Q71. Which of the following is an original criterion developed under the Gadgil Formula to designate a State as a Special Category State?
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 71–80 of 99 questions
Q72. Arrange the following developments related to fiscal federalism in correct chronological order:
I. Implementation of the Goods and Services Tax
II. Introduction of the Gadgil Formula for plan assistance
III. Establishment of NITI Aayog
IV. Recommendations of the 14th Finance Commission increasing tax devolution to 42%
Select the correct sequence:
I. Implementation of the Goods and Services Tax
II. Introduction of the Gadgil Formula for plan assistance
III. Establishment of NITI Aayog
IV. Recommendations of the 14th Finance Commission increasing tax devolution to 42%
Select the correct sequence:
Explanation
Fiscal federalism in India has evolved through several key milestones. The Gadgil Formula for plan assistance was established early on. Much later, the 14th Finance Commission recommended a record increase in tax devolution. This was followed by the creation of NITI Aayog in 2015 and the nationwide implementation of the Goods and Services Tax in 2017, transforming the country’s economic landscape.
Q73. Which of the following statements about the current status of Special Category States (SCS) is incorrect?
Explanation
The 14th Finance Commission did not recommend granting Special Category Status to additional states. Instead, it focused on increasing the general tax devolution to forty-two percent for all states. This shift was intended to provide states with more untied funds, reducing the need for the discretionary assistance associated with SCS, though existing beneficiaries in the North-East and Himalayan regions continue to receive support.
Q74. A state frequently demands "Special Category Status" citing low infrastructural development and historical disadvantages. Why has the Union Government consistently denied new grants of this status post-2015?
Explanation
Following the 14th Finance Commission’s recommendations, the Union Government stopped granting Special Category Status to new states. The commission argued that the significant increase in tax devolution from thirty-two percent to forty-two percent gave all states enough fiscal space to manage their own developmental needs. This move aimed to replace discretionary, status-based assistance with a more uniform and substantial formulaic tax sharing.
Q75. Consider the following statements about a State’s own tax revenues:
I. States have the power to levy taxes on agricultural income.
II. Stamp duties and registration fees form a major component of a State’s own tax revenue.
III. State excise duty on alcoholic liquor for human consumption is exclusively levied by the States.
IV. Property tax is generally devolved by States to local bodies.
V. The implementation of GST significantly expanded the independent taxation powers of the States over services.
Which of the combinations given above represents correct statements?
I. States have the power to levy taxes on agricultural income.
II. Stamp duties and registration fees form a major component of a State’s own tax revenue.
III. State excise duty on alcoholic liquor for human consumption is exclusively levied by the States.
IV. Property tax is generally devolved by States to local bodies.
V. The implementation of GST significantly expanded the independent taxation powers of the States over services.
Which of the combinations given above represents correct statements?
Explanation
States possess several independent revenue sources, including taxes on agricultural income, stamp duties, and registration fees. Excise duty on liquor remains a critical source of income outside the GST regime. While property taxes are important, they are often devolved to local bodies. However, the introduction of GST actually limited states’ independent power to tax many services, as these were unified under the new regime.
Q76. Match the taxes in List I with their Constitutional assignments in List II:
Choose the correct answer:
| Taxes | Constitutional Assignment |
|---|---|
| A. Corporation Tax | i. Exclusively Union Tax |
| B. Taxes on agricultural income | ii. Exclusively State Tax |
| C. Tolls | iii. Levied by State, usually collected by Local Bodies |
| D. Customs Duties | iv. Levied and retained by Union |
Explanation
The Constitution divides taxing powers to ensure both levels of government have resources. Customs and corporation taxes are managed by the Union. Taxes on agricultural income and liquor are reserved for the States. Tolls are often collected by local bodies under state authority. This division helps manage the specific administrative and economic requirements of both the national and local levels of governance.
Q77. Consider Statement I and Statement II regarding State finances.
Statement I: State excise on liquor and petroleum products are crucial for State finances because they are outside the GST framework.
Statement II: States frequently alter the Value Added Tax (VAT) on petrol and diesel to manage sudden revenue shortfalls.
Statement I: State excise on liquor and petroleum products are crucial for State finances because they are outside the GST framework.
Statement II: States frequently alter the Value Added Tax (VAT) on petrol and diesel to manage sudden revenue shortfalls.
Explanation
Because liquor and petroleum products are currently outside the GST, they remain vital for state fiscal autonomy. States can independently adjust excise duties and VAT on these items to respond to revenue needs. This flexibility is particularly useful during economic downturns or when there are sudden gaps in the state budget, allowing for immediate and localized fiscal adjustments.
Q78. Which of the following is NOT a major challenge to expanding a State’s own tax revenue base?
Explanation
Expanding a state’s own tax base is challenging due to the large informal economy and political reluctance to tax sectors like agriculture. Furthermore, GST has limited the range of goods and services that states can tax independently. However, central devolution is designed to supplement, not replace, state efforts, and the Finance Commission even uses tax effort as a criterion to reward states for revenue efficiency.
Q79. Find the odd one out with reference to taxes that a State Government in India can independently levy and modify rates for today:
Explanation
Today, states can independently set rates for VAT on fuels like diesel and excise on liquor. They also manage land revenue and various entertainment taxes. However, services like telecommunications are covered under the unified GST regime. Decisions on these rates are made collectively by the GST Council, so no individual state can unilaterally modify the tax rates for telecommunication or other integrated services.
Q80. Which constitutional amendments provided the framework for fiscal decentralisation to local bodies in India?
Explanation
The 73rd and 74th Constitutional Amendment Acts of 1992 were transformative for fiscal decentralization. They mandated the creation of Panchayats and Municipalities as a third tier of government. Crucially, these amendments required states to share revenue with these local bodies and established State Finance Commissions to oversee this process, ensuring that grassroots governance has the financial means to function effectively.Answer key for these questions
| Q | Correct answer |
|---|---|
| 71 | (a) Hilly and difficult terrain |
| 72 | (a) II, IV, III, I |
| 73 | (a) The 14th Finance Commission explicitly recommended extending SCS status to Bihar and Odisha. |
| 74 | (d) The 14th Finance Commission subsumed plan assistance into higher tax devolution |
| 75 | (a) I, II, III and IV only |
| 76 | (a) A-iv, B-ii, C-iii, D-i |
| 77 | (a) Both Statement I and Statement II are correct |
| 78 | (a) Excessive devolution of funds from the Central Finance Commission reducing state effort |
| 79 | (b) General Service Tax on telecommunication |
| 80 | (b) 73rd and 74th Amendments |
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.