Question

When tax imposition leads to a disproportionate rise in prices that is, by an extent more than the rise in the tax, it is known as:

• A. Cascading effect
• B. Critical divide
• C. Consummation point
• D. Economic saturation

Hint:

Remember that the main objective of introducing the Goods and Services Tax (GST) was to remove the cascading effect of taxes by allowing for input tax credits at each stage of the supply chain.

Answer 1

The Correct Option is A

Step 1: Understanding the Concept:
The question describes a situation where a tax leads to a price increase that is greater than the tax amount itself. This phenomenon is related to multi-stage taxation systems where tax is levied on a price that already includes previous taxes.

Step 2: Detailed Explanation:


Cascading effect of taxes: This is also known as "tax on tax". It occurs when a good or service is taxed at multiple stages of production and distribution. At each stage, the tax is applied to the total value, which includes the cost of the product plus the taxes paid at earlier stages. This leads to a final price increase that is significantly more than the sum of the nominal tax rates. This perfectly matches the situation described. The implementation of the Goods and Services Tax (GST) in India was primarily aimed at eliminating this cascading effect.
Critical divide, Consummation point, Economic saturation: These are not standard economic terms used to describe this specific tax phenomenon.

Step 3: Final Answer:
The disproportionate rise in prices due to tax on tax is known as the Cascading effect.