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Fiscal Policy

Fiscal Policy is a mechanism through which the Central Government controls the tax rates, thereby trying to balances its own finances, with economic growth. Two types of taxes are levied, both of which come under fiscal policy. The first is indirect taxes such as excise duty, sales tax and service tax. The second is direct tax such as personal or corporate income tax.

Typically, a lower tax rate spurs consumption; but of course weakens the government financially. It is used when a government fears an economic slowdown. A higher tax rate can apply brakes on growth, but improves the governments finances. Sometimes taxes are also used to fulfill the Governments other objectives, like encouraging investments in backward areas, or discouraging purchase of goods like cigarettes and tobacco.


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