Fiscal policy, budget and taxation: previous-year questions
38 real UPSC Prelims questions (2011–2026) with the official answer and a clear explanation. 11 of them came in the last five papers.
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Questions per year, counted from the official papers.
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There has been a persistent deficit budget year after year. Which action/actions of the following can be taken by the Government to reduce the deficit?
- 1. Reducing revenue expenditure
- 2. Introducing new welfare schemes
- 3. Rationalizing subsidies
- 4. Reducing import duty
Select the correct answer using the code given below.
Answer (c) & explanation
A deficit falls when spending falls or revenue rises. Cutting revenue expenditure (1) and rationalising subsidies (3) both reduce spending, so the answer is (c). New welfare schemes (2) add spending, and reducing import duty (4) cuts revenue; both widen the deficit.
India's FRBM Act (2003) set the path for fiscal discipline, later revised by the N. K. Singh committee to focus on debt. Notice how this question repeats a 2015 idea with one change: a revenue-reducing step in place of expanding industries. Small changes in options test whether you truly understand the logic.
Answer as per the official UPSC answer key.
Which of the following is/are included in the capital budget of the Government of India?
- 1. Expenditure on acquisition of assets like roads, buildings, machinery, etc.
- 2. Loans received from foreign governments
- 3. Loans and advances granted to the States and Union Territories
Select the correct answer using the code given below.
Answer (d) & explanation
All three are included (d). The capital budget has capital receipts and capital expenditure. Loans received from foreign governments (2) are capital receipts because they create a liability. Acquiring assets such as roads and buildings (1) and loans to States and UTs (3) are capital expenditure because they create an asset or a claim.
The revenue budget, by contrast, covers taxes, interest and day-to-day spending that create no asset or liability. The government has pushed capital spending to over ₹11 lakh crore to boost growth. Notice how capital spending has a bigger multiplier effect than revenue spending.
statement 2 is a receipt, not spending. The capital budget covers both sides.
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Answer as per the official UPSC answer key.
The term 'Base Erosion and Profit Shifting' is sometimes seen in the news in the context of
Answer (b) & explanation
BEPS is about curbing tax avoidance by multinationals (b). Base Erosion and Profit Shifting means MNCs move profits to low-tax places, shrinking the tax base where they really do business. The OECD/G20 BEPS project gave 15 actions in 2015 to fight it. It has nothing to do with mining in backward areas (a), biopiracy of genetic resources (c), or environmental costs of projects (d).
India brought in the equalisation levy (2016) on digital ads and joined the Two-Pillar solution. Pillar Two sets a 15% global minimum corporate tax. India dropped its 6% levy on online ads from April 2025. Notice the overlap with GAAR and the Place of Effective Management rule, two domestic tools used against treaty shopping.
Answer as per the official UPSC answer key.
With reference to the Fourteenth Finance Commission, which of the following statements is/are correct?
- 1. It has increased the share of States in the central divisible pool from 32 percent to 42 percent.
- 2. It has made recommendations concerning sector-specific grants.
Select the correct answer using the code given below.
Answer (a) & explanation
The 14th Finance Commission (chaired by Y. V. Reddy, covering 2015–20) raised the States' share of the divisible pool from 32% to 42%, the biggest jump ever (1 correct). It gave grants only for local bodies, disaster relief and revenue deficits, and deliberately made no sector-specific grants, preferring untied funds, so statement 2 is wrong. The answer is (a).
The 15th Finance Commission (N. K. Singh) set the share at 41% after Jammu and Kashmir became a Union Territory, and the 16th (Arvind Panagariya) covers 2026–31. Notice how Article 280 makes this body the balance wheel of fiscal federalism.
Answer as per the official UPSC answer key.
A decrease in tax to GDP ratio of a country indicates which of the following?
- 1. Slowing economic growth rate
- 2. Less equitable distribution of national income
Select the correct answer using the code given below.
Answer (a) & explanation
Tax collections are buoyant: they rise faster than GDP in good years and fall faster in slow years. So a falling tax-to-GDP ratio usually signals slowing growth (1 correct). Statement 2 is wrong because the ratio says nothing about how income is shared among people; that needs measures such as the Gini coefficient. The answer is (a).
India's combined tax-GDP ratio is around 17–18%, low compared with many developed economies, partly because of a large informal sector. Notice how GST and better compliance aim to widen the tax base without raising rates.
Answer as per the official UPSC answer key.
There has been a persistent deficit budget year after year. Which of the following actions can be taken by the government to reduce the deficit?
- 1. Reducing revenue expenditure
- 2. Introducing new welfare schemes
- 3. Rationalizing subsidies
- 4. Expanding industries
Select the correct answer using the code given below.
Answer (a) & explanation
Reducing revenue expenditure (1) and rationalising subsidies (3) both cut spending, so they directly reduce the deficit (a). Introducing new welfare schemes (2) adds spending and widens the deficit. Expanding industries (4) may raise tax revenue over time, but it is not a direct budget action to cut the deficit.
India's FRBM Act (2003) set targets for fiscal discipline, and the government aims to bring the fiscal deficit down to about 4.4% of GDP in 2025-26 and then focus on reducing debt. Notice how better targeting of subsidies through DBT cuts leakages and deficits together.
UPSC repeated this question in 2016 Q3, with "reducing import duty" in place of statement 4.
Answer as per the official UPSC answer key.
The sales tax you pay while purchasing a toothpaste is a
Answer (d) & explanation
In 2014, sales tax (by then State VAT) on goods sold within a State was levied and collected by the State under Entry 54 of the State List (d). The Centre levied Central Sales Tax only on inter-State sales, and that too was collected by the States, so (a), (b) and (c) do not fit an ordinary toothpaste purchase.
Since July 2017 a toothpaste carries GST: CGST and SGST shared by the Centre and the State, under the 101st Amendment. Sales tax now survives only on items outside GST, such as petrol, diesel and alcohol for drinking. Notice how a question can change its answer with a reform, so read it in its year.
read the question in its 2014 setting. Today the answer would be GST, not sales tax.
Answer as per the official UPSC answer key.
With reference to Union Budget, which of the following is/are covered under Non-Plan Expenditure?
- 1. Defence expenditure
- 2. Interest payments
- 3. Salaries and pensions
- 4. Subsidies
Select the correct answer using the code given below.
Answer (c) & explanation
All four were Non-Plan expenditure (c). Until 2016-17 the Budget split spending into Plan (new schemes and projects under the Five-Year Plan) and Non-Plan (running costs). Defence, interest payments, salaries and pensions, and subsidies all fell under Non-Plan. Options leaving out any of them are incomplete.
From 2017-18 the Plan/Non-Plan split was dropped, following the end of Five-Year Plans, and the Budget now uses revenue and capital expenditure. The same year the Railway Budget was merged into the Union Budget. Notice how fiscal terms change with reforms, so read such questions in their year.
this split no longer exists. Learn it for history and know today's revenue/capital split.
Answer as per the official UPSC answer key.
In India, deficit financing is used for raising resources for
Answer (a) & explanation
Economic development is correct (a). Deficit financing means the government spends more than it earns and fills the gap by borrowing or, in the old sense, by printing money through the central bank. In planned India, it was used to fund development spending under the Five-Year Plans, such as dams, steel plants and infrastructure, when tax revenue was not enough. (b) is wrong: deficit financing adds to debt rather than redeeming it. (c) is wrong: balance-of-payments gaps are met through reserves or IMF help. (d) is wrong: it does not reduce foreign debt.
Notice the risk: excessive deficit financing fuels inflation. The FRBM Act, 2003 set limits, and the Centre's fiscal deficit target is 4.4% of GDP for 2025–26, with a shift to a debt-to-GDP anchor from 2026–27. Trap: deficit financing is a means, not a debt-reduction tool.
Answer as per the official UPSC answer key.
Which one of the following is likely to be the most inflationary in its effect?
Answer (d) & explanation
Creating new money is correct (d). Creating new money to finance a deficit, by borrowing from the central bank, which prints it (monetisation), adds fresh money to the economy without any matching output, so it is the most inflationary. (a) is wrong: repaying public debt returns money to holders but is not strongly inflationary. (b) is wrong: borrowing from the public only moves existing money from people to the government. (c) is less inflationary than (d): borrowing from banks uses existing deposits, though it can expand credit somewhat.
Notice the history: India ended automatic monetisation through ad hoc Treasury Bills in 1997, and the FRBM Act bars direct RBI funding except in special cases. During COVID-19, the RBI bought bonds in the secondary market under G-SAP. Trap: all deficits are not equally inflationary.
Answer as per the official UPSC answer key.
Which of the following is/are among the noticeable features of the recommendations of the Thirteenth Finance Commission?
- 1. A design for the Goods and Services Tax, and a compensation package linked to adherence to the proposed design
- 2. A design for the creation of lakhs of jobs in the next ten years in consonance with India’s demographic dividend
- 3. Devolution of a specified share of central taxes to local bodies as grants
Select the correct answer using the codes given below :
Answer (c) & explanation
Statements 1 and 3 are correct (c). The 13th Finance Commission (chair Vijay Kelkar, covering 2010–15) proposed a 'model GST' and a ₹50,000-crore compensation package for states that adopted it (1). It also linked grants to local bodies to a specified share of the divisible pool of central taxes (3). Statement 2 is wrong: job creation plans are not a Finance Commission task. So (a), (b) and (d) fail.
Notice what followed: GST arrived in July 2017 through the 101st Amendment, with a five-year compensation cess; the 14th FC raised states' share to 42%, the 15th set it at 41%, and the 16th (Arvind Panagariya) kept 41% for 2026–31. Trap: 'demographic dividend' is a buzzword, not a commission mandate.
Answer as per the official UPSC answer key.
Under which of the following circumstances may ‘capital gains’ arise?
- 1. When there is an increase in the sales of a product
- 2. When there is a natural increase in the value of the property owned
- 3. When you purchase a painting and there is a growth in its value due to increase in its popularity
Select the correct answer using the codes given below :
Answer (b) & explanation
Statements 2 and 3 are correct (b). A capital gain is the rise in value of a capital asset, such as land, a house, shares, gold or art, over what was paid for it, realised when the asset is sold. A natural rise in the value of property (2) and a painting that gains value as it becomes popular (3) both give capital gains. Statement 1 is wrong: higher sales of a product raise business income or profit, not a capital gain. So (a), (c) and (d) fail.
Notice the tax rules: gains are short-term or long-term depending on holding period. From July 2024, LTCG tax on listed equity rose to 12.5% with an exemption of ₹1.25 lakh, and indexation was removed for most assets. Trap: revenue growth is not asset appreciation.
Answer as per the official UPSC answer key.
Which one of the following statements appropriately describes the “fiscal stimulus” ?
Answer (b) & explanation
The answer is (b). A fiscal stimulus is an intense, deliberate action by the government to boost economic activity, mainly by increasing public spending and/or cutting taxes, so that demand, output and jobs rise during a slowdown. India used it after the 2008 global financial crisis through excise duty cuts and higher spending, and again in 2020 with the Atmanirbhar Bharat packages during COVID-19. Option (a) is too narrow, limiting it to manufacturing, and links it to a demand surge, when stimulus is used in a slowdown. Option (c) describes farm credit, and (d) financial inclusion, which are separate policies.
Notice the difference: fiscal policy uses government spending and taxes, managed by the Finance Ministry; monetary policy uses interest rates and money supply, managed by the RBI. A stimulus raises the fiscal deficit in the short run, which the FRBM Act tries to keep in check.
Answer as per the official UPSC answer key.
Which one of the following is *not* a feature of “Value Added Tax” ?
Answer (d) & explanation
Statement (d) is not a feature of VAT, so it is the answer. Value Added Tax, introduced in most Indian States from April 2005, was a multi-point, destination-based tax (a). It taxed the value added at each stage of production and distribution, with input tax credit for tax already paid, avoiding the cascading 'tax on tax' (b). Its burden was finally borne by the consumer (c). But VAT was a State subject that replaced State sales tax; the Centre only facilitated it through the Empowered Committee of State Finance Ministers. So (d) reverses the roles.
Notice what came next: VAT was subsumed into the Goods and Services Tax (GST) from 1 July 2017, after the 101st Amendment (2016), with the GST Council under Article 279A. GST 2.0 reforms in September 2025 moved to mainly two slabs, 5% and 18%. Trap: VAT was a State tax, with the Centre as facilitator.
Answer as per the official UPSC answer key.
All revenues received by the Union Government by way of taxes and other receipts for the conduct of Government business are credited to the
Answer (c) & explanation
Consolidated Fund of India is correct (c). Under Article 266(1), all revenues of the Union, all loans it raises and all loan repayments it receives are credited to the Consolidated Fund of India. (a) is wrong: the Contingency Fund (Article 267) is a small emergency reserve, now ₹30,000 crore, placed at the President's disposal. (b) is wrong: the Public Account (Article 266(2)) holds money the government only keeps for others, such as provident funds and small savings. (d) is wrong: deposits and advances are a section within the Public Account.
Notice the rule: withdrawals from the Consolidated Fund need Parliament's vote, while Public Account payments do not. Trap: 'all receipts' points only to the Consolidated Fund.
Answer as per the official UPSC answer key.
With reference to the Finance Commission of India, which of the following statements is correct ?
Answer (d) & explanation
None of the statements is correct (d). The Finance Commission under Article 280, set up every five years, recommends how the net proceeds of central taxes are shared between the Union and the States (vertical) and among States (horizontal), the principles of grants-in-aid, and measures to strengthen local bodies' finances. (a) is wrong: it does not deal with foreign capital. (b) is wrong: it has no role in distributing funds among PSUs. (c) is wrong: transparency in financial administration is not its job, though the CAG audits accounts.
Notice the current one: the 16th Finance Commission (chair Arvind Panagariya) kept the States' share at 41% for 2026–31. Trap: (c) sounds generic and safe, but it is not the Commission's function.
Answer as per the official UPSC answer key.
What is the difference between “vote-on-account” and “interim budget” ?
- 1. The provision of a “vote-on-account” is used by a regular Government, while an “interim budget” is a provision used by a caretaker Government.
- 2. A “vote-on-account” only deals with the expenditure in Government’s budget, while an “interim budget” includes both expenditure and receipts.
Which of the statements given above is/are correct ?
Answer (b) & explanation
Statement 2 only is correct (b). A vote on account (Article 116) lets the Lok Sabha grant money for expenditure only, usually for a few months, until the full budget is passed. An interim budget is a full statement of both expenditure and receipts, presented when a government cannot present a full budget, typically in an election year (2). Statement 1 is wrong: any government, regular or outgoing, can use either device; neither is reserved for a caretaker government. So (a), (c) and (d) fail.
Notice the practice: in election years such as 2019 and 2024, the outgoing government presented an interim budget with a vote on account, and the new government presented the full budget later. Trap: the government types in statement 1 are invented.
Answer as per the official UPSC answer key.
Why is the Government of India disinvesting its equity in the Central Public Sector Enterprises (CPSEs) ?
- 1. The Government intends to use the revenue earned from the disinvestment mainly to pay back the external debt.
- 2. The Government no longer intends to retain the management control of the CPSEs.
Which of the statements given above is/are correct ?
Answer (d) & explanation
Neither statement is correct (d). Statement 1 is wrong: in 2011, disinvestment money went into the National Investment Fund (2005) and was used for social-sector schemes and capital spending, not to repay external debt, which is small and long-term for India. Statement 2 is wrong: the policy then was to sell minority stakes while keeping at least 51% and management control. So (a), (b) and (c) fail.
Notice the later shift: the New PSE Policy (2021) keeps a minimal presence in four strategic sectors and allows strategic sale with transfer of control elsewhere, as with Air India to Tata (2022). The Department of Disinvestment became DIPAM in 2016. Trap: statement 2 describes today's strategic sales, not the 2011 policy.
Answer as per the official UPSC answer key.