE TIME: Economic survey 2016-17 Vol1ch3, table 2 “impact of
demoneti..” to improve vocabulary.
24.13.5 🗳️🚨👨🏻‍⚖️
SC bans electoral bonds (2024-Feb)
Covered in Prelims Handouts 1C.

24.14 🫡B EHAVIOURAL ECONOMICS: IMPROVING TAX COLLECTION

 Behavioural economics is a field of study that combines economics and psychology.
 It aims understand how and why people make decisions in the real world.

TRADITIONAL ECONOMICS BEHAVIORAL ECONOMICS

पारम्परिक अर्थशास्त्र स्वभाव सं बंधी अर्थशास्त्र
people are rational actors who make decisions People are not always rational. They are
based on a cost-benefit analysis / profit motive. influenced by a variety of factors, such as
(लोग नफे नुकसान के मुताबिक/ अनुसार निर्णय लेते हैं) emotions, biases, and social norms. (भावनाओं,
पूर्वाग्रहों और सामाजिक मानदंडों के अनुसार निर्णय लेते हैं. हमेशा
तार्किक और न्यायोचित निर्णय नहीं लेते)

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 Plato said, “What is honoured in a country, is cultivated there.” Indians join military because not
merely for salary, but because serving in the armed forces is considered ‘honourable’. (भारतीय युवा
फौज में जाते हैं सिर्फ तनख्वाह के लिए नहीं बल्कि इसलिए क्योंकि वह सम्माननीय नौकरी है)
 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.” (व्यावहारिक अर्थशास्त्र के सिद्धांतों द्वारा कर अनुपालन मैं बढ़ोतरी कराएं . कर भरना एक सम्माननीय कर्तव्य बने)
 (Definition) Tax Morale: it is the motivation of taxpayers to pay taxes. (कर सं बं धी नैतिक मनोबल)
 When tax morale is ⏬ → motivation for tax evasion ⏫.

Table 1: Tax Morale is affected by two types of fairness

Fairness Vertical Fairness Horizontal Fairness
निष्पक्षता (उर्ध्वाधार निष्पक्षता क्षैतिज) (क्षैतिज निष्पक्षता)
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.

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 Fairness Vertical Fairness Horizontal Fairness
निष्पक्षता (उर्ध्वाधार निष्पक्षता क्षैतिज) (क्षैतिज निष्पक्षता)
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, ES19 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.

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 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

24.14.1 🍋🥛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.
(विविध प्रकार के लेनदेन को टीडीएस/टीसीएस के दायरे में लाया जाए ताकि कर चोरी पर निगरानी 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 फॉर्म भरने वाले 40% लोग असल में आयकर नहीं जमा करते क्योंकि…..)
o the taxable income was very low (आयकर योग्य आय बहुत कम है)
o they are hiding / underreporting income (आयकर फॉर्म में कु छ आमदनी को छु पाया जा रहा है)
o because of tax-deduction & tax rebates. (वह विविध प्रकार के टैक्स डिडक्शन, टैक्स रिबेट का लाभ लेकर
अपने आयकर दायित्व 0 कर देते हैं)
o So, Government needs to address this. इसलिए व्यवस्था में सुधार जरूरी
Income Tax Minimum Maximum Income Tax Minimum Maximum
Rate Rate
UK 20 45 Brazil 7.5 27.5
USA 10 37-40 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. (राज्य सरकारों को व्यवसाय कर वसूलने की
सं विधान में जो सीमा दी गई है उसे ढाई हजार से बढ़ाकर 12000 प्रति वर्ष किया जाए)
 Presently GST has four slabs 5-12-18-28. Rationalize it into just three slabs for more efficient
administration & relief to taxpayers (जीएसटी की दरों की सं ख्या को कम किया 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 ⏬ decrease 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 वित्त प्रबं धन के लिए परोक्ष करो
पर अपनी निर्भरता को थोड़ा कम करना चाहिए, प्रत्यक्ष करो का व्याप बढ़ाना चाहिए)

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24.14.2 👋👟 Conclusion- Black Money
To become a developed nation by 2047, India has to invest huge amount of money in education,
skill, infrastructure and healthcare. Government cannot do this, with a poor tax:GDP ratio.
Therefore, the need of the hour is to address the issue of black money and money laundering
urgently/on war-footing. (2047 तक एक विकसित राष्ट्र बनने के लिए भारत को शिक्षा, कौशल, बुनियादी ढांचे और स्वास्थ्य सेवा
में भारी मात्रा में धन निवेश करना होगा। खराब कर:जीडीपी अनुपात के साथ सरकार ऐसा नहीं कर सकती। इसलिए, समय की मांग है कि
काले धन और मनी लॉन्ड्रिंग के मुद्दे को तत्काल/युद्ध स्तर पर सं बोधित किया जाए)
🏻
24.14.3 ✍ Mock Questions for UPSC Mains (250 words each)
1. (PYQ-GSM3-2021) Discuss how emerging technologies and globalisation contribute to money
laundering. Elaborate measures to tackle the problem of money laundering both at national and
international levels. चर्चा कीजिए कि किस प्रकार उभरती प्रोध्योगिकियाँ और वैश्वीकरण मनी लॉन्ड्रिंग की समस्या में योगदान
देते है। इनसे निपटने के लिए राष्ट्रीय व वैश्विक स्तर पे उपायों को विस्तृत कीजिए।
2. (PYQ-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 लॉन्ड्रिंग देश की आर्थिक सं प्रभुता के लिए एक
गंभीर खतरा है। इस खतरे को नियंत्रित करने के लिए क्या कदम उठाए जाने की आवश्यकता है?
3. Despite being a trillion dollar economy, India's tax to GDP is quite low. Suggest ways to remedy
this contrast. (ट्रिलियन डॉलर की अर्थव्यवस्था होने के बावजूद, भारत का कर:जीडीपी अनुपात काफी कम। इस विषमता को हल
करने के उपाय सुझाए).
4. Suggest innovative measures to improve the Tax:GDP ratio for India. (भारत के कर:जीडीपी अनुपात को
बेहतर करने के लिए नवीन उपाय सुझाए)
5. Discuss the significance of taxpayers charter & tax ombudsman in the tax administration of
India. (भारत के कर-प्रबं धन में करदाताओं के अधिकार पत्र और कर-लोकप्रहरी/शिकायत निवारण अधिकारी के महत्व की चर्चा)
6. What is retrospective taxation? Discuss provisions in Taxation Laws (Amendment) Act, 2021 in
this regard. (पूर्वप्रभावी/भूतलक्षी कराधान क्या है? इस सं बं ध में कराधान सं शोधन क़ानून 2021 में क्या प्रावधान किए गए हैं?)
💡Refer to Prelims Handout.
7. Discuss the rationale behind of a global minimum tax. How will it help countries like India?
(वैश्विक न्यूनतम कर की शुरूआत के पीछे तर्क पर चर्चा करें। यह भारत जैसे देशों की कै से मदद करेगा?) 💡Prelims Handout.
8. Examine critically the debate around the reintroduction of wealth tax and inheritance tax. (सं पत्ति
कर और उत्तराधिकार/विरासत कर को पुनः लागू करने के सं बं ध में चल रही बहस की आलोचनात्मक जांच कीजिए।)

📑 Next Handout: Pillar2CD- Subsidies, Disinvestment, Deficit

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