(Batch:PCB1) Mrunal's Economy Pillar#2: Budget Revenue 15 FC, Black Money, Subsidies Page 241

2B: Finance Commission, Black Money & 2C: subsidies, revenue expenditure
Table of Contents
23 🍋 (🧔⚖️👨‍🦲👳🏻‍♀‍👳🏻) Taxation → Finance Commission ................................ 243
23.1 Introduction to Finance Commission (वित्त आयोग) .................................... 243
23.2 🕵️‍♂‍(🍋 🧔⚖️👨‍🦲) Fifteenth FC Composition (setup in 2017-Nov) ................. 244
23.2.1 📑15th FC Terms of Reference (TOR: विचारार्थ विषय)? ......................... 244
23.3 🕵️‍♂‍📑: (👨‍🦲 → 😱) 15th FC’s TOR: Apprehension of the States.................... 245
23.3.1 👪 States Fear#1: Vision for New India 2022 ................................... 245
23.3.2 🏆 States fear#2: Performance based incentives (प्रदर्थन आधाररत प्रोत्साहन) 245
23.3.3 👪 States fear#3: Census-2011 (जनगणना -2011) ............................... 246
23.3.4 🔪 States fear#4: Debt and Grants (ऋण और अनुदान) .......................... 246
23.3.5 ✍🏻15th FC TOR: Conclusion (ननष्कषथ) ............................................. 246
23.4 🍋 [🧔⚖️(👨‍🦲👳🏻‍♀‍👳🏻)] FC: Vertical Tax Devolution from Union to States ........ 246
23.5 🍋 [👨‍🦲⚖️👳🏻‍♀‍ 👳🏻] Horizontal Tax Devolution among States .................... 247
23.5.1 🍋 [👨‍🦲⚖️👳🏻‍♀‍ 👳🏻]15th FC: Horizontal devolution ............................ 248
23.5.2 🧕Finance Commissions & the fate of UTs of J&K & Ladakh ................. 248
23.6 🧔 → 💸🤲🏼 (👨‍🦲👳🏻‍♀‍) Grants from Union to States (संघ से राज्यों को अनुदान) ...... 248
23.6.1 💸🤲🏼🏕15th FC: Local Bodies Grants (स्थानीय ननकाय अनुदान, 90k cr) ........ 249
23.6.2 💸🤲🏼🤦🏼‍♂‍Post-Devolution Revenue Deficit Grants (74kcr) ..................... 249
23.6.3 💸🤲🏼🌬🌪15th FC: Disaster Management Grants (आपदा प्रबंधन) ............. 249
23.6.4 💸🤲🏼🍽15th FC: Sector Specific Grants (क्षेत्र-निनिष्ट अनुदान, ~7700cr) ....... 250
23.6.5 💸🤲🏼🙋🏿15th FC: Special Grants: (नििेष अनुदान , ~6700kcr) .................. 250
23.6.6 💸🤲🏼💪🏿 15th FC: Performance-based incentives (प्रदिशन-आधारित प्रोत्साहन) . 250
23.6.7 🤏 15th FC: Other recommendations to Govt .................................. 251
23.6.8 ✍️ 15th FC Report for 2020-21: conclusion ...................................... 251
23.6.9 👻ATMANI → 🧔🕉👨‍🦲Helping States → Tax devolution and grants ....... 251
23.7 🕵️‍♂‍(🍋🧔⚖️👨‍🦲)⏰ FC: Giving Permanent Status (स्थायी दर्ाश देना) ................. 251
23.7.1 🤦‍♂‍👎Arguments against giving permanent status to FC ...................... 252
23.7.2 🙋‍♂‍👌Argument in favour of giving permanent status to FC ................... 252
23.7.3 ✍🏻 Conclusion: give permanent status to FC or not? ......................... 252
23.8 🕵🏻 FC vs PC vs NITI: What’s the Difference? ......................................... 253
23.9 🍋(🧔⚖️🤷‍♂‍🙏) Special Category States? विर्ेष श्रेणी के राज्य? ..................... 254
(Batch:PCB1) Mrunal’s Economy Pillar#2: Budget → Revenue → 15th FC, Black Money, Subsidies→ Page 241
23.9.1 🍋(🧔⚖️🤷‍♂‍🙏) Sp.Cat States → Economic Surveys criticised .............. 255
23.9.2 🍋(🧔⚖️🤷‍♂‍🙏) Sp.Cat States → Hill Union Territory Status for J&K? ..... 255
23.9.3 ✍🏻 Mock Questions for UPSC Mains (250 words each) ......................... 256
24 🍋👺🕵🏻 Taxation → Black Money & Allied Issues ..................................... 256
24.1 (🍋👺)🕵🏻Black Money → Notable Organisations .................................... 257
24.2 🍋👺 Tax Evasion (Hiding Income / Transaction) .................................. 258
24.2.1 🍋👺⚖️ Prevention of Money Laundering Act (PMLA-2002) ................. 258
24.2.2 🍋👺⚖️ Undisclosed Foreign Income & Assets Act (UFIA-2015) ............. 258
24.2.3 🍋👺⚖️ Benami Transactions Prohibition Act (BTPA- 1988, 2016) ......... 259
24.3 (🍋👺)💼 Tax Evasion → Full-Budget-2019 Announcements...................... 259
24.3.1 🍋👺🙌 Tax (Evasion) disclosure schemes (“surrender”) .................... 259
24.3.2 🍋👺🙌 Vivad se Vishwas Scheme for Direct Taxes (Budget-2020) ......... 260
24.3.3 🍋👺 Tax Evasion → Other Initiatives (अन्य कदम) .............................. 261
24.4 (🍋👋🤵)Tax avoidance (कर पररहार / कर टालना) .................................... 261
24.4.1 🍋👋🤵 Double Taxation Avoidance Agreement (DTAA) & Round Tripping 261
24.4.2 🍋👋🤵 Tax Avoidance through Non-Resident Status ......................... 262
24.4.3 🍋👋🤵 Place of Effective Management (POEM: पीओईएम) ................... 263
24.4.4 🍋👋🤵 Base Erosion and Profit Shifting (BEPS: बीईपीएस) .................... 263
24.4.5 🍋👋🤵 Transfer Pricing (हसतांतरण मल्

ू य) ...................................... 263
24.4.6 (🍋👋🤵) 🕵🏻 Authority for Advance Rulings (AAR) ............................ 264

24.4.7 (🍋👋🤵) 🕵🏻 General Anti-Avoidance Rules (GAAR) .......................... 264
24.4.8 🍋👋🤵 Angel Tax on Startup Investments (2012) ............................. 264
24.5 🍋🍋🍋🕵🏻: 🙇🏻 Reforms to reduce Tax Terrorism / Harassment ................. 265
24.5.1 💼 (Full) Budget-2019: Ease of paying taxes & reducing tax-terrorism ..... 265
24.5.2 🍋🕵🏻:🧾 Document Identification Number (DIN: दस्तािेज़ पहचान संख्याक) .... 266
24.5.3 📯📜 Taxpayers’ Charter in 💼 Budget-2020 (किदाताओ का अनधकािपत्र) ..... 266
24.6 🍋🌐🤝Taxation → Global Treaties, Agreements & Indexes ..................... 267
24.6.1 🍋🌐🤝 Tax Information Exchange Agreement (TIEA: समझौता) ............ 267
24.6.2 🍋🌐🤝 USA’s Foreign Account Tax Compliance Act (FATCA-2010) ........ 267
24.6.3 🍋🌐📊 Global Financial Secrecy Index (िैश्विक वित्तीय गोपनीयता सच

ू कांक) . 267
24.7 💸Black Money → Demonetisation (विमुद्रीकरण) ...................................... 267
24.7.1 💸Why Demonetise ₹ 500 & 1000? ................................................ 268
24.7.2 💸How did 99.30% SBN returned into banking system? ........................ 268
24.7.3 💸99.30% SBN returned, but Demonetization not failed experiment: ...... 269
24.7.4 💸Demonetization: Impact as per Economic survey 2016-17 ................. 269
24.8 📘📘Economic Survey on taxation and fiscal capacity (वित्तीय क्षमता) ............. 269
24.8.1 🍋🥛The reasons for low Tax: GDP in India: .................................... 270
24.8.2 📘📘 ES19: “Use Behavioural Economics to improve Tax Compliance” ..... 270
24.9 🍋Taxation: Misc. Terms ................................................................ 272
24.9.1 🍋 Net Tax Revenue of the Govt (र्द्

ु ध कर राजसि) ............................. 272
24.9.2 🍋 Revenue Shortfall (राजसि में कमी)............................................. 273
24.9.3 ✍🏻 Mock Questions for UPSC Mains (250 words each) ......................... 273
24.10 📥🚆📮 Budget → Revenue Part → Receipts → Non-Tax Receipts......... 274
25 📤⏰ Budget → Revenue Expenditure ................................................. 274
25.1 📤⏰(🌽⛽️) Revenue Expenditure → Subsidies ................................... 275
25.1.1 📤⏰(🌽⛽️) Types of subsidies with selected examples ..................... 276
25.1.2 👍🏻 👎🏻 Impact of Subsidies (सश्ससडी का प्रभाि) .................................... 276
25.1.3 📘📘 Past Economic Surveys on subsidy delivery............................... 277

25.1.4 📘📘 ES19: Use ‘Behavioural economics (व्यिहाि अथशिास्त्र)’ to ↓ subsidy bill 277
25.2 📤⏰🥳 Revenue xpdr → Salaries→ 7th Pay Commission (िेतन आयोग) ........ 278
25.2.1 🥳 Pay Commission: Associated terms ........................................... 278

25.2.2 🏃🏻‍♀‍✍🏻🕵️‍♂‍National Recruitment Agency (NRA: िाष्ट्रीय भती एर्ेंसी) ................ 278
25.3 (📥<📤)⏰⚠️ Revenue Deficit (राजसि घाटा: 2.7% of GDP) ....................... 279
25.4 (📥<📤)⏰⚠️ Effective Revenue Deficit (प्रभािी राजसि घाटा: 1.8% of GDP) .... 279
23🍋 (🧔⚖️👨‍🦲👳🏻‍♀‍👳🏻) TAXATION → FINANCE COMMISSION
23.1 INTRODUCTION TO FINANCE COMMISSION (वित्त आयोग)

- Fiscal Federalism (िार्कोषीय संघिाद) refers to the division of responsibilities of i)
taxation and ii) expenditure between the different levels of the government. While the
7th schedule assigns many responsibilities to the States but their taxation power is
relatively lower than Union’s. So, Finance Commission plays a key role in transferring
union’s revenue resources to the state.
- Article 280: President of India forms a Finance Commission (a quasi-judicial body)
every 5th Year or earlier, with 1 chairman and 4 members. Eligible for re-appointment.
Recommendations are not binding on the government but usually not rejected.
📔Further self-study & HINDI TERMS@ M.Laxmikanth’s Indian Polity ch.45.
14th FC: YV Reddy Recommendation Period: 1st April, 2015 to 31st March, 2020
15th FC: NK Singh Originally, it was meant to cover: 1st April, 2020 to 31st March, 2025
But later, Modi Govt ordered it to submit two reports:
1) Report#1: for 1/Apr/2020 to 31/March/2021 → submitted to
President in 2019-Nov, and accepted in 2020-Jan
2) Report#2: for 1/Apr/2021 to 31/March/2026. (to be
submitted by 30 October 2020)
23.2 🕵️‍♂‍(🍋 🧔⚖️👨‍🦲) FIFTEENTH FC COMPOSITION (SETUP IN 2017-NOV)
Chairman N.K. Singh (Retd. IAS, Ex-Member of Parliament)

Member1 Shaktikanta Das (Retd. IAS, RBI Gov)
Member2 Dr. Anoop Singh, Professor
Member3 (Part Time) Dr. Ashok Lahiri, Bandhan Bank
Member4 (Part Time) Prof. Ramesh Chand. member of NITI Aayog & Agri Economist.
Secretary Arvind Mehta (IAS)
23.2.1 📑15th FC Terms of Reference (TOR: विचारार्थ विषय)?

President of India has ordered them to study and recommend following:
1. Union Taxes’ vertical devolution to the states, and its horizontal distribution among
the states. (except cess, surcharge and IGST).
2. Union’s grant-in-aids to the states.
3. How to augment State Govts’ Consolidated funds to help their PRI/ULBs
4. Any other matters referred by the President of India such as:
✓ Use Census-2011 for your calculation. (र्नगणना)
✓ Keep in mind Union’s responsibilities for New India 2022 vision. (2022 के नए भाित
के ननमाशण के निए कें द्र सिकाि की नर्म्मेदारियों को ध्यान में िखना)
✓ Recommend measures for Fiscal Discipline/Consolidation for the Union and
State governments. (िार्कोषीय अनुिासन/समेकन)
✓ Should union continue to provide revenue deficit grants to States? (िार्स्ि घाटे की
भिपाई के निए अनुदान देना)
✓ How to finance the disaster management initiatives? (आपदा प्रबंधन)
✓ Performance based incentives to the state governments? (प्रदिशन आधारित प्रोत्साहन)
✓ (2019-Jul) suggest ways for allocation of non-lapsable funds for defence and
internal security. (िक्षा औि आंतरिक सुिक्षा बिनव्यपगत नननध)
✓ (2019-Oct) Award for the UT of J&K. (This terms of reference required under
JAMMU AND KASHMIR REORGANISATION ACT, 2019. पुनगशठन अनधननयम)
23.3 🕵️‍♂‍📑: (👨‍🦲 → 😱) 15TH FC’S TOR: APPREHENSION OF THE STATES

विचारार्थ विषय से राज्य आशंकािान क्यों है
23.3.1 👪 States Fear#1: Vision for New India 2022

15th FC is required to keep New India 2022 vision in mind (wherein Modi government aims
to double the farmers’ income, provide housing for all, achieve 175GW of renewable
energy etc.)
 15th FC also required to keep in mind Union’s additional burden regarding Defence,
Internal Security, Infrastructure, Railways, Climate Change, commitments towards
administration of UTs without legislature etc.
 So, TOR indirectly implying that 15th FC should give less than 42% to state
governments because union government needs more ₹ ₹ for aforementioned activities.
So, Non-BJP states are angry- “Tax devolution is our constitutional right”. (कें द्र के कि में
नहस्सा हमािा संिैधाननक अनधकाि है)
23.3.2 🏆 States fear#2: Performance based incentives (प्रदर्थन आधाररत प्रोत्साहन)

15th FC asked to recommend performance-based incentives based on (list not exhaustive)
Performance parameter Why states apprehensive?
➢ Manipur can’t do as much as Maharashtra in deepening
the GST tax net, owning to the variety of economic,
State’s Efforts in geographic and political factors (frequent bandh and
expansion of tax-net blockades).
कि-र्ाि का निस्ताि बढ़ाना ➢ Secondly, Constitution provides for a separate GST
council with representatives of state governments. FC
doesn’t have state representatives.
State’s Efforts in Gangetic plain states’ total fertility rate higher, so they’re
population control apprehensive that Kerala & other Southern States will get
आबादी ननयंत्रण more money. <More about TFR in Pill#6>
State’s efforts in Southern states have been running populist schemes for
controlling the free TV, Fridge, Mixer, Idli at ₹ 1 etc. Similarly Northern
expenditure on populist states run schemes for farm-loan waiver, free bicycle,
schemes/measures mobile & laptop schemes. They fear they’ll be reviewed
(लोकलुभािन योर्नाएं). negatively, and union will get to keep more ₹ ₹ for itself.
State’s Efforts in Electricity theft is a rampant problem in certain Gangetic

controlling power sector states but their ruling parties turn blind eye because of
electoral populism of farmers and villagers. Now they are
losses (ऊर्ाश /नबर्िी)
apprehensive of getting less money.
 States resent that Modi’s Swatchh Bharat Mission is
Behavioral changes to end ‘imposed upon them’.
open defecation. (खुिे में  FC devolution is their Constitutional right, and not an
िौच र्ाने के बताशि में सुधाि) alm (खेरात) tied to their implementation of central
schemes.
23.3.3 👪 States fear#3: Census-2011 (जनगणना -2011)
For horizontal distribution of taxes among states, 14th FC had used Census-1971 data.
Census-1971 population was given 17% weight i.e. more populous state will get more
funds.
 15th FC’s Terms of Reference (TOR) requires NK Singh to use ONLY Census-2011 data.
But, Southern states have reduced their fertility rate between 1971 to 2011, whereas
Northern states could not- due to poverty, illiteracy and lack of healthcare
infrastructure. So, Southern states had feared Northern states will get
proportionately more funds, if Census-2011 is used.
23.3.4 🔪 States fear#4: Debt and Grants (ऋण और अनद

ु ान)
 Article 293: States can’t borrow without consent of the Union. So, what additional
conditions should the Union impose on the states when they (states) borrow from
market / external sources? (िाज्य सिकाि बार्ाि से पैसा उधाि िे तो कें द्र सिकाि ने उस पि क्या िते
िखनी चानहए)
 TOR even requires 15th FC to make recommendations in this regard. States fear it’ll
reduce their autonomy in raising loans from the market. (स्ितंत्रता चिी र्ाएगी)
 15th FC will also examine whether to abolish revenue deficit grants given to the
States. (although 15th FC has continued this grant)
23.3.5 ✍🏻15th FC TOR: Conclusion (ननष्कषथ)

✓ Economic Survey 2016-17 had observed ‘aid-curse’ ('सहायता-अनभिाप') i.e. over the
years, Special Category States received large amount of funds via Planning Commission
and Finance Commissions yet couldn’t perform well in poverty removal or economic
growth due to lack of accountability and poor governance.
✓ The 15th FC TOR aims to link the fund transfers with performance and accountability
parameters. While states are apprehensive, but such measures are the bitter pills that
we’ll have to swallow eventually to ⬆ India’s human dev. & economic growth.
Error in Answer Writing: Don’t digress to unsolicited suggestions &

overthinking like “Southern states should help Northern states in their
family planning programs.”
23.4 🍋 [🧔⚖️(👨‍🦲👳🏻‍♀‍👳🏻)] FC: VERTICAL TAX DEVOLUTION FROM UNION TO STATES

Finance Commission recommends the vertical devolution (ऊध्िाशधि कि अंतिण) from the
‘divisible pool’ of union taxes. (Here IGST, Cess, Surcharge not counted.)
FC → 12th (2005-10) 13th (2010-15) 14th (2015- 15th (2020-21)

20)
Chairman? C.Rangarajan Vijay Kelkar VY Reddy NK Singh
States Share 30.5% 32% 42% 41%*
*15th FC’s justification: Compared to 14th FC, 1% extra Union should keep for UTs of J&K &
Ladakh’s security & other needs.
23.5 🍋 [👨‍🦲⚖️👳🏻‍♀‍ 👳🏻] HORIZONTAL TAX DEVOLUTION AMONG STATES
राज्यों के िीच समस्तरीय/क्षैनतर् किअंतिण
Finance Commission also gives formula for How to distribute that share horizontally with
individual States (Guj | Bihar | MH | TN...). 14th FC (YV Reddy)’s formula was…
14th FC horizontal distribution formula components Weight %
👪 आबादी Population: as per Census 1971 17%
👪 जनसाांख्ययकीय Demographic Change as per Census 2011 (To consider the
10%
बदलाि migration angle.)
Income-Distance: Based on per capita income of a state
👜 आय-दरू ी (GSDP ÷ its population). Accordingly, poorer states get 50%
more weight
📏 क्षेत्र Area: more area more weight 15%
Forest-Cover: more forest cover more weight because of
🌳 िन-आिरण Opportunity cost (State can’t allow industries there, else 8%
it could have obtained some taxes)
Based on above formula, Highest to Lowest: Uttar Pradesh > Bihar > MP > WB > MH > Raj>
….. > Mizoram > Goa > Sikkim.
15th FC horizontal distribution formula components (घटक) → (भािांक%) Weight%

Income Distance (आय में अंति):
 State GSDP divided by its Population = per capita GSDP.
45%
 For most states, Haryana’s per capita GSDP is taken as benchmark. How
poorer is your state compared to Haryana= more ₹₹ you’ll get.**
📏 Area (क्षेत्रफि) More area = more ₹₹ 15%
👪 Population (as per Census-2011: आबादी): More population = more ₹₹ 15%

Demographic Performance (र्नसांनख्यकीय ननष्पादन): States that have ⬇ Total
12.5%
Fertility Rate (TFR: कु ि प्रर्नन दि), will get ⬆₹₹. More in Pill#6
🌳 Forest and Ecology (िन एिं पारिनस्थकी): More forest= more ₹₹ 10%
🍋 Tax Effort (कि प्रयास) : States who’ve improved their per capita (State) tax
2.5%
collection in the last 3 years = get more ₹₹
Total (कु ि) 100%
** Note: computing income distance: the Highest per capita GSDP: 1) Goa 2) Sikkim 3) Haryana 4) Himachal.
But since Goa, Sikkim are very small states with a unique economic situation, so it’ll distort statistical
formula. So, there are some internal fine tunings done in formula. Long story cut short: Haryana taken as
benchmark for most states. If you’ve more intellectual curiosity about how above indicators are calculated in
real life, you may spend waste time in PHD-reading of the original report@ https://fincomindia.nic.in/
23.5.1 🍋 [👨‍🦲⚖️👳🏻‍♀‍ 👳🏻]15th FC: Horizontal devolution: States’ share in ⬇ order
Table 1: Try to remember 3-5 names in top & bottom each, & your home state.
1) Uttar Pradesh (17.931%) 11) Chhattisgarh (3.418%) 21) Himachal (0.799%)

2) Bihar (10.061%) 12) Gujarat (3.398%) 22) Meghalaya (0.765%)
3) MP (7.886%) 13) Jharkhand (3.313%) 23) Manipur (0.718%)
4) W. Bengal (7.519%) 14) Assam (3.131%) 24) Tripura (0.709%)
5) Maharashtra (6.135%) 15) Telangana (2.133%) 25) Nagaland (0.573%)
6) Rajasthan (5.979%) 16) Kerala (1.943%) 26) Mizoram (0.506%)
7) Odisha (4.629%) 17) Punjab (1.788%) 27) Sikkim (0.388%)
8) Tamil Nadu (4.189%) 18) Arunachal (1.76%) 28) Goa (0.386%)
9) Andhra (4.111%) 19) Uttarakhand (1.104%) ANY type of UT = 0% here
10) Karnataka (3.646%) 20) Haryana (1.082%)
23.5.2 🧕Finance Commissions & the fate of UTs of J&K & Ladakh
Until 10th Finance Commission, the FC would also prescribe the revenue sharing formula
between the Union Government and Union Territories.
➢ But this practice stopped since 11th finance commission i.e. Finance ministry itself
decides how much revenue will be shared with Union Territories based on its own
discretion (कें द्रिानसत प्रदेिों को ककतने पैसा देना है= कें द्र सिकाि अपने नििेक से तय किता है).
➢ Finance Commission no longer prescribed formula in this regard. But,
➢ 31st October 2019: The state of Jammu Kashmir was officially split into the union
territories of Jammu Kashmir and union territory of Ladakh.
➢ Jammu and Kashmir Reorganization Act, 2019 mandates that:
o Whatever amount the former state of J&K was supposed to receive between
31/10/2019 to 31/3/2020 (as per 14th FC formula) …It will be distributed
between these two new union territories on the basis of population ratio and
other parameters.
o President of India shall require 15th FC to make award for UT of J&K.
o However, looking the 15th FC report, no separate share is given in verticle /
horizontal tax devolutions. Simply 1% extra kept with Union to look after J&K &
Ladakh, compared to 14th FC.
23.6 🧔 → 💸🤲🏼 (👨‍🦲👳🏻‍♀‍) GRANTS FROM UNION TO STATES (संघ से राज्यों को अनद
ु ान)
Apart from the tax devolution, FC would also suggest Union to give grant to the states
(grant= NOT loan, so need not return with interest).
14th FC suggested following types of grants→
1. For All States: Grants for Panchayati Raj Institutions (PRI) and Urban Local Bodies
(ULB). These grants will be subdivided into two parts: basic grant (प्राथनमक) and (10-
20%) performance based grants.(प्रदिशन आधारित)
2. For All States: Disaster Management Grants. (आपदा प्रबंधन अनुदान)
3. For 11 States: Post-Devolution Revenue Deficit Grants. (अंतिण-पश्च िार्स्ि घाटा अनुदान)
15th FC suggested following types of grants (in ⬇decreasing order, 2020-21)→
1) 💸🤲🏼🏕Local Bodies Grants (स्थानीय ननकाय अनुदान, 90k cr)
2) 💸🤲🏼🤦🏼‍♂‍Post-Devolution Revenue Deficit Grants (74kcr)
3) 💸🤲🏼🌬🌪Disaster Management Grants (आपदा प्रबंधन अनुदान: 41kcr)
4) 💸🤲🏼🍽Sector Specific Grants: Nutrition (क्षेत्र-निनिष्ट अनुदान, ~7700cr)
5) 💸🤲🏼🙋🏿Special Grants: (नििेष अनुदान , ~6700kcr)
6) 💸🤲🏼💪🏿 Performance-based incentives (ननष्पादन-आधारित प्रोत्साहन)
23.6.1 💸🤲🏼🏕15th FC: Local Bodies Grants (स्थानीय ननकाय अनुदान, 90k cr)
2020-21 Approx. Amount in ₹cr.
Rural Local Bodies ~60k. Out of this,
- given to all three  50% is Tied Grants (ननर्दशष्ट) = meant only for specific objectives
tiers in the 1) sanitation 2) water (स्िच्छता औि पानी)
panchayats, i.e.  50% is Untied/basic (प्राथनमक) = can be used for any objective
village, block and
depending on location. Except salary & establishment (building
district. And also,
renovation, electricity bill etc.)
for 5th and 6th
From 1/4/2021 they’ll be required to submit audited accounts
Sch. areas
online through Panchayati Raj Institutions Accounting Software
(PRIAsoft) to Comptroller and Auditor General (CAG: ननयंत्रक औि
महािेखा पिीक्षक)
Urban Local ~30k. Out of this,
Bodies (ULB) &  ~9k cr for million plus population-walli cities. (Excluding Delhi
Cantonment boards & Srinagar for being in UT). These grants are mainly to be used
for air quality improvement, water & solid waste management
(िायु गुणित्ता में सुधाि, र्ि औि ठोस अपनिष्ट प्रबंधन).
 ~21k for cities with <1million pop: 50% untied (basic) grants +
50% tied for specific objectives 1) drinking water 2) solid waste
management.
From 1/4/2021, ULBs required to 1) reform property tax rates 2)
submit audited accounts to CAG online.
Total grants ~60k Rural + ~30k Urban = 90k.
23.6.2 💸🤲🏼🤦🏼‍♂‍Post-Devolution Revenue Deficit Grants (74kcr)
Figure 1: हमको औि पैसा दो, हमािे िार्स्ि घाटे की भिपाई के निए!
Suppose (amt in ₹cr) 2020-21

Andhra’s own State Budget: Revenue Expenditure - Revenue Income = 41 kcr
Revenue Deficit (िार्स्ि घाटा)
Andhra’s share from Union’s taxes based on horizontal devolution 35 kcr
Andhra’s Post-Devolution Revenue Deficit = 41-35=6 kcr.
So 15th FC will give Andhra extra 6 kcr as Post-Devolution Revenue Deficit Grant (अंतिण-
पश्च िार्स्ि घाटा अनुदान). Only 14 states eligible: Assam, Himachal Pradesh, Manipur,
Meghalaya, Mizoram, Nagaland, Sikkim, Tripura, Uttarakhand, Andhra,Kerala, Punjab,
Tamil Nadu, West Bengal.
23.6.3 💸🤲🏼🌬🌪15th FC: Disaster Management Grants (आपदा प्रबंधन अनुदान: 41kcr)
Disaster Management Act, 2005 → Ministry of Home Affairs (गृह मंत्रािय) looks after the
subject.
15th FC: 2020-21 🧔National Disaster Risk Management 👨‍🦲State Disaster
recommendations Fund (NDRMF: एनडीआिएमएफ/िाष्ट्रीय आपदा र्ोनखम Risk Management
नसफ़ारििे प्रबंधन कोष) Fund (SDRMF)
allotted ₹ cr ~12k ~29k**
Internal  80% amt for National Disaster Response Same pattern,
distribution Fund (NDRF:एनडीआिएफ/िाष्ट्रीय आपदा change word from
आंतरिक नितिण सहायता कोष) National to ‘State’
 20% amt for National Disaster Mitigation
Funds (NDMF:एनडीएमएफ/िाष्ट्रीय आपदा
प्रिमन कोष)
**Notes on SDRMF:
1) How much will an individual state get? Ans= depends on its past disasters, risk
exposure (area & population wise) etc.
2) Respective State Govt is also required to contribute some money in SDRMF.
23.6.4 💸🤲🏼🍽15th FC: Sector Specific Grants (क्षेत्र-निनिष्ट अनुदान, ~7700cr)

 Seven sectors: health, pre primary education, judiciary, rural connectivity, railways,
statistics, housing. (स्िास््य, पूिश प्राथनमक निक्षा, न्यायपानिका, ग्रामीण संपकश , िे ििे, सांनख्यकी,
आिास)
 15th FC asked the Union & State Government to build a preparatory framework
(प्रािं नभक रूपिे खा), then later it’ll recommend the actual ₹₹ figure.
 At present, 15th FC only recommended health → Nutrition grant (₹7700+ cr पोषण
अनुदान) to combat malnutrition (कु पोषण). Ministry of Women and Child Development
(MoWCD: मनहिा बाि निकास मंत्रािय) will oversee its utilization.
23.6.5 💸🤲🏼🙋🏿15th FC: Special Grants: (नििेष अनुदान , ~6700kcr)

 If a state receives less ₹₹ in (15th FC’s devolution + post revenue deficit grants) in 2020
compared to 2019 (when 14th FC Rangarajan’s formula was in effect),
 Then such State will get Special Grants just to prevent any ‘feeling of injustice / bias’
(अन्याय / पक्षपात कक हमको पहिे से कम पैसा नमि िहा है)
 Only 3 states eligible: Karnataka, Telangana and Mizoram. Total ₹6,764 cr for 2020-21
23.6.6 💸🤲🏼💪🏿 15th FC: Performance-based incentives (प्रदिशन-आधारित प्रोत्साहन)

15th FC didnot decide the amount yet but asked Union’s Ministries/Departments to
prepare State-wise baseline indices/score/data (आधािभूत सूचकांक) by 2020-May/June for
following performance indicators:
1) Implementation of Agriculture. Reforms कृ नष सुधािों का कायाशन्ियन
2) Development of Aspirational Districts (=backward districts identified by NITI Aayog)
आकांिी नर्िो का निकास
3) Power (Electricity) Sector Reforms. नबर्िी क्षेत्रमे सुधाि
4) Enhancing Trade including Exports. व्यापाि ि ननयाशत को बढ़ािा देना
5) Promotion of Domestic and International Tourism. घिे िू औि अंतिाशष्ट्रीय पयशटन को बढ़ािा
6) Education, esp. of girls. निक्षा, खासकि कन्या निक्षा
If States perform well in above areas, they’ll get more ₹₹ grants than other States in
subsequent years.
23.6.7 🤏 15th FC: Other recommendations to Govt
 Some States have requested special category status(नििेष श्रेणी का दर्ाश). But it’s not part
of our mandate/Terms of Reference. So we’ve nothing to say on this matter.
 Reform the direct taxation system → increase tax collection.
 Reform GST’s operational challenges, slabs and rates.
 Review the outcomes of all Government schemes. Merge/abolish non-essential
schemes → reduce Expenditure.
 We need a law on “Public Financial Management System (िोक नित्तीय प्रबंधन प्रणािी)” it’ll
prescribe the budgeting, accounting, internal control and audit standards to be
followed at all levels of government.
 Govt should follow FRBM Act with full sincerity in letter and spirit. (More in Pillar2D:
FRBM Section) पूिी ननष्ठा के साथ एफआिबीएम कानून का पािन र्रूिी
23.6.8 ✍️ 15th FC Report for 2020-21: conclusion

✓ Sustainable Development Goal#10 (SDG): reduce inequality within the country. सतत
निकास िक्ष्य: असमानता को कम किो
✓ SDG-Goal#16 requires nations to build effective, accountable and inclusive institutions
at all levels. िोक प्रिासनके सभी स्तिो मे संस्थानो को प्रभािी, र्िाबदेह औि समािेिी बनाओ
✓ In this regard, 15th FC has tried to provide a framework for 1) equitable distribution
of revenue 2) incentives tied with performance. ऐसा ढांचा र्ंहा 1) किनितिण समानता के साथ
औि 2) प्रोत्साहन प्रदिशन के नहसाब से नमिेगा
✓ It’ll greatly help to improve India’s human development and economic growth. मानि
निकास औि आर्थशक निकास मे मदद नमिेगी
23.6.9 👻ATMANI → 🧔🕉👨‍🦲Helping States → Tax devolution and grants

 Corona = Union’s tax income ⏬⏬ but still under Atma-Nirbhar → Union has given
assurance, “we’ll release Tax Devolution and grants to the states as per the figures
announced in the Budget and Finance Commission report.”
23.7 🕵️‍♂‍(🍋🧔⚖️👨‍🦲)⏰ FC: GIVING PERMANENT STATUS (स्थायी दर्ाश देना)
Figure 2: CAG-UPSC र्ेसी कायम चािू िहेने िािी संस्था बनाओ FC को- तभी ठीक से काम होगा- िनिकांता
(Introduction: Origin) Shaktikanta Das, the Governor of RBI and a member of the 15th
Finance Commission (FC), has recommended giving a permanent status to the FC, wherein
the old commission continues to implement & monitor the recommendations till the next
commission starts functioning.
23.7.1 🤦‍♂‍👎Arguments against giving permanent status to FC
 Indian economy and Indian union has functioned successfully for over 70 years with this
mechanism, so there is no need for such constitutional amendments and
experimentations. ितशमान व्यिस्था योग्यरूप से चि िही है, नए संिेधाननक प्रयोगो की कोई र्रूित नही
 We already have a NITI Aayog acting as a permanent think-tank on all the matters
related to economy and governance.
 We already have a GST Council where states & union can deliberate on issues related
to indirect taxes. If there is an economic crisis they can finetune the GST formula and
GST-distribution to address it.
 Both NITI Aayog and GST Council provide a platform for cooperative federalism (सहकािी
संघिाद की चचाश के निए मंच उपिब्ध).
 Further, we already have the CAG to audit the accounts of the Union and the States.
 Therefore, Giving permanent status to Finance Commission will result in overlapping
responsibilities and duplication of efforts.(प्रयासों का व्यथश दोहिाि)
 Even if the Finance Commission is given a permanent status, the states ruled by
opposition parties will continue to allege injustice & partiality, just like they allege
with the functioning of Election Commission. Then, the Union Finance Ministry’s
precious time will be wasted in filing counter-responses to the States at FC.
23.7.2 🙋‍♂‍👌Argument in favour of giving permanent status to FC

✓ Election Commission has a permanent status even though elections are to be
conducted every 5 years. Previous Lok Sabha’s speaker continues to hold position until
new Lok Sabha meets for the first time. Following this rationale, Shaktikanta Das’s
suggestion that “Previous Finance Commission should continue to function & oversee
the implementation of its recommendations until new FC is formed” is valid.
✓ Finance Commission recommendations are valid for a block of 5 years. Even if there is
a war, disaster, famine or an economic crisis which may affect the revenue collection
of the union vs. the demands by the States, still, the FC-formula/recommendations
cannot be modified/finetuned in-between the five years. So, even if Union/states are
feeling any injustice in the FC-formula, they have to wait for five years to make pleas
to the next Finance Commission. चुनाि आयोग, स्पीकि के कायशकािको देखते हुए ये सही है।
✓ If FC has a permanent secretariat/office = staff will keep all the records/ Knowledge
bank for future reference, and a few officers will act as ‘Resource Persons’ to assist
the new panel. Then, there will be more consistency in the FC recommendations.
✓ Such permanent body can keep a constant vigil (अनिित सतकश ता) on the Union and State
finances & revenue collections and hold them accountable for any transgressions or
lethargy (उल्िंघन / सुस्ती). [Present approach of the union governments is if they are not
getting enough taxes, they will simply borrow more money and changing the FRBM
targets/goalposts as per their convenience. More under FRBM handout]
✓ Previously, Union and States designed their five-year plans, and so it made sense to
have a ‘five-year formula for tax distribution’. But now the five-year planning system
has been discontinued. पंचिषीय योर्नाओं का दौि खत्म हो चुका है
23.7.3 ✍🏻 Conclusion: give permanent status to FC or not?

 (In-favor) Considering the aforementioned benefits, Finance Commission should be
given a permanent status for better monitoring, accountability, grievance redressal in
the matters related to fiscal federalism. (िार्कोषीय संघिाद के मामिों में बेहति ननगिानी,
र्िाबदेही औि निकायत ननिािण के निए नित्तआयोग को स्थायी दर्ाश देना िाभकािक होगा.)
 (Against) Considering the aforementioned issues, the present constitutional and
institutional mechanisms are adequate for fiscal federalism; they do not merit any
changes for the time being. (ितशमान प्रणािी सुयोग्य, कफ़िहाि कोई परिितशन अनािश्यक)
23.8 🕵🏻 FC VS PC VS NITI: WHAT’S THE DIFFERENCE?
🕵🏻 🍋⚖️ Finance 🕵🏻🤴 Planning Commission 🕵🏻🧔 NITI Aayog

Commission (FC) (PC) योजना आयोग National Institution
for Transforming India
Constitutional body Created by executive resolution, so neither constitutional non
statutory. Both headed by Prime Minister as the chairman.
1951: 1st FC setup under - 1951: PC set up and over the - 2015: Formed.
KC Neogy years designed 12 Five Year - Three Year Action Agenda
plans (12th FYP: 2012-2017) (2017-20).
- 2014: Dissolved by Modi - Seven Year Strategy
Government. Document.
- Fifteen Year Vision
Document(2017-32).
- Taxes’ Vertical 1. How much money should It is not in its scope of work
Devolution and union give to each state for to decide how much money
horizontal distribution implementation of Union’s should be given to each
among states. centrally sponsored state. That component is
- + any other matters schemes (CSS)? decided by the Finance
referred by the 2. How much money should Ministry.
President in TOR union government give to - NITI’s primary objective
- Each Finance the five year plans of the is to serve as the think
Commission arrived at state governments? tank of the Government
its own methodology. To answer these Qs, PC would of India,
E.g. 14th FC: 42% use Gadgil Mukherjee formula - Helps in policy design.
vertical, and 5 factor (designed in 8TH FYP)- based - Helps in monitoring
formula for horizontal on population, per capita schemes’ through its
distribution. income, special problems etc. dashboard e.g. ‘School
of a state. Education Quality Index’,
‘SDG India Index’,
‘Digital Transformation
Index’
< More about Planning Commission and NITI Aayog in Pillar#4>
🔠❓ (Pre19-SetA) Q69. In India, which of the following review(s) the independent

regulators in sectors like telecommunications, insurance, electricity etc. ?
1. Ad Hoc Committees set up by the Parliament.
2. Parliamentary Department Related Standing Committees
3. Finance Commission
4. Financial Sector Legislative Reforms Commission
5. NITI Aayog
Answer Codes: (a) 1 and 2 (b) 1 , 3 and 4 (c) 3, 4 and 5 (d) 2 and 5
23.9 🍋(🧔⚖️🤷‍♂‍🙏) SPECIAL CATEGORY STATES? विशेष श्रेणी के राज्य?
Figure 3: हमािा िाज्य गिीब है, इसनिए हमे निकास के निए कें द्र सिकाि ने अिग से ढेि सािा पैसा देना चानहए!
- 1952: The National Development Council (NDC) was set up, consisting of PM, CMs and
other representatives to approve the five year plans prepared by the Planning
Commission. But became obsolete with establishment of NITI Aayog.
- 1969: 5th Finance Commission recommended giving extra funds and tax-relief to
certain disadvantaged states. Over the years, NDC added more states into the Special
Category List based on
✓ (i) hilly and difficult terrain (पहाडी औि करठन भूभाग)
✓ (ii) low population density and / or sizeable share of tribal population (कम
र्नसंख्या घनत्ि औि / या र्नर्ातीय र्नसंख्या का बडा नहस्सा)
✓ (iii) strategic location along borders with neighbouring countries (पडोसी देिों
के साथ सीमाओं के साथ िणनीनतक स्थान)
✓ (iv) economic/infrastructural backwardness (आर्थशक/अिसंिचनात्मक नपछडेपन)
✓ (v) non-viable nature of state finances. (िाज्य नित्त की गैि-नननहत प्रकृ नत।)
- Examples: 8 North Eastern states and 3 Himalayan States (JK, Uttarakhand, HP). Post-
370 removal, J&K is no longer in this list.
- Benefits of Sp.Cat. States?
✓ Industrialists will be given benefits in Union-taxes for setting up factories in
these states. (उद्योगपनत को फै क्री िगाने पि कि में छू ट/ रियायत )
✓ In Centrally Sponsored Schemes (CSS: कें द्र प्रायोनर्त योर्नाएं), Union will bear
higher burden (90:10).
✓ FC & PC would assign more weightage in their formulas to give’em more funds.
- 14th FC: Previous Finance Commissions would assign extra weightage & funds to
Sp.Cat states, but 14th FC stopped this practice.
- But, whenever elections are near, W.Bengal, Bihar and Andhra CMs would demand
Sp.Cat. status & blame Union for ‘injustice’.
- 15th FC: Some States have requested special category status. But it’s not part of our
mandate/Terms of Reference. (हमािे निचािाथश निषयो मे ये है ही नही!)
- So, at present, Sp.Cat states don’t get additional revenue/grants in FC’s formula.
Although, Union upon its own discretion continues to give them certain benefits in CSS.
हाि के नित्त आयोग, इन िाज्यों को अिग से कोई पैसा नहीं देते। ककं तु कें द्र सिकाि स्ियं के नििेक से योर्नाओं
में ज्यादा पैसा दे सकती है।
23.9.1 🍋(🧔⚖️🤷‍♂‍🙏) Sp.Cat States → Economic Surveys criticised
Figure 4: इतने सािों तक ढेि सािा अनुदान कदया फिर भी विकास क्यों नहीं? - "दान एक श्राप है"- Former CEA
- 📔📔Economic survey 2016-17: Noted that Sp.Cat states have received lot of funds &
grant from previous FCs and PCs, and yet they have not made any tangible progress in
improving public administration or removing poverty (=” Aid Curse”: सहायता का
अभभशाप). Similar problem with the States having abundant mineral resources
(“Resource Curse”: खननर् संसाधनों का अभभशाप).
- Economic Survey 2017-18: Noted that compared to Brazil, Germany and other
countries with federal polity, India’s State Governments and Local Bodies are
collecting less amount of tax for two reasons :
- 1) Constitution has not given them sufficient taxation powers.
- 2) Even where constitution gave them powers like collection of Agricultural Income
Tax, Land Revenue, Property Tax: The States/Local Bodies are shy of collecting taxes
due to electoral politics.
- Result? Poor quality of Public Schools, Public Transport, Police, Drinking Water and
Sanitation. सािशर्ननक स्कू िों, परििहन, पुनिस, पेयर्ि औि स्िच्छता की खिाब गुणित्ता
23.9.2 🍋(🧔⚖️🤷‍♂‍🙏) Sp.Cat States → Hill Union Territory Status for J&K?
While Finance commissions no longer give extra weightage to ‘Sp.Category States’ in
horizontal tax distribution formula, but Union provides them additional funding for their
welfare schemes from Union’s own pocket.
Category (श्रेणी) → Welfare schemes Cost sharing (खचश की साझेदािी)

A "Special Category States" (नििेष श्रेणी के िाज्य): Depending on the scheme,
- North-Eastern States, and union may contribute 80-90%
- TWO Himalayan Hilly States: Himachal Pradesh of the scheme cost, rest will
and Uttarakhand # be borne by the State.
B - Other States: who are not in above category Union may bear lower burden
(UP, Bihar, etc.) than Sp. Category states e.g.
- Union territory (UT) with legislature: Delhi, 50:50, 60:40 etc.
Puducherry, Jammu & Kashmir.
C - UT without legislature (नबना निधानयका के कें द्र 100% funded by Union
िानसत प्रदेि): Ladakh, Andaman Nicobar etc.
#
- Before removal of Article 370, the State of J&K was previously in Special category.
- But as a UT with legislature, J&K will get lower assistance from Union in the welfare
schemes. So, 2019-Aug: Central Government considering creating a new category ‘Hilly
Union Territory (पहाडी कें द्र िानसत प्रदेि)’ so J&K may continue to received 90:10 funding.
<update when done>
23.9.3 ✍🏻 Mock Questions for UPSC Mains (250 words each)
1. What are the terms of reference of the 15th Finance Commission? Why were some state governments
apprehensive about them? १५िें नित्त आयोग के विचारार्थ विषय क्या है ? कुछ राज्य इस विषयमें आशंकािान क्यों?
2. Compare and contrast the horizontal tax devolution approaches of 14th FC vs 15th FC क्षेनतर् कि
अंतिण के नसध््ांतों मे 14िा औि 15िे नित्तआयोग की समानता ि नभन्नता की तुिना कीनर्ए
3. Enumerate the grants suggested by 15th FC for 2020-21. अनुदानों की सूची दीनर्ए।
4. “The constitution of GST Council has reduced the role of Finance Commission as the balancing wheel
of fiscal federalism in India.” Do you agree? Justify your stand. "जीएसटी परिषद के गठन ने वित्त आयोग की
भाित में िाजकोषीय संघिाद के संतुलन में भूवमका को कम कि ददया है।" क्या आप सहमत हैं? अपने तकक को उवित ठहिाएं।
5. Examine critically the merits of giving a permanent status to the finance commission. नित्त आयोग को
स्थायी दर्ाश देने (के सुझाि) की योग्यता की गंभीि समीक्षा कीनर्ए.
24 🍋👺🕵🏻 TAXATION → BLACK MONEY & ALLIED ISSUES

Tax Planning / Tax When person invests money in LIC/PPF/Pension funds etc.in such
Mitigation manner that he can claim various deductions legally available in the
(कर-ननयोजन) Income Tax Act. It’s neither illegal nor unethical. (न ही अिैध औि न ही
अनैनतक)
Black Money It is an income or transaction that is taxable yet NOT reported to the
(काला धन) tax authorities concealed from the tax authority.
कािाधन ऐसी आय/िेनदेन है र्ो की कि-पात्र है, ककन्तु कि-अनधकारियों से नछपाई गई.
Parallel Economy The economy that runs on black money. (समानांतर अर्थव्यिस्र्ा)
👺Tax Evasion When person hides income or transaction from tax authorities, and
thereby evades paying taxes. It’s illegal.
(कर अपिांचन)
🤵🍸Tax When person discloses his income and transactions to tax authorities
Avoidance but uses legal loopholes to avoid paying taxes. E.g. Bollywood stars
who register digital media companies in Tax Havens. It may not be
(कर पररहार) illegal in every case, but still unethical.
🍸Tax Haven Is a country that demands little taxes from foreigners and offers legal
loopholes for Tax Avoidance & opportunities for Tax Evasion. E.g.
(कर स्िगथ)
Liechtenstein, Mauritius, Marshall Islands, Cayman Islands, Panama,
Nauru, Vanuatu etc. These countries are geographically small, &
without viable economy. So they offer such mechanism to attract
foreign investors and foreign tourists.
👺→🤵Money  When drug trafficking, ransom, corruption and other criminal
laundering activity generates substantial profits, the criminal tries to spend /
invest / hide the money without attracting attention.
(गैरकानूनी तरीके से
 Money laundering (धनशोधन) is the process of disguising the
प्राप्त धन को िैध source of money, as if it came from a legitimate activity, & then
िनाना) channelize it into banks, share market and other financial
intermediaries.
Hawala  Hawala is an illegal money transfer / remittance system. Money is
paid to an agent who instructs an associate in the relevant country
or area to pay the final recipient.
 Although used by Indian workers in middle east because lower
commission than post-office/bank transfers, + better network in
remote areas.
Shell firms, They do not have any active business operations. Created with sole
Post-box/ objective of money laundering/tax evasion/avoidance E.g. Mishail
Letter-box Packers and Printers Pvt Ltd. allegedly setup by Misa Bharti Yadav to
companies launder ₹1.2 crores (as per Enforcement Directorate).
Panama Papers - International Consortium of Investigative Journalists is a USA
(2016) Paradise based nonprofit organization.
Papers (2017) - They released these incriminating documents from certain law
Mauritius papers firms in tax havens & showed how notable people across the world
(2018) engaged in tax avoidance/ evasion. Amitabh Bachchan &
Aishwarya Rai also named in some them.
Tax Terrorism - Happens when tax authorities put undue pressure on an honest
(कर आतांकिाद) taxpayer to pay more taxes.
- 2012: Vodafone won a case against income tax department in the
🍋🍋🍋🕵🏻: 🙇🏻 supreme court related to Capital Gains Tax on purchase of Hutch
mobile company.
- Afterwards, UPA government amended the Income Tax Act with
retrospective effect and issued fresh notices against Vodafone. So,
Modi called it “UPA’s Tax Terrorism on Corporates”
TDS/TCS Tax Deduction at Source (TDS) स्रोत पर कर कटौती
Tax Collection at Source (TCS) स्रोत पर कर संग्रह
These are the mechanism to discourage tax evasion. Ref: IT Handout
PAN Card 10 letters alphanumeric numbered assigned to all taxpayers in India
स्र्ाई खाता सांययाक by Income Tax Dept. Ref: GST Handout for more.
24.1 (🍋👺)🕵🏻BLACK MONEY → NOTABLE ORGANISATIONS
Enforcement FinMin → Department of Revenue → ED is a Specialized financial

Directorate (ED: investigation agency to enforce following laws
प्रितथन ननदे र्ालय ) 1. Foreign Exchange Management Act,1999 (FEMA)
2. Prevention of Money Laundering Act, 2002 (PMLA)
Directorate of FinMin → Department of Revenue →CBIC → DRI is an agency
Revenue Intelligence against Customs/Narcotics/Wildlife/Arms related smuggling &
illegal activities. (DRI: राजस्ि आसच
ू ना ननदे शालय)
Financial Intelligence It analyses the suspected financial transactions in domestic and
unit (FIU-2004: वित्तीय crossborder levels & reports directly to the Economic Intelligence
Council (EIC: आर्थशक आसूचना परिषद) headed by the FM
आसूचना एकक)
Financial Action Task - is a brainchild of G7, Combating Money laundering and terror
Force (FATF-1989: finance. HQ@Paris. India became member in 2010.
वित्तीय कारथ िाई कायथदल) - Greylist: nations that safe haven for terror financing and
money laundering. E.g. Pakistan, Syria, Yemen, Iceland,
Jamaica and Mauritius, are on the grey list
- Blacklist: nations that are not cooperating in the global fight
against money laundering, terrorist financing. Iran and N.Korea
OECD (1961:आर्र्थक Organisation for Economic Co-operation and Development
HQ@Paris. Works for International cooperation in the matters of
सहयोग तर्ा विकास economy and taxation. Known for Base erosion and profit shifting
(BEPS) Norms. India is not a member of OECD, yet.
सांगठन)
24.2 🍋👺 TAX EVASION (HIDING INCOME / TRANSACTION)

24.2.1 🍋👺⚖️ Prevention of Money Laundering Act (PMLA-2002)
धनशोधन ननिारण अधधननयम

➢ 1998: UN General Assembly (UNGA) declaration on Money Laundering → 2002: India
enacts this law to combat money laundering with search-seizure-arrest-penalty. Main
agency? Enforcement Directorate.
➢ Cases are heard @ PMLA Adjudicating Authority (न्यायननणथयन प्राधधकारी) → PMLA
Appellate Tribunal (अपीलीय प्राधधकरण) → High Court
➢ It also empowers the RBI, SEBI, IRDAI and other regulators to make norms for
Banks/NBFCs & punish the errant parties.
➢ E.g. RBI’s Know Your Customer (KYC) norms and Anti-Money Laundering (AML)
standards. 2013: Online Magazine Cobrapost’s sting operation proved ICICI, HDFC and
Axis Bank were flouting norms so RBI Imposed a heavy penalties.
24.2.2 🍋👺⚖️ Undisclosed Foreign Income & Assets Act (UFIA-2015)
अज्ञात विदे शी आय तर्ा पररसंपवत्त अधधननयम
➢ It requires Indian residents to disclose their foreign assets (e.g. bungalow in Dubai,
Bank account in Switzerland) and income coming from foreign sources (e.g. shell
company in Cayman Island) in their income tax returns.
➢ Foreign source income will be subjected to 30% income tax. No deduction, exemption
or rebate will be given on it.
➢ Violation = Penalty + upto 10 years jail time. If a company is found violating the Act,
then every person responsible to the company shall also be liable for punishment
unless he proves that it was done without his knowledge.
➢ It also empowers the Union to enter into agreements with other countries for the tax
exchange of information.
➢ (Full) Budget-2019: If a person was resident in India at the time of acquiring an
undisclosed asset (and later ran away from India, acquired citizenship elsewhere like
Nirav, Mehul & Mallya), still his properties will also be subjected to this law.
24.2.3 🍋👺⚖️ Benami Transactions Prohibition Act (BTPA- 1988, 2016)
➢ िेनामी लेनदे न (ननषेध) अधधननयम: 1988’s original act did not achieve much results →
amended in 2016. Main Agency? Income Tax Department.
➢ Benami refers to properties that buyer registers in the name of his relative, personal
staff (Driver, Gardner) or a non-existent/ fictitious persons (काल्पननक व्यनि) to avoid tax
authorities’ attention.
➢ E.g. 2018: Misa Bharti Yadav (allegedly) bought farmhouse in the name of her brother-
in-law Nilesh Kumar.
➢ Cases are heard @ PMLA-walli bodies.
➢ Violation = Confiscation of property + penalty + upto 10 years jail time.
🔠❓MCQ. With reference to the ‘Prohibition of Benami Transactions Act’, find correct
statement(s):(Asked in UPSC-Pre-2017)
1. A property transaction is not treated as a benami transaction if the owner of the
property is not aware of the transaction.
2. Properties held benami are liable for confiscation by the Government.
3. The Act provides for three authorities for investigations but does not provide for any
appellate mechanism.
Answer Codes: (a) 1only (b) 2 only (c) 1 and 3 only (d) 2 and 3 only
24.3 (🍋👺)💼 TAX EVASION → FULL-BUDGET-2019 ANNOUNCEMENTS

✓ Stick: Government provides (indirect tax) credits to exporters for the inputs used in
the manufacturing of export products. However, some villains generate fake invoices
to claim such credits. If the amount is ₹ 50 lakh/> it'll be made a non-bailable and
cognizable offence (संज्ञेय अपिाध i.e. police can arrest without warrant).
✓ Cash-based economy = more opportunities for tax evasion and avoidance. So, need to
encourage less-cash economy:
o Carrot: If a businessman has annual turnover more than ₹ 50 crore → No MDR
on him or his customer. RBI and Banks will absorb these MDR costs. We’ll
amend Payments and Settlement Systems Act, 2007 to implement this.
o Stick: 2% TDS on cash withdrawal exceeding ₹ 1 crore in a year from a bank
account from a single user account in post office / bank.
✓ Stick: (Often, businessman deposits black money in his wife’s account and when/IF
raided, wife feigns ignorance about who deposited money in her account. पता नहीं होने
का नाटक किती है) So, Nirmala S. promised to initiate technical reforms so that no one
can deposit money in others’ account without the account holder’s permission.
✓ Carrot: Sabka Vishwas (Legacy Dispute Resolution) Scheme, 2019 (‘LDS’). →
24.3.1 🍋👺🙌 Tax (Evasion) disclosure schemes (“surrender = lesser punishment”)

Under such schemes, a tax-evader can declare his undisclosed income, pay the taxes and
penalty. Then, Income Tax Department will not pursue case against him. (Although Police
may still pursue case if income is from narcotics, kidnapping, extortion etc.)
Income Offer? 45% of the undisclosed income shall be taken away by govt as
Declaration (tax 30%+ surcharge 7.5% + penalty 7.5%).
Scheme (IDS) Validity? 2016 June to Sept. ~67,000 cr black money was declared.
Pradhan Mantri - ~50% of the undisclosed income shall be taken away by Govt. as
Garib Kalyan Tax + Penalty + Pradhan Mantri Garib Kalyan Cess.
Yojana (PMGKY) - Further, 25% of the undisclosed income shall be deposited in RBI’s
Launched after
‘Pradhan Mantri Garib Kalyan Deposit Scheme, 2016’. It’ll be a
Demonetization
Validity? fixed deposit for 4 years @ ZERO % Interest rate.
2016-Dec: - The PM Garib Kalyan cess, and deposit will be used for schemes
To 2017-April related to irrigation,housing,toilets,infrastructure, edu, health etc.
- The scheme was not so successful, hardly ~ ₹ 5000 cr. declared.
🍋🛒👺🙌 Sabka - > ₹ 3.75 lakh crore tax revenue is locked in the service tax and
Vishwas L.D.S excise duty related cases.
Scheme 2019 - (Full) Budget-2019: Launched Sabka Vishwas (Legacy Dispute
In budget-2019 Resolution) Scheme, 2019 (नििाद समाधान योर्ना).
For - Businessman accepts his fault, Tax officials gives a
Service Tax ‘discount/relief/waiver’ in the penalty/late-fees, and the matter
& Excise Duty is settled instead of litigating in courts for years & years.
24.3.2 🍋👺🙌 Vivad se Vishwas Scheme for Direct Taxes (💼Budget-2020)
Presently, >₹9 lakh cr worth direct tax cases are pending before Appellate Forums (अपीिीय
मंचों के समक्ष िंनबत मामिे) viz. IT Commissioner (Appeals) → Income Tax Appellate Tribunals
(ITAT: आयकि अपीिीय न्यायानधकिण ) → HC → SC. So, in 💼Budget-2020 announced “Direct
Tax Vivad se Vishwas Bill/Act, 2020”.
 Scope: Appeal related to Income tax or Corporation Tax, pending before a forum as of
31/Jan/2020. Then,
 Taxpayers can settle with IT dept in following manner
o A) If IT dept filled appeal → he has to pay 50% of disputed tax amt
o B) If Taxpayer filled appeal → he has to pay 100% of the disputed tax amt
 In both situations, he'll get a complete waiver/relief from interest and penalty (ब्यार्
औि र्ुमाशना मे से माफी). Scheme has certain variations if tax amount is settled but
interest/penalty/arrear is disputed. But chasing that info: poor cost:benefit for MCQs.
 Above scheme is valid upto 31/March/2020. Afterwards, there is modified formula upto
30/Jun/2020 wherein he may have to pay some small extra amount.
 This scheme is not applicable if:
o person is under prosecution for criminal activities
o If black money is hidden in foreign countries.
Controversies? 1) Southern India’s Members of Parliament angry that Hindi scheme name
is used. 2) both honest and dishonest tax payers are treated equally. Even dishonest tax
payer can now settle without paying interest/penalty. 3) Income Tax officials’ job-transfer
etc will be linked to how many cases they solve in this scheme. They’re also asked to work
on weekends to fulfill these targets. = resentment among staff (आयकि कमशचािीओमे आक्रोि).
24.3.3 👻 ATMA NIRBHAR BHARAT → Tax Ordinance 2020 [कर अध्यादे श]

 Vivad se Vishwas Scheme & Sabka Vishwas LDS deadline = extended
 Income tax, TDS, TCS, GST: last date for filling = extended (अंनतम नतनथ को बढ़ाया गया)
 TDS rates ⏬ so tax-payer left with more money for spending → shopping / demand⏫
→ economic revival
24.3.4 🍋👺 Tax Evasion → Other Initiatives (अन्य कदम)

Banking Cash A 0.1% direct tax levied on cash withdrawals from banks. Started
Transaction Tax by Chidambaram but later withdrawn (2005-09). Objective was to
(BCTT: 2005-09) encourage less-cash economy and data mining of transactions.
(Suggested) Banking A proposal by a Pune based think-tank to Baba Ramdev that all
Transaction Tax (BTT) the direct and indirect taxes of the Union and the states should be
abolished and replaced with 2% tax on banking transactions.
Impracticable because such experiments were tried and failed in
Australia and other countries as people shifted to using barter
system, diamonds and gold for transaction. 2017: Govt clarified
they are not considering any such proposal. So NOTIMP
SC’s special Chairman: Retd. SC Justice MB Shah, and senior tax officials. They
investigation team recommended various measures against Black Money hidden in
(SIT) on Black Money India, in overseas banks, P-Notes etc. SC ordered Govt to
2014 implement its recommendations.
Operation Clean Income Tax Dept. verified large bank deposits made in the
Money 2017 aftermath of demonetization.
Project Insight 2017 Income Tax Dept. hired L&T Infotech ltd to develop an integrated
platform for data mining & tracking tax evaders.
(Related) Project Saksham 2016: CBEC/CBIC’s project for
digital re-engineering related to GST. It’s not a ‘drive against
black money’ but for ‘Ease of Paying Taxes’.
(Related) Aaykar Setu: CBDT’s mobile app to pay Income Tax.
Restrictions on Cash Budget 2017 → Finance Act, 2017 → if anyone accepts ₹ 2 lakh
Transactions, 2017 /> CASH in a day / in multiple transactions related to one
‘event’, then Income Tax Dept penalty = 100% of the cash
received.
Banks, post office, government organisations are exempted.
Electoral Bonds, 2017 Ref: Pillar#1C: SEBI/Sharemarket handout
24.4 (🍋👋🤵)TAX AVOIDANCE (कर पररहार / कर टालना)
Here, people will not hide the transaction, they’ll blatantly declare transactions in their
official records, but will use legal loopholes (कानूनी-खानमया) to avoid paying taxes.
24.4.1 🍋👋🤵 Double Taxation Avoidance Agreement (DTAA) & Round Tripping
दोहरा कराधान पररहार समझौता
➢ It is a tax treaty signed between two or more countries.
➢ Objective? A taxpayer resides in one country and earns income in another, then he
need not pay (direct) tax twice in two countries for the same income.
➢ e.g. India Mauritius DTAA (1982): If a Mauritius person / company buy shares in India
and sells them at profit, then he need not pay Capital Gains Tax (CGT) in India. Only
the Mauritius government can ask CGT from him. And vice-versa.
➢ Loophole? India has ~10-20% CGT whereas Mauritius has ~0-3% CGT (depending on
nature of asset, how long the buyer kept asset before selling etc). So many Indian
Politicians, Businessmen and Bollywood actors would transfer the money using Hawala
to their shell companies in Mauritius, and then make those Mauritius shell companies
to invest back in Indian assets & avoid paying Indian CGT. This process is called Round
Tripping (राउां ड-ट्रिवपांग) i.e. money that leaves the country through various channels and
makes its way back into the country as foreign investment.
➢ Similar loophole in India Singapore DTAA.
➢ 2016: Modi government amended the treaties = even Mauritius and Singapore
investments in India will be subjected to Indian taxes**.
24.4.2 🍋👋🤵 Tax Avoidance through Non-Resident Status
If a person is 🦁Has to pay his IT on 🐼Has to pay IT on global income e.g.

income coming from income coming from the USA/China?
India?
Ordinarily Yes Yes
resident of India
Non-residents Yes No
If India has a double taxation avoidance agreement (DTAA) with other nation, then above
things may differ (e.g. recall erstwhile Mauritius CGT-roundtripping-walla example)
Table 2: 💼Budget-2020 changed these definitions
Definition in Indian Tax laws Before Budget- 💼Budget-

2020 → 2020
Ordinarily Indian Resident (साधािणतया भाितीय ननिासी) 182 days/> in a 120 days/>
= person who stays in India for → year
Non resident (गैि ननिासी)= person who stays outside 182 days/> in a 246 days/>
India for → year
Implications? Person will have to stay out of India for a longer period if he want to be
treated as “Non-Resident” to avoid taxes on his global income.
💼Budget-2020: A citizen of India (even if he is staying abroad), but if he is not liable to

tax in any other country → he’ll have to pay tax in India. E.g. United Arab Emirates and
Bahrain where no income tax is payable. Then critics started opposing it, so govt made
some technical clarifications →
✓ bonafide Indian workers in other countries are not targeted. (प्रामानणक रूप से िीदेि
गए भाितीय मर्दूिों को पिेिान ही किेंगे )
✓ Only the Indian citizens who deliberately shift residence to avoid taxes in India,
will be targeted. (के िि ऐसे भाितीय नागरिक र्ो र्ानबूझकि भाित में किों से बचने के निए ननिास
स्थान बदिते हैं, उन्हें िनक्षत ककया र्ाएगा।) ✋👨‍🎓How exactly?= NOT-HERE-for-CA-Exam
24.4.3 🍋👋🤵 Place of Effective Management (POEM: पीओईएम)

➢ Bollywood Producer “A” forms a shell company in Cayman Islands (because it has a
very low rate of corporation tax). He gives this company international movie
distribution rights for his Indian movie @₹ 10 only.
➢ Then, Cayman Island company makes ₹ 50 crore profits, but he’d not pay any taxes in
India saying it’s a foreign company making profits from foreign territories, so Income
Tax Department of India has no jurisdiction!
➢ But, here the Place of Effective Management is India, from where the Bollywood
producer was really taking the decisions of this shell company. (फर्ी कं पनी के प्रबंधन का
िास्तनिक स्थान भाित में नस्थत है।)
➢ So, Budget-2015 introduced the concept of POEM. Such overseas / foreign company
will be subjected to India’s 40% Corporation tax + cess + surcharge.
24.4.4 🍋👋🤵 Base Erosion and Profit Shifting (BEPS: बीईपीएस)
➢ Multinational Corporation (MNC) “M” opens fast food outlets in India & makes ₹ 50
crores profit. By default, it should be subjected to 40% Corporation tax in India.
➢ But then MNC shows its Indian outlets had taken loan / raw material / patented
technology from MNC’s shell firm in Bahamas (where Corporation tax is 0-2%). So, after
deducting these operating costs, it has zero profit, so in India, it will pay only 18.5%
Minimum Alternative Tax (MAT), instead of 40% Corporation tax.
➢ Thus, when MNCs shift profit from its source country to a tax-haven to avoid / reduce
paying taxes, its known as “BEPS”. (बहुिाष्ट्रीय ननगम द्वािा मुनाफे को स्थानांतरित किना)
➢ 2019-July: India ratified the OECD’s joint Multilateral Convention to Implement Tax
Treaty Related Measures to Prevent Base Erosion and Profit Shifting (commonly
referred to as MLI) ओईसीडी के बहुपक्षीय समझौते पि हस्ताक्षि ककए हैं
24.4.5 🍋👋🤵 Transfer Pricing (हस्ताांतरण मल् ू य)

➢ Transfer pricing happens whenever two subsidiary companies that are part of the same
multinational group, trade with each other.
➢ Suppose Coca Cola’s (Indian Subsidiary company) buys Sosyo Company’s shares or soda
formula at ₹ 10 crores, and then sells it to Coca Cola’s (Cayman Islands subsidiary
company) at ₹ 10 rupees. Then ₹ 10 is the transfer price.
➢ Coca Cola (Cayman Islands) further sells Sosyo’s shares / Soda-Formula to other
companies at very high price. Yet, Indian tax authorities will not get any Capital Gains
Tax (CGT) even though Coca-Cola (USA holding company) may be making profit
(Capital Gains) of billion$ from this ‘Indian Asset’ (Sosyo).
➢ 2001: Transfer pricing related provisions added in the Income Tax Act. But they were
quite strict leading to ‘tax terrorism’ by IT officials who’d slap notices on every
transaction, resulting into ‘No ease’ of doing business for MNCs.
24.4.6 (🍋👋🤵) 🕵🏻 Authority for Advance Rulings (AAR)

➢ After above episode, Coca Cola (India) would like to know in advance whether its
transfer price of ₹ “y” or its imported / exported item worth ₹ “z” is agreeable to tax
authorities or not? lest it suffers from notices, raids and litigations afterwards.
➢ For this purpose, Authority for Advance Rulings (and their Appellate bodies) have been
set up under Income Tax Act, Customs Act and even GST Act (Recall Amul Camel Milk).
➢ Advance Pricing Agreement (APA: अधग्रम मूल्य ननधाथरण समझौता)= If in previous example,
Coca Cola approached AAR and an agreement was signed between taxpayer and a tax
authority that “Transfer price of ₹ y is agreeable to both of us, and will not attract
any notices / raids / litigations afterwards.”
➢ Related terms? Safe Harbour Regime (SHR), Dispute Resolution Panel (DRP), Alternative
Dispute Resolution (ADR). How they work? poor cost benefit for MCQs.
24.4.7 (🍋👋🤵) 🕵🏻 General Anti-Avoidance Rules (GAAR)

Till now we learned how Indians and foreigners avoid tax payment in India through
loopholes like DTAA, POEM, BEPS, Transfer Pricing etc.
➢ So, UPA/Congress Govt setup economist Parthasarathi Shome panel who suggested
General Anti Avoidance Rules (GAAR: कर पररिजथन रोधी व्यापक ननयम) → they were
incorporated in Income Tax Act in 2012.
➢ GAAR empowers Income Tax officials to send notices to both Indians and foreigners for
suspected Tax Avoidance. (For Tax evasion, we’ve separate laws- PMLA, UFIA, BTPA)
➢ But critics alleged GAAR will result in tax terrorism, harassment, no ease of doing biz.
So successive Budgets kept delaying the GAAR- implementation. Finally done on
1/4/2017.
24.4.8 🍋👋🤵 Angel Tax on Startup Investments (2012)
 Angel investors are the rich people who occasionally invest equity-capital in start-up
companies out of hobby / timepass / profit motive. (Whereas Venture Capital
Companies do the same thing but on regular & serious basis)
 Startup Entrepreneur Sunder Yadav registers a phony “Sunder Construction” as an
(unlisted) Public Limited Company with ₹ 10 Face Value Shares, & sells them to Angel
Investor Sadhu Yadav @a premium price of ₹ 1,000 per share.
 But, even construction sector’s (listed) public limited companies like DLF’s shares are
selling around for ₹ 230.
 Thus, Sundar-startup’s shares are above ‘fair market price (fair market price’)’. So,
this is not a genuine “Angel investment” but rather a facade for laundering Sadhu
Yadav’s money from construction, corruption or extortion business.
 So, UPA/Congress’s Budget-2012 required Sunder Construction (the Startup Company)
to pay 30% Tax + Penalty on the investment they received from Angel investor Sadhu
Yadav. This is dubbed as ‘Angel Tax’.
 Norms were further tightened by Modi-regime, but then controversy that Angel Tax
will discourage the growth of startup companies so norms relaxed- ‘Angel Tax will not
apply if Startup’s turnover is less than ₹ “x” crores or if startup was registered for
upto “y” years & other technical ball by ball commentary that is NOTIMP4UPSC.’
 (Full) Budget-2019: IF Start-ups and their investors provide the required declarations
and information, then IT dept will settle the matter.
24.5 🍋🍋🍋🕵🏻: 🙇🏻 REFORMS TO REDUCE TAX TERRORISM / HARASSMENT

We learned about the reforms to fight “Tax evasion” → ban on cash transaction of ₹ 2
lakh / >, Operation Clean Money etc. So on one hand, Income Tax Department has to
become 😡💪strict / coercive to fight against Tax evasion.
- At the same time, IT dept. also needs to become more 🤝🌷friendly towards honest
taxpayers, while reducing the scope of tax avoidance. Here notable measures are →
Rajaswa Gyan Sangam Organised by CBDT & CBIC for idea exchange between policy
2016 & 2017 makers and senior tax officers.
2016: Modi gave them RAPID Mantra: R for Revenue, A for
Accountability, P for Probity, I for Information and D for
Digitization.
Direct Tax Code 2010 This bill aimed to replace the Income Tax Act, 1961 with simpler
provisions. But, lapsed with 15th LokSabha dissolution in 2014.
Easwar Panel on To simplify the provisions of IT Act, 1961, to remove ambiguities
Direct Taxes 2015 that cause unnecessary litigations & hardships to Taxpayers.
Direct Tax Code - 2017: Setup by CBDT to draft New Direct Tax Legislation (Law)
Taskforce 2017 to replace IT Act 1961.
- 2019: Chairman Akhilesh Ranjan submitted report (Ref:
Pillar#2 income tax handout)
Aaykar Setu 2017: CBDT’s mobile app that helps you calculate and pay Income
Tax, claim TDS refunds etc.
Ease in paying 1. Indian Customs Electronic Gateway (ICEGATE) webportal for e-
Customs Duty services related to the Customs duty.
: 2. ICEDASH webportal: public can view daily data on customs
Portals/Apps by CBIC clearance at seaports and airports. (launched 2019-Nov)
3. ATITHI mobile app: for international travelers to file the
customs declaration in advance (e.g. ‘we are leaving or
coming with “x” gms of gold/diamonds/electronics etc on
which y% customs duty is applicable/exempted’). So, they
don’t have to waste time at airport queues in filing such
declarations. (launched 2019-Nov)
24.5.1 💼 (Full) Budget-2019: Ease of paying taxes & reducing tax-terrorism

Pre-filled online forms for Tax Payers
We’ll extract your financial data from Banks, Stock exchanges, Mutual Funds, EPFO,
Employers’ TDS submissions etc. and provide you with a Pre-filled tax returns containing
your salary income, capital gains from share/bond, bank interests, etc. (पहिे से भिा हुआ फॉमश
आपको दे देंग)े This will help →
1) Income tax payers’ time and energy saved. He’ll not have to consult Chartered
Accountant for every small matter on how to fill form.
2) Accuracy of reporting income and paying taxes
Faceless interaction between Tax payers and Tax official

Personal interaction between the assessee and Income Tax official = more chances of
harassment / bribery. So, we’ll launch two reforms:
1) Cases will be allotted in random computerized lottery basis to IT officials without
disclosing the name, designation or location of the Officer.
2) Faceless assessment in electronic mode. E.g. assessee received a notice about
discrepancy in his reported income vs TDS submitted by his banker, then at initial
stage assessee need not visit IT-office, simply give clarification in web-portal. (फे सिेस:
नबना प्रत्यक्ष/रूबरू मुिाकात के ननधाशिण)
3) 💼Budget-2020: Faceless appeal (फे सिेस अपीि) process introduced. So, even in appeal
stage, assessee need not physically visit IT commissioner / tribunal.
24.5.2 🍋🕵🏻:🧾 Document Identification Number (DIN: दस्तािेज़ पहचान संख्याक)
Whenever Tax official sends letters to taxpayers regarding search authorisation, summons,
arrest memo, inspection notices etc. All such documents will have computer generated
‘Document Identification Number’ (DIN).
✓ 2019-Oct: Central Board of Direct Taxes (CBDT) implemented this.
✓ 2019-Nov: Central Board of Indirect Taxes and Custom (CBIC) implemented this.
DIN system benefits?
✓ It’ll create a digital directory of communication between tax authorities and
taxpayers. Transparency, accountability, efficient and faster clearance of cases,
because all the information available at the click of a mouse.
✓ If a document doesn’t have DIN number, it’ll be treated invalid. Thus, DIN system will
prevent the corrupt tax officials from sending fake notices to harass/blackmail
taxpayers for bribes.
Sidenote: Director Identification Number (DIN): Director of every company is required to
obtain this number from the Ministry of Corporate Affairs under the provisions of
Companies Act. It helps monitoring the company act provisions related to “1 person can’t
be director in more than ‘x’ number of companies” etc.
24.5.3 📯📜 Taxpayers’ Charter in 💼 Budget-2020 (किदाताओ का अनधकािपत्र)
A citizens’ charter (नागरिक अनधकािपत्र) is a document of commitments made by a
government agency to the citizens in respect of the services being provided to them.
 e.g Dept of Post's citizen charter reads, "we'll deliver speed post anywhere in India by
4-5 days →ELSE complain online to this website & we'll solve it → if not solved in 90
days then complain to Postmaster General → then to Chief Postmaster General.”
 1991: citizen charter system first started in UK by PM John Major
 1997: introduced in Indian union ministries/departments.
 💼Budget-2020: CBDT will declare a Taxpayers’ Charter. So, Tax payer will easily
know what services / complaint redressal mechanisms (निकायत ननिािणतंत्र) are available
to him= ⬇taxpayer’s harassment (किदाता का उत्पीडन)
24.6 🍋🌐🤝TAXATION → GLOBAL TREATIES, AGREEMENTS & INDEXES
24.6.1 🍋🌐🤝 Tax Information Exchange Agreement (TIEA: कर सूचना विननमय समझौता)
➢ India has signed such agreements with multiple countries. It enables mutual sharing of
information to detect tax avoidance and tax evasion. Example,
➢ 2019-May: India has notified a tax information exchange agreement (TIEA) with the
Marshall Islands.
➢ On Indian side, CBDT is the the nodal agency for such agreements.
24.6.2 🍋🌐🤝 USA’s Foreign Account Tax Compliance Act (FATCA-2010)

विदे शी खाता कर अनुपालन अधधननयम
➢ USA’s FATCA Act requires foreign financial Institutions (such as Indian Banks, Pakistani
Insurance Companies, Chinese Mutual Funds etc) to report the assets held by
Americans.
➢ This helps US Tax authorities to detect tax avoidance / evasion by Americans who are
hiding income outside USA.
24.6.3 🍋🌐📊 Global Financial Secrecy Index (िैश्विक वित्तीय गोपनीयता सच

ू कांक)
➢ Prepared by London based Think Tank ‘Tax Justice Network (TJN)’.
➢ It uses 20 indicators to measure the countries on their financial secrecy,
opportunities for Tax Avoidance, BEPS etc.
➢ 2020 Ranking: 1st rank Cayman Islands>USA> Switzerland,….India (47).
24.7 💸BLACK MONEY → DEMONETISATION (विमुद्रीकरण)
Definition? Demonetization is the wholesale withdrawal of currency notes from

circulation. (मुद्रा-चिन में से कु छ खास ककस्म की नोटों को हटा देना)
➢ RBI Act 1934: Every banknote is a legal tender. However, RBI Central Board can
recommend the Government of India to notify specific currency note(s) should no
longer be treated as legal tenders. Then FinMin → Department of Economic Affairs
makes official gazette notification.
➢ 1946: ₹ 500 Notes demonetized; 1978: ₹ 1000, ₹ 5000, ₹10000 Notes demonetized.
➢ 2016-Nov-8th: Public was ordered to deposit the (old) Mahatma Gandhi series
currency notes ₹ 500 and ₹ 1,000 (henceforth called “Specified Bank Notes: SBN”) into
Banks and post-offices latest by 30th December 2016. And all the banks and post
offices where ordered to deposit such SBN into RBI.
➢ Specified Bank Notes (Cessation of Liabilities) Ordinance:
- From 31st December 2016, RBI Governor not required to honour “I promise to
pay…” or exchange the SBN. Except for NRIs: deadline little bit relaxed, with
certain caveats.
- Public prohibited from keeping SBN, except for research or numismatics or
museum- and that too in limited amount. This ordinance became Act in 2017.
➢ India is not the only country in the world to do demonetisation. Sweden ( 2013),
European Union ( 2016) and even Pakistan (2015) has done it for their currency notes.
24.7.1 💸Why Demonetise ₹ 500 & 1000?

➢ Demonetization is usually done in the aftermath of hyperinflation, war & regime-
change.
➢ India did it to combat Corruption, Black money, Counterfeiting and Terror finance .
भ्रष्टाचाि, कािा धन, र्ािी नॉट,आतंक का नित्तपोषण
➢ We had 12.04% Cash to GDP ratio, one of the highest in the world. Currency printing &
transportation cost alone was 1.7% of GDP.
➢ “Soil rate” is the rate at which notes are considered to be too damaged to use and
returned to the RBI. (नबगडे/फटे हुए नोटों को रिर्िश बेंक में बदििाना)
➢ For ₹ 500 & 1000 SBN-notes, soil rate was much lower than the currency notes of ₹ 10
to 100. (implying that 500-1000 SBN were used more for ‘storing black money’, rather
than using in transactions.)
➢ So, experts made mathematical comparison of the foreign countries’ economic
development, soil rates of their foreign currency notes etc. and arrived at a figure ₹ 3
lakh crores of Indian black money is stored in SBN (=2% of GDP).
➢ So if SBN were demonetised, the black money holders will not return their currency
notes into banks (fearing IT-RAIDS) and thus black money will be destroyed.
➢ But in reality, ~99.30% of the SBN were returned back into the banking system, so
hardly ₹ 10,720 crore of black money was destroyed by the demonetisation of 2016.
24.7.2 💸How did 99.30% SBN returned into banking system?

If the mathematical modelling was correct, then only 80% of the SBN should have returned
back, & 20% SBN (presumed to be Black Money) should not have returned. But, Black
money owners used following tricks to deposit their SBN in bank accounts:
1. Businessmen / Politicians used their drivers, cooks, gardeners, personal staff members
and relatives as Money mules. This is evident from exponential rise in the deposits in
Pradhan Mantri Jan Dhan bank accounts.
2. SBN were given out as “loans” to poor & as advance salaries to workers.
3. Agents who tied up with corrupt bankers who exchanged SBN without KYC verification.
4. SBN deposited in Cooperative Banks as back-dated Fixed Deposits, because Cooperative
Banks didn’t use Core Bank Solution (CBS) so it was possible to temper records.
5. SBN deposited in banks and then shown as income from sale of (fictitious) grain stock
etc. So, IT-dept can’t demand tax on it (and most state governments not levy tax on
agricultural income due to populism/vote bank politics).
6. SBN deposited in shell companies & shown as income from (fictitious) sale and
invoices.
7. SBN donationed to trust, temples & political parties with backdated receipts (and
those entities are exempted from Income Tax on their income.)…. And so on
24.7.3 💸99.30% SBN returned, but Demonetization not failed experiment because:
✓ Those who could not return their SBN, have lost their black money (₹ 10,720 crore)
✓ Those who used poor people are money mules- must have paid some commission to
them. So even if government did not get tax from black money, atleast poor people
benefited. Thus, indirectly demonetization helped in redistribution of wealth.
✓ Further, during Operation Clean money, IT-dept issued notices to the suspicious bank
accounts where large amount of money was deposited. Such shell firms & their benami
properties are being seized.
✓ With Project Insight & Op. Clean Money: IT dept fetched ₹ 1.30 lakh crore in taxes and
penalty, attached ₹ 7000 crore worth Benami properties, ₹ 1600 crore worth foreign
assets & de-registered ~3.40 lakh shell firms. (says the Int-Budget-2019).
✓ The number of PAN card registration, IT returns, registrations under excise / VAT /
GST have greatly increased in the aftermath of demonetisation which proves that
crooked people have learned lesson. More than 1 cr. new IT assesses added in 2017.
✓ Tax collection has increased from ~₹ 6 lakh crores (2013) to ~₹ 12 lakh crores (2018).
24.7.4 💸Demonetization: Impact as per Economic survey 2016-17

Area 😢 Short Term Challenges 🥰 Long Term Benefits
Banking Administrative challenges Growth in the deposits → more loans can be
on the bankers to exchange given @cheaper interest rate, Less Cash
the banned notes, long economy & associated benefits.
queues of people
Real Sale of houses declined Prices & rents of houses should decline.
Estate Migrants will benefit.
Economy Job loss in cash-intensive Less-cash economy, digitization and
at large sectors like diamond formalization of economy, Bizmen getting
polishing, farm laborer, GST registrations → further surveillance →
MSME forced to show their employees on paper →
EPFO & ESIC benefits to worker.
Growth Slow down improvement
rate
SELF-Study for Mains: Economic survey 2016-17 Vol1ch3, table 2 “impact of demoneti..”
24.8 📘📘ECONOMIC SURVEY ON TAXATION AND FISCAL CAPACITY (वित्तीय क्षमता)

The Economic Surveys of 2015, 2016, 2017 have repeatedly observed that
- Democracy is a contract (अनुबंध). Taxation is the economic glue (आर्थशक गोंद) that binds
government and citizens into this contract.
- But, when ever government delivers poor quality of service in public schools, hospital
etc. → middle class and rich citizens will “EXIT” towards the private school and
hospitals → Then they also feel ‘moral right’ to evade / avoid taxes, because they
are no longer using public services. Result? hardly 4% of Indian voters are taxpayers
(23% is desirable, as per our level of development against BRICS nations.)
- Govt gets less taxes → poor fiscal capacity → poor services → vicious cycle continues
and results in decline of govt’s accountability towards citizens.
24.8.1 🍋🥛The reasons for low Tax: GDP in India:

1) Lack of civic sense among people that paying taxes is their basic duty. (नागरिकों में देि के
प्रनत कतशव्य / नर्म्मेदािी की भािना)
2) Presence of informal sector, parallel economy, cash based economy provides ample
opportunities of hiding income. (नगदी आधारित अनौपचारिक अथशतंत्र)
3) Low per capita income, high level of poverty. Concentration of income in the hands of
few- who are greedy to engage in tax evasion & avoidance. (देि की ज्यादाति संपनत्त चुननंदा
िोगों के हाथों में कें कद्रत, र्ो स्ियं की िािच में कि र्मा नहीं किते)
4) Election funding as the mother source of corruption → therefore black money.
Politician-Builders-Mafia nexus.
5) Due to political considerations, state governments and local bodies do not levy all the
taxes authorised by the constitution e.g. tax on agricultural income. So our (direct)
tax base is narrow. [Tax base: कराधार means the total value of all the persons/
income/property, etc. on which tax is charged.]
6) Loopholes in the tax laws which encourage tax avoidance using Domestic and Offshore
channels. (कि कानूनों में खानमयां)
7) Direct taxes like wealth tax, gift tax and estate duty suffered from loopholes, lax
monitoring and evasion. They didn’t yield much revenue. Hence even referred as
‘paper taxes’, and had to be abolished ultimately. (कागर्ी कि नर्नसे िास्ति में नाम मात्र की
आमदनी होती थी)
24.8.2 📘📘 ES19: “Use Behavioural Economics to improve Tax Compliance”
❖ Plato said, “What is honored in a country, is cultivated there.” Indians join military
because 1) salary 2) because serving in the armed forces is considered ‘honorable’.
❖ So, we should use the principles of Behavioral Economics (व्यािहारिक अथशिास्त्र) enhance
tax compliance (कि अनुपािन). We’ve to modify the social norm from “evading taxes is
acceptable” to “paying taxes honestly is honorable.”
❖ Tax Morale (कि संबंधी नैनतक मनोबि): it is the intrinsic motivation (आंतरिक प्रेिणा) of
taxpayers to pay taxes. When tax morale is down → motivation for tax evasion
increases.
Table 3: Tax Morale is affected by two types of fairness
Fairness Vertical Fairness Horizontal Fairness

ननष्पक्षता (उध्िाशधाि ननष्पक्षता क्षैनतर्) (क्षैनतर् ननष्पक्षता)
Tax Payer’s What I pay in taxes is There should not be a great
thought commensurate to the benefits I difference in the taxes paid by the
process → receive as services from the ‘similar’ sections of society.
Government.
His Tax He sees taxpayers' money wasted If a salaried employee and a
morale is in public expenditure (like shopkeeper are earning ₹8 lakhs
lowered Mayawati’s elephant statutes) per annum, still the salaried
when → instead of better quality of water, employee is forced to pay more
road, education or electricity. taxes than this shopkeeper,
because
- TDS on salary whereas
shopkeeper underreports his
sales in cash payment.
- Shopkeeper shows less profit
through fictitious business
expenditures.
Solution(s) ✓ under-constructions projects ✓ SMS, billboards highlighting
should show signboards “Your self-employed individuals who
tax money at work” pay good amount of tax.
✓ Reminding tax payers that ✓ Public shaming of individuals
public goods can only be who don’t pay taxes. It’ll scare
provided in return for tax other tax-evaders that the
compliance. Most people in probability of their detection
your local community pay has increased.
their taxes on time. ✓ Avoid Tax Amnesties. Give
stringent punishment to tax
evaders.
Further, CEA Subramanian K. suggested:
✓ Top 10 highest taxpayers within a district → They should be given VIP-treatment such
as faster boarding privileges at airports, special “diplomatic” type lanes at
immigration counters, fast-lane on roads and toll booths, etc.
✓ Highest taxpayers over a decade → Important places should be named after them e.g.
roads, trains, schools, universities, hospitals and airports.
✓ In Hinduism, Islam and Christianity - unpaid debt is considered a sin. So,
advertisements should highlight how tax evasion is a violation of such
“spiritual/religious norms”.
✓ Ease in Paying Taxes: Pre-populated Income Tax forms with easy to understand terms.
Even if a person’s tax liability is ZERO, he should be required to fill Income Tax form.
✓ Automated TDS as and where possible and timely release of Tax refunds.
Hindi-Medium-Mains candidates should refer ES2018-19 Vol1 Ch.2

page52’s bullet 2.33 upto page 55’s box 5 to get the clean & formal
vocabulary for Answer Writing
24.9 🍋TAXATION: MISC. TERMS

- American economist Arthur Laffer: if (direct) tax rates are increased
above a certain level, then tax revenue collection will fall because
higher tax rates discourage people from working and/or encourage
them to engage in tax evasion and tax avoidance).
Laffer Curve - So, tax-cuts could lead to higher tax revenue collections.
(लफ़र िक्र): - Modi Budgets from 2017 onwards: The lowest Income Tax slab was
cut from 10% to 5%; The corporation tax on small sized companies
was also brought down from 30 % to 25% in a phased manner.
- 💼Budget-2020: new optional Income tax slabs.
- USA Budget-2017: Corporation tax cut down from 35 % to 15%
Tax buoyancy - If GDP grew by x%, then how much % Income tax collection will grow?
- E.g. if income tax collection growth rate is 11% when GDP growth
(कर उत््लािकता):
rate is 10%, then Income Tax’s tax buoyancy is 1.1
Tax elasticity If first income tax slab increased from say 5% to 15%, then in absolute
(कर लर्चलाता): terms how much more IT-revenue will be generated?
24.9.1 🍋 Net Tax Revenue of the Govt (शुद्ध कर राजस्ि)

Sr. Budget → Revenue Receipts → Tax Receipts 💼Budget 2020-21
A Union’s Direct taxes, incl. cess and surcharge ~ 13 lakh crores
B Union’s Indirect taxes incl. cess and surcharge. ~ 11 lakh crores
- For Union: direct taxes income is >>
indirect taxes.
- But if we summed all the taxes of union,
state and local bodies then indirect taxes
income >> direct taxes.
C Union territories without legislature: their direct ~7500 crores
and indirect taxes: विधानमंडल रहहत संघ राज्य क्षेर
D Gross Tax Revenue (=A+B+C) सकल कर राजस्ि ~24 lakh crores
E Minus the Tax devolution to States (कर हस्तांतरण) (-)~8 lakh crores
as per the Finance Commission
F Minus Contributions to National Disaster Response (-)~3500 crores
Fund in Home ministry**
D-E-F Net Tax Revenue of Union (शुद्ध कर राजस्ि) ~ 16 lakh crores
**Public Account → National Disaster Response Fund (राष्ट्रीय आपदा प्रनतक्रिया कोष) is a statutory fund under
Disaster Management Act, 2005. Previously, called National Calamity Contingency Fund (NCCF).
24.9.2 🍋 Revenue Shortfall (राजस्ि में कमी)
Type Amount in ₹ crore बर्ट अनुमान संिोनधत अनुमान
Budget Estimates Revised Estimates
2019-2020 2019-2020
Direct Tax Corporation Tax 766000 610500
Direct Tax Income Tax 556200 547000
Direct Tax Securities Transaction Tax 12800 12500
Indirect Tax GST 663343 612327
Indirect Tax Excise Duty 300000 248000
Indirect Tax Customs Duty 155904 125000
Total Gross Tax Revenue → 24.5 lakh cr 21.5 lakh cr
Hoping this much But towards reality
- Budget 2019 is presented for the next financial year starting from 1st April 2019 to
31st March 2020. So, FinMin could have only made projections /estimations about how
much taxes will be collected during 1/4/19 to 31/3/20.
- But throughout the year, based on the advance tax-collection figures & monthly GST
collection figures, FinMin will have to re-adjust the estimates.
- 1/2/2020: Budget 2020 is presented for next FY-2020-21. Along with that, Govt will
present revised estimates for previous Financial Year (2019-20).
- From the table we can see Gross Tax collection is less than expected (24.5 MINUS 21.5)
= ~3 lakh crore is ‘Revenue Shortfall’, mainly because GST & Corporation Tax
collection are much less than expected due to slowdown in economy.
24.9.3 ✍🏻 Mock Questions for UPSC Mains (250 words each)

1. (Asked in GSM3-2013) Money laundering poses a serious threat to country’s economic sovereignty. What
steps are required to be taken to control this menace? मनी लॉन्ड्रंग देश की आर्थकक संप्रभुता के वलए एक गंभीि खतिा
है। इस खतिे को वनयंवित किने के वलए क्या कदम उठाए जाने की आिश्यकता है?
2. Despite being a trillion dollar economy, India's tax to GDP is quite low. Suggest ways to remedy this
contrast. ररनियन डॉिि की अथशव्यिस्था होने के बािर्ूद, भाित का कि:र्ीडीपी अनुपात काफी कम। इस निषमता को हि किने के
उपाय सुझाए.
24.10 📥🚆📮 BUDGET → REVENUE PART → RECEIPTS → NON-TAX RECEIPTS
🚆📮 Notable sources of Non-Tax revenue (In descending order) 2020-21

✓ Interest receipts (ब्याज प्राश्प्तयां received on Union’s loans to states, ~1.7 lakh cr.
railways, CPSE, foreign countries.) is a revenue receipt. [Had those
borrowers repaid loan-principal, then that portion is ‘Capital Receipt.]
✓ Dividends and profits received from CPSE, PSBs, RBI. [Had Union sold its
shares to a third party (disinvestment / privatization), then that will be
‘Capital Receipt’].
Union’s income from (Dividend & Profits) >> from Interests.
Income from selling various goods & services such as railways, postal ~2.2 lakh cr.
services, selling of India Yearbook-, Yojana-Kurukshetra magazines, fees
that CISF charges for giving protection to Private Airports, auction of
spectrum & mining rights, selling of commemorative coins etc.
Grant in Aid (अनुदान)/ Donations received by Union. 812 cr.
[Had Union received ‘loan’, it’ll be ‘Capital Receipt’.]
Similar Non-tax revenue earned by UT without Legislature ~ 2300 cr.
Sum of Above= Total Non-Tax Revenue Receipts कर-भभन्न प्राश्प्तयां ~4 lakh cr.
Total Revenue Receipts= NET Tax receipts (~16.0 lcr) + Non-Tax receipts (~4 lcr)= ~20lcr.
Figures are not important, but the fact that revenue budget: the tax receipts >> non-tax
25📤⏰ BUDGET → REVENUE EXPENDITURE

िजट → राजस्ि भाग → राजस्ि व्यय: Revenue-expenditure are usually associated with
- Expenditures spent on day to day functioning of the organs of the state =
- salaries & pensions, stationery, electricity bill, phone bill etc.
- in Executive, Judiciary, Legislature;
- Various Constitutional & Statutory bodies.
- Expenditures that do not create income generating assets or permanent assets or
financial assets.
- Thus, money SPENT on loan-interests, subsidies, scholarships, grants etc. counted here
Notable Revenue Expenditures (In descending order) 2020-20
Interest to be paid on previous loans is Revenue Expenditure. [Whereas 7 lakh cr.
Union repays loan-principal, its ‘Capital Expenditure’]
- Grant-in-Aid (अनुदान) to States & Local Bodies for Disaster 5.6 lakh cr.⬆
Management, Panchayati Raj Development etc. as per Finance
Commission recommendations. Additionally, Govt also gives grants to
foreign countries for its soft diplomacy.
- Grant = Amt doesn’t have to be returned with Interest. (Whereas If
Govt gave ‘loans’ to States/CPSE/Foreign Countries then it’s an
income generating financial asset = counted under Capital
Expenditure).
Subsidies: Within them descending order (Approx. Figures) 2.6 lakh cr
⬇ means it’s reduced than last budget
Last budget
1. 🌽Food subsidies: ₹ 1.2 lakh cr. ⬇
allotted
2. 🌽👨🏼‍🔬Fertilizer (Urea > Others): ₹ 71,000 cr⬇ ₹3.4 lakh cr so
3. ⛽️Fuel (LPG > Kerosene): ₹ 41,000 cr⬆ ⬇
4. Interest Subsidies on loans: Farmers (highest), MSME, Affordable
Housing, LIC Vay Vandana Yojana etc.: 28,000 cr.⬆
5. Other (Price stabilization fund, Cotton & Jute etc.): 6000 cr. ⬇
👮🏼Defence revenue expenditure (e.g. soldier salaries, fuel for tanks) 2.2 lakh cr⬆
👴🏼Pension to retired employees (In the last 3 years it has kept rising.) 2.3 lakh cr⬆
➢ Economic services related revenue expenditure (Agriculture, energy, Fig. not imp.
transport, communication, Science technology)
➢ Social services related revenue expenditure ( health, education, social
security):
➢ Expenditure on Administrative machinery (Police, Jail, External Affairs
etc.), Elections, Parliament, Judiciary:
➢ Revenue expenditures of UT without Legislature:
Total Revenue Expenditure कुल राजस्ि व्यय ~26 lakh cr⬆
Total Revenue Receipts (Tax + Non Tax Receipts) कुल राजस्ि प्राश्प्तयां ~20 lakh cr⬆
⚠️ Revenue Deficit = Revenue Receipt MINUS Expenditure ~6 lakh cr⬆
Projected (nominal) GDP for 2020-21 is ₹ 225 lakh crores. So Revenue 2.7 %⬆
Deficit as a percentage of GDP = (6 divided by 225) x 100=
25.1 📤⏰(🌽⛽️) REVENUE EXPENDITURE → SUBSIDIES

Tax (₹ ~16 lakh crores in Budget 2020) Subsidies (₹ ~ 2.6 lakh cr in Budget 2020)
Tax is a compulsory contribution imposed by A subsidy is a benefit given to an individual
State. or firm by the government to reduce some
Refusal to pay the tax is punishable. type of burden. A person may refuse to
accept the subsidy, he will not be punished.
Tax doesn’t promise specific and direct A specific benefit is promised e.g. 6000 to
goods/services to the taxpayer. (Mukesh farmers, idli@₹ 1 rupee in Amma Canteen
Ambani’s car will still suffer from potholes) (Tamilnadu).
25.1.1 📤⏰(🌽⛽️) Types of subsidies with selected examples

1. Given in direct cash (or bank transfer): PM KISSAN 6k for farmers, LPG Pahal ~200 per
cylinder. नगद में.
2. Given in kind: free school bags, uniform and books to the poor children, free
medicines in public hospitals, free insurance. मुफ्त िस्तु या सेिा के रूप में
3. Indirect subsidies (पिोक्ष): cheap fees in government colleges, cheap kerosene, cheap
urea, cheap crop insurance premium etc. Here govt. is paying some money to an
organization so they may provide goods/services @cheap rate to the beneficiary.
4. Implicit Subsidies (अंतर्नशनहत): Govt supresses the supply so to ⏫ the prices to help a
sector. E.g. Indian govt banned import of American chicken/poultry/eggs. So, shortage
of chicken helps local Indian poultry industry to demand high prices from public. Here
Indian poultry receiving ‘implicit subsidy’ (from public), even though Govt is not
paying them money. (More in 📑Pillar#3B -> WTO)
5. Cross-Subsidization (क्रॉस सहानयकीकिण): To keep rail travel cheap for the poor people,
Railways keeps the passenger tickets lower than its input cost. To compensate this
loss, Railways keeps freight (goods transport) prices higher. This is called “Cross
subsidization” (More in 📑Pillar#5 Infra → Railways)
6. Regulatory (ननयामक) subsidies: e.g. if State Electricity Regulatory Commission directs
companies- that electricity to farmers must NOT to be beyond ₹ “x” per unit.
7. Procurement (खरीद) subsidies: e.g. FCI purchasing at food grains from farmers at
minimum support price (MSP). (More in 📑Pillar#4A -> AGRO)
8. Interest (ब्याज) subsidies / subvention: govt pays “x%” interest on agriculture, MSME,
affordable housing loans.
25.1.2 👍🏻 👎🏻 Impact of Subsidies (सश्ब्सडी का प्रभाि)

❖ 👍🏻 Merit Goods (लाभदायक िस्तुऐां): Healthcare, education, scientific research, LPG,
solar panels, wind mills etc. Here subsidies can increase the positive externalities.
(Cheap LPG → poors don’t use firewood → more trees & less indoor pollution.)
❖ 👎🏻 But subsidies on diesel, kerosene generate negative externalities (नकािात्मक बाह्यता)
on the environment.
❖ 👎🏻 Urea subsidies to industries → cheap urea to farmers → excessive consumption →
soil & water pollution, algae-blooms.
❖ 👎🏻 Subsidy leakage (सख्ब्सडी ररसाि): When ghost beneficiaries (non-existent persons
propped up by corrupt officials), and ineligible (rich) people are receiving subsidy.
25.1.3 📘📘 Past Economic Surveys on subsidy delivery
📘📘 Economic survey 2014-15:
✓ We should use Jandhan Aadhar Mobile (JAM) trinity to reduce the subsidy leakage.
✓ Direct benefit transfer (DBT: प्रत्यक्ष िाभ हस्तांतिण) can’t be a panacea in every case,
because males of the house may waste DBT-money on liquor & tobacco. So, in
some cases, Biometrically Authenticated Physical Uptake (BAPU) mechanism will
be better i.e. beneficiary goes to a grain / fertilizer shop and uses his Aadhaar &
fingerprint to purchase subsidized goods. (बॉयोमीररक रूप से प्रमानणत किके िाभाथी को
िस्तु देना)
➢ The present subsidy delivery mechanism suffers from two errors:
○ Inclusion Error (समािेि त्रुरट): Non-poor (=affluent people) are receiving ~40%
of subsidies.
○ Exclusion Error (बनहष्किण त्रुरट): real poor are not getting subsidies due to
corruption (भ्रष्टाचाि).
✓ So better to abolish all type of subsidies and directly deposit a specific sum of
money into beneficiary’s bank account to help him buy goods/services from open
market = Universal Basic Income (सािशनत्रक बुननयादी आय) (UBI): More in Pillar#6.
25.1.4 📘📘 ES19: Use ‘Behavioural economics (व्यिहाि अथशिास्त्र)’ to ↓ subsidy bill

To reduce Government’s subsidy burden: Above the Poverty Line (APL: गिीबी िे खा से ऊपि)
households should be encouraged to voluntarily surrender their LPG subsidies using
following tools of Behavioral economics:
✓ People have a strong tendency to go with the status quo. So, ‘Default ticked option’ in
LPG registration forms should be ‘I wish to give up the subsidy’, so a person will be
‘forced’ to untick the option to avail the subsidy benefit.
✓ Similarly, income tax forms should contain extra-fields with pre-ticked options like ‘I
want to give up LPG subsidy’.
✓ The online /SMS-based ‘subsidy giving up process’ should be quick and hassle-free. It
should not take more than a few minutes. Because every additional minute required to
complete the formalities= increases the chances that person will drop out in the
middle of the process.
✓ People act positively when they see others act positively, and particularly when they
can relate to such individuals. So, online “scroll of honour” should show
name/photos/social media-profiles of others in their area who gave up subsidies.
✓ Advertisements to highlight that “Rich people are helping in poverty removal by giving
up subsidies.“
✓ When people are watching a movie with social message (such as Padman, Toilet Ek
Premkatha etc), it should contain ad asking people to give up full / partial subsidy.
✓ Once a person gives up subsidy, he should be shown the photos of poor people
benefitting from his act / or a video with a beneficiary saying ‘thank you’.
Hindi-Medium-Mains candidates should refer ES2018-19 Vol1 Ch.2 bullet 2.26 to 2.31 to
get the clean & formal vocabulary for answer writing.
25.2 📤⏰🥳 REVENUE XPDR → SALARIES→ 7TH PAY COMMISSION (िेतन आयोग)
Setup by Finmin → Department of Expenditure. 1st: Srinivasa Varadachariar (1946). 7th:
(Retd) Justice AK Mathur (2014). Its recommendations became effective from 1/1/2016.
Major highlights were:
✓ New system of “Pay Matrix” instead of previous system of pay band and grade pay.
✓ Regulatory bodies salaries increased: Chairman ₹ 4.50 lakh / month, members ₹ 4l.
✓ Minimum pay in Central service increased to ₹ 18k / per month (Group-D).
✓ Maximum pay: ₹ 2.25 lakh per month for Apex scale (e.g. Secretary of a Dept.), and ₹
2.50l (for Cabinet Secretary)
✓ It adopted Dr. Aykroyd formula to computing wages at periodic interval (formula
tracks the changes prices of the commodities used by a common man). So, critiques
believe there will not be an 8th Pay Commission because salaries will be updated
automatically at regular interval, using this formula.
✓ It abolished various type of ‘interest free allowances’ e.g. Purchase of bicycle etc.
✓ It continued ‘interest-bearing advances’ for purchase of computer, house building
(upto ₹ 25 lakhs). [= employee can borrow money from department but he will have to
return it with interest.]
✓ Various reforms for defence and CAPF services.
✓ Made stronger rules in Modified Assured Career Progression (MACP) system so lazy
officials don’t get promoted.
25.2.1 🥳 Pay Commission: Associated terms

- Dearness Allowance (DA: महां गाई भत्ता): It’s given by an employer to protect the
employees against rise in inflation. In government services, both working employees
and retired pensioners are given dearness allowance.
- House Rent Allowance (HRA: मकान ककराया भत्ता): rent allotted by the employer for
employee's accommodation (house).
- Gratuity (ग्रेच्युटी): It’s a lump sum amount “x” given by an employer to the employee
for rendering services continuously for “y” number of years. Usually given at
retirement. Norms governed under Payment of Gratuity Act, 1972
- One Rank One Pension (OROP): 2015- Modi govt. promised equal pension to military
personnel retiring in the same rank with the same length of service, regardless of the
date of retirement. Although, Ex-servicemen unhappy about the base year &
calculation formula.
25.2.2 🏃🏻‍♀‍✍🏻🕵️‍♂‍National Recruitment Agency (NRA: िाष्ट्रीय भती एर्ेंसी)

 Present: multiple recruitment exams conducted by multiple agencies at different
points of time throughout the year..
 Future: NRA will conduct Common Eligibility Test for recruitment to Non-Gazetted
personnel in Government and PSBs. → SSC and IBPS will conduct Mains exams for
respective posts → time and cost saved for both candidate and recruiting agencies.
 💼Budget-2020: we’ll set up NRA & open a (computerized) test centre in every
district.
 Self-Study-Topics for GSM2/GSM4: 1) Lateral entry in IAS. 2) Three years tour of duty
in Army. Source? Internet / Current Affairs PDF/Lectures.
25.3 (📥<📤)⏰⚠️ REVENUE DEFICIT (राजस्ि घाटा: 2.7% OF GDP)
When government spends more than its income in revenue account, it incurs …
- Revenue deficit = Revenue expenditure – Revenue receipts.
- Since a major part of revenue expenditure is committed expenditure (like Interest
repayment on previous loans, staff-salaries & pensions which Govt can’t ‘avoid’), so it
is quite difficult to ⬇ the revenue deficit.
- So, when revenue deficit ⬆, government will be forced to borrow more money or cut
down the expenditure in the capital part (= less new schools, bridges and hospitals).
This will result in lower human development and lower economic growth (less new
bridges → ⬇ demand of steel/cements → ⬇ growth in those sectors).
25.4 (📥<📤)⏰⚠️ EFFECTIVE REVENUE DEFICIT (प्रभािी राजस्ि घाटा: 1.8% OF GDP)
- We’ve counted Grant-in-Aid to States / Local Bodies as ‘Revenue Expenditure’, but
some portion of that ₹₹ may have been spent by the States / Local Bodies for building
Panchayat-Bhavans, Disaster Management Training Institutes, Cranes & Bulldozers for
Disaster rescue operations etc. which are actually “Capital Assets”.
- Therefore, Budget 2011 (Chidambaram) introduced a new concept:
- Effective Revenue Deficit = Revenue Deficit (~6 lakh cr) MINUS Grants to various
bodies which were spent for creation of Capital Assets (2 lakh cr)
- ERD= ~4 lakh crores (1.8% of GDP) for 2020⬆. (⬆means increased than last year)
- To be continued…. Next Handouts
2A) ✅ Direct Indirect Taxes

2B) ✅ Black Money, 15th FC
2C) ✅ Subsidies, Salaries, Revenue Expenditure
2D) Disinvestment, Deficit, FRBM Act, Fiscal Council, Budgeting-Railway budget, plan-
non plan budget, & scheme types etc.

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What are the key aspects discussed around the 15th Finance Commission?

What are the key aspects discussed around the 15th Finance Commission?

What are some of the major grants recommended by the 15th Finance Commission?

What are some of the major grants recommended by the 15th Finance Commission?

2B: Finance Commission, Black Money & 2C: subsidies, revenue expenditure

23 🍋 (🧔⚖️👨‍🦲👳🏻‍♀‍👳🏻) Taxation → Finance Commission ................................ 243

23.1 Introduction to Finance Commission (वित्त आयोग) .................................... 243

23.2 🕵️‍♂‍(🍋 🧔⚖️👨‍🦲) Fifteenth FC Composition (setup in 2017-Nov) ................. 244

23.2.1 📑15th FC Terms of Reference (TOR: विचारार्थ विषय)? ......................... 244

23.3.3 👪 States fear#3: Census-2011 (जनगणना -2011) ............................... 246

23.3.5 ✍🏻15th FC TOR: Conclusion (ननष्कषथ) ............................................. 246

24.4 (🍋👋🤵)Tax avoidance (कर पररहार / कर टालना) .................................... 261

24.4.3 🍋👋🤵 Place of Effective Management (POEM: पीओईएम) ................... 263

24.4.5 🍋👋🤵 Transfer Pricing (हसतांतरण मल्

24.4.6 (🍋👋🤵) 🕵🏻 Authority for Advance Rulings (AAR) ............................ 264

24.6.3 🍋🌐📊 Global Financial Secrecy Index (िैश्विक वित्तीय गोपनीयता सच

24.7 💸Black Money → Demonetisation (विमुद्रीकरण) ...................................... 267

24.7.1 💸Why Demonetise ₹ 500 & 1000? ................................................ 268

24.9.1 🍋 Net Tax Revenue of the Govt (र्द्

24.9.2 🍋 Revenue Shortfall (राजसि में कमी)............................................. 273

25.1.2 👍🏻 👎🏻 Impact of Subsidies (सश्ससडी का प्रभाि) .................................... 276

25.1.3 📘📘 Past Economic Surveys on subsidy delivery............................... 277

25.2.1 🥳 Pay Commission: Associated terms ........................................... 278

23🍋 (🧔⚖️👨‍🦲👳🏻‍♀‍👳🏻) TAXATION → FINANCE COMMISSION

23.1 INTRODUCTION TO FINANCE COMMISSION (वित्त आयोग)

23.2 🕵️‍♂‍(🍋 🧔⚖️👨‍🦲) FIFTEENTH FC COMPOSITION (SETUP IN 2017-NOV)

Chairman N.K. Singh (Retd. IAS, Ex-Member of Parliament)

23.2.1 📑15th FC Terms of Reference (TOR: विचारार्थ विषय)?

23.3 🕵️‍♂‍📑: (👨‍🦲 → 😱) 15TH FC’S TOR: APPREHENSION OF THE STATES

23.3.1 👪 States Fear#1: Vision for New India 2022

23.3.2 🏆 States fear#2: Performance based incentives (प्रदर्थन आधाररत प्रोत्साहन)

State’s Efforts in Electricity theft is a rampant problem in certain Gangetic

23.3.4 🔪 States fear#4: Debt and Grants (ऋण और अनद

23.3.5 ✍🏻15th FC TOR: Conclusion (ननष्कषथ)

Error in Answer Writing: Don’t digress to unsolicited suggestions &

23.4 🍋 [🧔⚖️(👨‍🦲👳🏻‍♀‍👳🏻)] FC: VERTICAL TAX DEVOLUTION FROM UNION TO STATES

FC → 12th (2005-10) 13th (2010-15) 14th (2015- 15th (2020-21)

15th FC horizontal distribution formula components (घटक) → (भािांक%) Weight%

👪 Population (as per Census-2011: आबादी): More population = more ₹₹ 15%

1) Uttar Pradesh (17.931%) 11) Chhattisgarh (3.418%) 21) Himachal (0.799%)

23.6.2 💸🤲🏼🤦🏼‍♂‍Post-Devolution Revenue Deficit Grants (74kcr)

Figure 1: हमको औि पैसा दो, हमािे िार्स्ि घाटे की भिपाई के निए!

Suppose (amt in ₹cr) 2020-21

23.6.4 💸🤲🏼🍽15th FC: Sector Specific Grants (क्षेत्र-निनिष्ट अनुदान, ~7700cr)

23.6.5 💸🤲🏼🙋🏿15th FC: Special Grants: (नििेष अनुदान , ~6700kcr)

23.6.6 💸🤲🏼💪🏿 15th FC: Performance-based incentives (प्रदिशन-आधारित प्रोत्साहन)

23.6.8 ✍️ 15th FC Report for 2020-21: conclusion

23.6.9 👻ATMANI → 🧔🕉👨‍🦲Helping States → Tax devolution and grants

23.7 🕵️‍♂‍(🍋🧔⚖️👨‍🦲)⏰ FC: GIVING PERMANENT STATUS (स्थायी दर्ाश देना)

23.7.2 🙋‍♂‍👌Argument in favour of giving permanent status to FC

23.7.3 ✍🏻 Conclusion: give permanent status to FC or not?

23.8 🕵🏻 FC VS PC VS NITI: WHAT’S THE DIFFERENCE?

🕵🏻 🍋⚖️ Finance 🕵🏻🤴 Planning Commission 🕵🏻🧔 NITI Aayog

< More about Planning Commission and NITI Aayog in Pillar#4>

🔠❓ (Pre19-SetA) Q69. In India, which of the following review(s) the independent

23.9 🍋(🧔⚖️🤷‍♂‍🙏) SPECIAL CATEGORY STATES? विशेष श्रेणी के राज्य?

Category (श्रेणी) → Welfare schemes Cost sharing (खचश की साझेदािी)

24 🍋👺🕵🏻 TAXATION → BLACK MONEY & ALLIED ISSUES