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Question

Difficulty: MediumEconomic Growth, National Income Accounting, and Development Indicators

In the national income accounting system adopted by India in 2015, the relationship between Gross Value Added (GVA) at basic prices and Gross Domestic Product (GDP) at market prices incorporates specific tax and subsidy adjustments. Evaluate the following statements regarding these adjustments:

Statement I: GVA at basic prices includes production taxes and excludes production subsidies.
Statement II: GDP at market prices is derived by adding net product taxes (product taxes minus product subsidies) to GVA at basic prices.
Statement III: Land revenue and stamp duty are classified as product taxes in India's national accounting system.

Which of the statements given above are correct?

  1. Statement I and Statement II onlyAnswer
  2. B
    Statement II and Statement III only
  3. C
    Statement I and Statement III only
  4. D
    Statement I, Statement II, and Statement III

Answer

Statement I and Statement II only are correct.
GVA at basic prices reflects output value inclusive of production taxes (such as land revenue, stamp duty, and professional tax) and exclusive of production subsidies. To obtain GDP at market prices, net product taxes (product taxes like GST minus product subsidies like food/fertilizer subsidies) are added to GVA at basic prices. Because land revenue and stamp duty are paid regardless of volume produced, they are production taxes, making the statement identifying them as product taxes incorrect.

Step-by-Step Solution

1
Evaluate Statement I regarding the conceptual definition of GVA at basic prices.
GVA at basic prices is defined as GVA at factor cost plus production taxes minus production subsidies. Thus, Statement I is correct.
Basic price represents the amount receivable by the producer from the purchaser per unit of a good or service, inclusive of production taxes but exclusive of production subsidies.
2
Evaluate Statement II regarding the conversion of GVA at basic prices to GDP at market prices.
GDP at market prices is derived as GVA at basic prices plus net product taxes (product taxes minus product subsidies). Thus, Statement II is correct.
Product taxes (such as GST or excise duty) depend directly on the quantity of output sold and convert basic price valuation to market price valuation.
3
Evaluate Statement III regarding the taxonomic classification of land revenue and stamp duty.
Land revenue, stamp duty, and registration fees are levied irrespective of output volume, making them production taxes rather than product taxes. Thus, Statement III is incorrect.
Production taxes are paid relationally to production factors or ownership, regardless of actual quantity produced.

Key Concept

Distinction between Production Taxes/Subsidies and Product Taxes/Subsidies in National Income Accounting
Estimated Time:1m 15s
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Topics

Economic Growth, National Income Accounting, and Development Indicators