Q91. Identify the correct pair regarding the Rajasthan State Finance Commission:
Fiscal Federalism and Finance Commission: RAS Prelims MCQs
99 RAS Prelims MCQs on fiscal federalism and the Finance Commission cover the constitutional financial provisions, the sharing of taxes between the Union and States, and the GST framework. The Articles on the Consolidated Fund and Contingency Fund, the duties of the Finance Commission and the criteria it uses are asked as facts and statements.
Practice questions based on the RPSC RAS Prelims syllabus. They follow the exam pattern but are not past-paper questions.
Showing 91–99 of 99 questions
Q92. Which of the following does NOT constitute a part of the non-tax revenue of a State Government?
Explanation
Non-tax revenue for states includes interest receipts, royalties from minerals, and dividends from public enterprises. These are funds earned from services or assets rather than through taxation. In contrast, stamp duties and registration fees are categorized as a state’s own tax revenue. Understanding this distinction is important for analyzing the diverse ways in which state governments fund their operations and development projects.
Q93. What is the best characterization of a "Cess" in the context of Centre-State financial relations?
Explanation
A cess is a temporary tax levied for a specific purpose, such as education or infrastructure. Unlike regular taxes, the proceeds from a cess are not part of the divisible pool shared with the states. This allows the Union to target funding toward national priorities but has been a source of tension, as it reduces the overall share of revenue available for state devolution.
Q94. The increasing reliance of the Union Government on cesses and surcharges in recent years has led to which of the following effects?
Explanation
As the Union Government increasingly relies on cesses and surcharges, the portion of total tax collection that must be shared with states decreases. Because these levies are kept entirely by the Centre, the "effective" devolution rate falls below the percentage recommended by the Finance Commission. This trend has led to concerns among states about the shrinking size of the divisible revenue pool.
Q95. Which statement accurately reflects the status of agricultural income tax in India’s fiscal federal structure?
Explanation
Taxation of agricultural income is a power reserved exclusively for the States under the Indian Constitution. While the Union levies tax on non-agricultural income, it cannot tax farm earnings. Most states have chosen not to exercise this power due to socio-political reasons. This distinction remains a key feature of the fiscal division of powers, even after the implementation of the GST regime.
Q96. Consider Statement I and Statement II regarding local body grants.
Statement I: The 15th Finance Commission has made it mandatory for local bodies to have both provisional and audited accounts online to receive tied grants.
Statement II: This condition aims to ensure financial transparency and accountability at the grassroots level.
Statement I: The 15th Finance Commission has made it mandatory for local bodies to have both provisional and audited accounts online to receive tied grants.
Statement II: This condition aims to ensure financial transparency and accountability at the grassroots level.
Explanation
The 15th Finance Commission introduced strict transparency requirements for local bodies. To receive tied grants, these bodies must now maintain and publish both provisional and audited accounts online. This condition is designed to improve financial accountability at the grassroots level. By making funding conditional on transparency, the commission aims to strengthen the administrative capacity and integrity of India’s rural and urban local governments.
Q97. Which of the following statements regarding the State Finance Commission (SFC) is incorrect?
Explanation
The State Finance Commission and the Central Finance Commission operate at different levels. The SFC focuses on revenue sharing between the state and its local bodies, while the CFC manages the distribution of national taxes among the states. The SFC does not replace the CFC; rather, both are essential components of the multi-tiered fiscal framework that ensures resources reach every level of governance.
Q98. The mechanism of "Ways and Means Advances" (WMA) is utilized in fiscal federalism to:
Explanation
Ways and Means Advances are short-term credit facilities provided by the Reserve Bank of India to the government. This mechanism helps states manage temporary gaps between their revenue receipts and expenditure needs. It is not a source of long-term funding but a liquidity management tool that ensures the smooth functioning of state treasuries without the need for constant, unplanned market borrowing or sudden spending cuts.
Q99. A State government decides to launch an ambitious welfare scheme providing free electricity, which strains its budget. According to fiscal federal principles and the FRBM Act, what is the most immediate constraint the state will face if it attempts to fund this through unlimited borrowing?
Explanation
State governments are subject to fiscal discipline frameworks that limit their annual borrowing to a specific percentage of their Gross State Domestic Product. This prevents excessive debt accumulation that could destabilize the national economy. If a state launches expensive welfare schemes, it must manage the expenditure within these strictly defined and monitored constitutional and statutory borrowing limits to ensure long-term fiscal sustainability and stability.Answer key for these questions
| Q | Correct answer |
|---|---|
| 91 | (b) 1st Rajasthan State Finance Commission -- Chaired by Krishna Kumar Goyal |
| 92 | (c) Stamp duties and registration fees |
| 93 | (d) A specific-purpose tax levied by the Centre and fully retained by the Union |
| 94 | (a) A reduction in the States’ effective share of gross central tax revenues |
| 95 | (b) It falls under the State List, allowing States to levy it at their discretion |
| 96 | (a) Both Statement I and Statement II are correct |
| 97 | (a) It replaces the Central Finance Commission’s role in allocating national grants to the state completely. |
| 98 | (c) Help states tide over temporary mismatches in their cash flow accounts |
| 99 | (d) The state’s borrowing is capped at a fixed percentage of its annual GSDP |
Key facts from Fiscal Federalism and Finance Commission
- The President appoints the Chairman and members of the Finance Commission; Article 280(3) lists its duties, including the distribution of net proceeds of taxes.
- Article 266 provides for the Consolidated Funds; the Contingency Fund is at the disposal of the President.
- Article 268 covers Union-levied duties that are collected and kept by the States.
- Horizontal fiscal imbalance among States is addressed by the tax devolution formula recommended by the Finance Commission; revenue deficit grants help States that cannot meet basic needs.
- The 15th Finance Commission dropped the criterion of the 1971 population for horizontal devolution.
- The GST Council is an example of cooperative federalism; the GST Compensation Cess was extended to March 2026 to repay back-to-back loans of the Centre.
Frequently asked questions
How many RAS Prelims practice MCQs are there on Fiscal Federalism and Finance Commission?
This page has 99 practice MCQs on Fiscal Federalism and Finance Commission (Indian Economy). Each has the correct answer, and most have an explanation.
Who appoints the Finance Commission?
The President of India, under Article 280, every five years or earlier. The Commission recommends how the net proceeds of taxes are shared between the Union and the States and among the States.
Which Article lists the duties of the Finance Commission?
Article 280(3). It sets out the duties, including recommending the distribution of the net proceeds of taxes between the Union and the States and the principles that govern grants-in-aid to States.
What kind of federalism does the GST Council show?
Cooperative federalism. The Council, with the Union Finance Minister as chairperson and State Finance Ministers as members, takes decisions on GST rates and rules jointly, and the votes of the Centre and States are weighted.