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 51–60 of 99 questions
RAS PrelimsIndian Economy · Fiscal Federalism and Finance Commission
Q51. Consider the following regarding the Integrated Goods and Services Tax (IGST): I. It is an additional tax levied exclusively to compensate states for revenue loss. II. It is levied on inter-state trade or commerce and imports. III. The revenue collected under IGST is apportioned between the Union and the States. Which of the combinations given above is correct?
Explanation
IGST is levied on inter-state trade and imports to ensure that tax follows the destination of consumption. The revenue collected is shared between the Union and the state where the goods or services are consumed. It is not an additional compensation tax but a mechanism to manage the flow of credit across state borders, simplifying tax compliance for businesses operating nationally.
RAS PrelimsIndian Economy · Fiscal Federalism and Finance Commission
Q52. Which of the following taxes was subsumed under GST?
Explanation
The introduction of GST led to the subsuming of several indirect taxes. Most notably, the State-level Value Added Tax on the sale of goods was integrated into the new regime. However, certain items like alcoholic liquor for human consumption and petroleum products remain outside GST, allowing states to continue levying excise duties and VAT on these specific categories independently.
RAS PrelimsIndian Economy · Fiscal Federalism and Finance Commission
Q53. Which of the following statements about the Goods and Services Tax Network (GSTN) is incorrect?
Explanation
The Goods and Services Tax Network is a technological backbone that provides the IT infrastructure for GST registration, filing, and settlement. While it facilitates data sharing and manages the clearing house for IGST, it does not have administrative powers like auditing or tax enforcement. Those functions remain with the respective Central and State tax authorities who use the network’s data.
RAS PrelimsIndian Economy · Fiscal Federalism and Finance Commission
Q54. Find the odd one out with reference to items currently kept outside the purview of GST:
Explanation
Most fuels, including natural gas, aviation turbine fuel, and high-speed diesel, are currently kept outside the GST purview. This allows the Centre and States to continue levying their own taxes on these products. In contrast, edible oils are fully integrated into the GST regime with a specific tax rate, highlighting their status as essential goods within the unified national tax framework.
RAS PrelimsIndian Economy · Fiscal Federalism and Finance Commission
Q55. Given below are two statements, one labeled as Assertion (A) and the other as Reason (R): Assertion (A): The Goods and Services Tax (Compensation to States) Act provided for compensation to the States for a period of five years from the rollout of GST. Reason (R): States feared a loss of revenue due to the shift from an origin-based taxation system to a destination-based consumption tax.
Explanation
States were concerned that shifting to a destination-based consumption tax like GST would lead to revenue losses, particularly for manufacturing-heavy regions. To address this, the GST Compensation Act promised to make up for any shortfall for five years. This guarantee was crucial for gaining the political support of the states, ensuring a smooth transition to the new tax system.
RAS PrelimsIndian Economy · Fiscal Federalism and Finance Commission
Q56. The GST Compensation Cess is primarily levied on which category of goods?
Explanation
The GST Compensation Cess is specifically levied on demerit and luxury goods to generate funds for compensating states. Items such as tobacco, aerated drinks, and high-end motor vehicles attract this cess in addition to the standard GST rate. This ensures that the burden of compensation is placed on non-essential consumption while protecting the revenue interests of the states during the transition.
RAS PrelimsIndian Economy · Fiscal Federalism and Finance Commission
Q57. Consider the following statements regarding the GST compensation mechanism: I. The base year for calculating the revenue of a State was fixed as 2015-16. II. A projected growth rate of 14% per annum was assumed for calculating state revenue. III. The compensation period ended permanently in June 2022 with no extensions for any purpose. IV. To meet the shortfall during the COVID-19 pandemic, the Centre borrowed funds and passed them to States as back-to-back loans. Which combination represents the correct statements?
Explanation
To calculate compensation, state revenues from 2015-16 were grown at a projected fourteen percent annually. When the COVID-19 pandemic caused revenue shortfalls, the Centre provided back-to-back loans to the states to cover the gap. Although the compensation period was for five years, the cess collection was extended to repay these loans, even though the direct compensation to states ended in June 2022.
RAS PrelimsIndian Economy · Fiscal Federalism and Finance Commission
Q58. The collection of GST Compensation Cess was extended until March 2026. What is the primary purpose of this extension?
Explanation
The GST Compensation Cess collection was extended until March 2026 so that the Centre could repay the principal and interest on the back-to-back loans it took to compensate the States for their GST revenue losses.
RAS PrelimsIndian Economy · Fiscal Federalism and Finance Commission
Q59. Match the type of scheme or fund in List I with its funding pattern or feature in List II:
Type of Scheme/Fund
Funding Pattern/Feature
A. Central Sector Schemes
i. 100% funded by the Union Government
B. Centrally Sponsored Schemes
ii. Jointly funded by the Centre and States
C. Finance Commission Grants
iii. Statutory devolution not requiring matching State funds
D. Public Account Funds
iv. Moneys held by the Government as a banker
Choose the correct answer:
Explanation
Central Sector Schemes are fully funded by the Union, while Centrally Sponsored Schemes involve shared funding between the Centre and States. Finance Commission grants provide statutory transfers that do not require matching funds. The Public Account holds money as a banker for the people. Understanding these different funding patterns is essential for analyzing the fiscal relations and resource management within India.
RAS PrelimsIndian Economy · Fiscal Federalism and Finance Commission
Q60. Consider Statement I and Statement II regarding Centrally Sponsored Schemes (CSS). Statement I: Core of the Core schemes under CSS include umbrella programs for the most vulnerable groups, such as MGNREGA. Statement II: The funding pattern for Core of the Core schemes requires mandatory 50% contribution from all States including Special Category States.
Explanation
Core of the Core schemes, like MGNREGA, target the most vulnerable populations. While they are a priority, the funding pattern is not a flat fifty percent for everyone. For Special Category States, the Union usually contributes a much higher proportion, often ninety percent. This recognizes the limited revenue capacity of these states and ensures that essential social safety nets are maintained nationwide.
Answer key for these questions
Q
Correct answer
51
(b) II and III only
52
(c) Value Added Tax (VAT) on sales of goods
53
(b) It possesses the authority to audit businesses and enforce tax recovery directly.
54
(d) Edible Oils
55
(a) Both A and R are true and R is the correct explanation of A.
56
(c) Luxury items and demerit goods including tobacco products and motor vehicles
57
(b) I, II and IV only
58
(d) To repay the principal and interest on back- to-back loans taken by the Centre
59
(a) A-i, B-ii, C-iii, D-iv
60
(c) Statement I is correct but Statement II is incorrect
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.
