Question

Q. Consider the following pairs

List A	List B
1. Tax Buoyancy	Change in Tax revenue in response to the change in the tax rate
2. Tax Elasticity	Change in tax revenue in response to the change in GDP
3. Tax Expenditure	Opportunity cost of giving tax exemptions and rebates

Which of the pairs given above is/are correctly matched?

• A. 1 and 2 only
• B. 2 and 3 only
• C. 3 only
• D. 1, 2 and 3

Answer 1

The correct option is C 3 only

Explanation:

• Tax buoyancy shows the relationship between the changes in the government’s tax revenue growth and the changes in GDP. It is a tool to check the responsiveness of tax revenue growth to the changes in the GDP. For example, in the year 2002-03, the Tax buoyancy had risen to 2, which meant that the Centre’s gross tax revenues had grown at double the rate at which the Indian economy had grown in nominal terms.
• Tax elasticity on the other hand is the responsiveness of tax revenue to changes in the tax rate.
• Tax expenditure does not relate to the expenditures incurred by the Government in the collection of taxes. Rather it refers to the opportunity cost of taxing at concessional rates, or the opportunity cost of giving exemptions, deductions, rebates, deferrals, credits, etc. to the taxpayers. It is a measure of the indirect subsidies given to the taxpayers.