CAT 1999 Question Paper Question 65

Question 65

Cigarettes constitute a mere 20% of tobacco consumption in India, and fewer than 15% of the 200 million tobacco users consume cigarettes., Yet these 15% contribute nearly 90% of the tax revenues to the Exchequer from the tobacco sector. The punitive cigarette taxation regime has kept the tax base narrow, and reducing taxes will expand this base.
Which one of the following best bolsters the conclusion that reducing duties will expand the tax base'?

Solution

The stated conclusion is that the tax base will increase if the taxes levied on cigarettes is reduced. The underlying assumption is that tobacco users who are not smoking cigarettes will shift to cigarettes if the taxes on them decrease. Option B supports this assumption and hence gives credence to the conclusion.

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