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Free CA Business Economics Practice Questions & Answers
501 exam-style Business Economics questions. Pick your answer, hit Check answer, and see the worked solution — free to start, no signup.
100% free · No login to startQuestion 481
The ABILITY TO PAY principle of taxation holds that:
Select an option first.
Correct answer: D — Taxes should be levied in proportion to the taxpayer's capacity to bear them
Explanation: Ability to pay underlies progressive income tax and rests on the idea that a rupee taken from a rich man causes less sacrifice than one taken from a poor man. The rival BENEFIT principle, described in distractor A, works for services such as toll roads but fails for defence, whose benefit cannot be apportioned.
Question 482
A tax is progressive when:
Select an option first.
Correct answer: A — The rate of tax rises as the taxable base rises
Explanation: Under a progressive tax, higher incomes bear not merely a larger amount but a larger PROPORTION - which is how income tax slabs work. A proportional tax keeps the rate constant, and a regressive one takes a falling proportion as income rises, as indirect taxes on necessities tend to do. Progression rests on ability to pay.
Question 483
A fundamental difference between public and private finance is that:
Select an option first.
Correct answer: A — Government adjusts its INCOME to its expenditure, while an individual adjusts expenditure to income
Explanation: A household must live within its means; a government first determines what public purposes require and then raises the revenue. Governments also have compulsory powers of taxation, a longer horizon, and objectives of welfare rather than profit - differences that shape the whole subject.
Question 484
Which of the following is a method of redeeming public debt?
Select an option first.
Correct answer: D — A sinking fund, conversion, or repayment from budget surpluses
Explanation: A sinking fund sets aside sums annually for eventual repayment; conversion replaces high-interest debt with lower-interest debt; surpluses repay directly. Repudiation, though it extinguishes the debt, destroys the government's credit and is not counted as a legitimate method.
Question 485
A tax is regressive when:
Select an option first.
Correct answer: C — The rate falls as income rises, so it takes a larger PROPORTION from the poor
Explanation: An indirect tax on a necessity is regressive in effect: the same rupee amount is a larger share of a small income than of a large one. Regressive taxation conflicts with ability to pay, which is why essential goods are commonly exempted or taxed at concessional rates.
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Question 486
Which of the following is CAPITAL expenditure by government?
Select an option first.
Correct answer: A — Construction of a national highway
Explanation: Capital expenditure creates an asset or reduces a liability - building infrastructure, acquiring machinery, repaying debt. Salaries, interest and subsidies are recurring costs that create nothing durable, so they are revenue expenditure. The distinction drives the revenue deficit calculation.
Question 487
Which of the following is a CAPITAL receipt of the government?
Select an option first.
Correct answer: B — Borrowings and recovery of loans
Explanation: Capital receipts either create a liability, as borrowing does, or reduce an asset, as the recovery of a loan or the sale of a public undertaking does. Revenue receipts neither create a liability nor reduce an asset, and taxes are the leading example. The test is the effect on the government's balance sheet.
Question 488
The revenue deficit is:
Select an option first.
Correct answer: A — Revenue expenditure minus revenue receipts
Explanation: A revenue deficit means the government is borrowing to meet its day-to-day running costs, adding to debt without creating any asset - which is why it is regarded as more troubling than a fiscal deficit incurred for capital projects. Distractor B defines the FISCAL deficit and distractor C the primary deficit.
Question 489
The scope of public finance covers:
Select an option first.
Correct answer: B — Public revenue, public expenditure, public debt and financial administration
Explanation: Public finance studies the whole of the government's economic activity - how it raises money, how it spends it, how it borrows, and how the process is administered and controlled. Restricting it to taxation alone, as distractor A does, leaves out the expenditure side, which is where the policy purpose actually lies.
Question 490
Under India's GST, a supply of goods made WITHIN a state attracts:
Select an option first.
Correct answer: A — CGST and SGST together
Explanation: An intra-state supply is taxed by both the centre and the state, each taking half the applicable rate. An INTER-state supply attracts IGST, collected by the centre and apportioned to the destination state - which is what makes GST a destination-based tax.
Question 491
The principal economic objection to large subsidies is that they:
Select an option first.
Correct answer: C — Distort relative prices, strain the budget, and may not reach the intended beneficiaries
Explanation: Subsidies can be justified for merit goods and for protecting the poor, but they blunt price signals, encourage waste of the subsidised item, and often leak to those who do not need them. The policy question is one of targeting and cost, not of principle.
Question 492
The difference between tax evasion and tax avoidance is that evasion:
Select an option first.
Correct answer: A — Is ILLEGAL, involving concealment or misstatement, while avoidance uses lawful means to reduce liability
Explanation: Evasion is a punishable offence - suppressing income or inflating expenses. Avoidance exploits gaps in the law and is not an offence, though aggressive avoidance invites anti-avoidance legislation. The line between them is the legality of the means, not the size of the saving.
Question 493
Taxable capacity refers to:
Select an option first.
Correct answer: A — The maximum amount that can be taken in taxation without serious harm to the economy
Explanation: Taxable capacity depends on the size and distribution of national income, the standard of living and the productivity of the economy. Taxing beyond it discourages effort, saving and investment, and encourages evasion - so the limit is economic rather than legal.
Question 494
The Finance Commission in India is constituted to recommend:
Select an option first.
Correct answer: D — The distribution of tax revenues between the centre and the states, and the principles governing grants-in-aid
Explanation: It is a constitutional body appointed every five years under Article 280. Distractor C is the function of the Reserve Bank, and the budget is prepared by the government itself - three separate institutions whose roles are commonly confused.
Question 495
The Laffer curve suggests that:
Select an option first.
Correct answer: B — Beyond a certain rate, further increases in the tax RATE reduce total revenue
Explanation: At a zero rate revenue is nil, and at a hundred per cent rate no one would work or declare income, so revenue is nil again - implying a maximum somewhere between. Very high rates discourage effort and encourage evasion, though where the peak lies is disputed.
Question 496
Adam Smith's canon of CERTAINTY in taxation requires that:
Select an option first.
Correct answer: D — The taxpayer should know with certainty the amount, time and manner of payment
Explanation: Arbitrariness invites both taxpayer harassment and official corruption, and uncertainty discourages the planning of business and saving. The canon is about the CLARITY of the obligation, not about the size of the yield, which distractor A confuses it with.
Question 497
The government budget is:
Select an option first.
Correct answer: B — An annual statement of ESTIMATED receipts and expenditure for the coming financial year
Explanation: The budget is forward-looking, presenting estimates for approval by the legislature, and it is the principal instrument of fiscal policy. Accounts of what was actually spent are prepared afterwards and examined by the Comptroller and Auditor General - a separate document and a separate function.
Question 498
A budget in which estimated expenditure EXCEEDS estimated receipts is called a:
Select an option first.
Correct answer: D — Deficit budget
Explanation: A deficit budget injects purchasing power and is appropriate during a recession; a surplus budget withdraws it and suits an inflationary boom. A balanced budget was once regarded as a canon of sound finance, but Keynesian analysis showed that the appropriate balance depends on the state of demand.
Question 499
The essential feature of a value added tax is that:
Select an option first.
Correct answer: C — Tax is charged at each stage but credit is allowed for tax paid on inputs, so only the VALUE ADDED bears tax
Explanation: The input credit chain removes the cascading of tax upon tax that a simple turnover tax produces, so the total burden does not depend on how many stages the goods pass through. This is the principle on which India's GST is built.
Question 500
Wagner's law of increasing state activity holds that:
Select an option first.
Correct answer: A — Government expenditure grows FASTER than national income as an economy develops
Explanation: As economies industrialise and urbanise, demands on the state for administration, regulation, education, health and social security expand more than proportionately. The law is an empirical generalisation about the long-run trend rather than a normative prescription.
Question 501
Under zero-based budgeting:
Select an option first.
Correct answer: A — Every item must be justified afresh from a zero base each year
Explanation: Conventional incremental budgeting takes last year's allocation as given and debates only the increase, so obsolete spending survives indefinitely. ZBB forces each activity to justify its whole cost against its results - more rigorous, but demanding in time and information.
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