Book Excerpts

Everything You Need to Know About Paying Taxes Ahead of Tax Season

This book, a result of an encouraging response from readers, is meant for the on-the-go reader. A handy companion to understand financial management, it covers all the topics from the main book, albeit in an abridged form. Learn it all with zeal; carry it with ease.

With tax season around the corner, we thought it would be useful for you to learn everything you need to know about tax, tax evasion, and why it’s cheaper to pay it. Read an excerpt:

 

Why do we pay taxes?

Taxes are obviously paid so that governments can raise the resources to provide for various facilities meant for you and I. These facilities are those that all of us need, but none of us can provide for ourselves individually.

Even if I don’t go into complicated theories of taxation and take some blatant examples of services and amenities that the government provides – roads, street lighting, police, the army
– they are of a nature that is neither possible nor affordable
for citizens of a country to obtain on their own. I mean, if the government asks each individual to build a road for say a hundred metres outside their respective houses, a majority of the people will not be able to afford it. But how many miles and miles of roads do we use? We use postal services. The police are there to protect us. Without the army guarding our borders, we could become slaves to a marauding and ambitious rogue nation.

So, the logic of income tax, as other taxes, is that all of us use the facilities and hence all of us must pay.

The problem of income tax is all of us use the facilities, but all of us don’t pay.

It is not only that all of us don’t pay, but all of us can’t pay.

And why can’t all of us pay? This is because a significant percentage of India’s population lives below what is known as the ‘poverty line’.

Persons living below the poverty line do not earn enough to have three meals a day.

Even conservative government estimates put the percentage of our population that lives below the poverty line at around 30. Privately, one even hears of a percentage as high as 50.

I have pointed out that the logic of collecting tax is that all of us enjoy the facilities, therefore all of us must pay. Can this 50 per cent afford to pay? Are they even bothered whether the roads have potholes and the street lights are functioning effectively or not. They are struggling merely to survive.

That leaves us with the remaining 50 per cent; the ones that are above the poverty line.

Now, so far as income tax is concerned, the government’s stand is that it doesn’t want you to pay income tax unless you lead a relatively decent life.

So, those who earn less than the amount needed to live a decent life are not expected to pay any tax at all.

Out of the 50 per cent that are above the poverty line, perhaps 40 per cent earn less than the minimum required to pay income tax.

Now we are left with some 10 per cent of the population that is not only above the poverty line, but has a surplus beyond the minimum, on which they can pay income tax.

And of this 10 per cent, about 60 to 70 per cent are tax evaders.*

(*The percentages used by me to indicate the number of taxpayers and tax evaders are not exact but approximations, and are merely intended to be illustrative.)

Do you see how grave the situation is?
The question I had posed earlier was ‘Should we pay taxes?’ My answer is, of course we should.

If for no other reason than as a token of appreciation for occupying the top 2–3 per cent slot of this nation’s population; the least we can do is pay our taxes honestly.

I’m not sermonizing. It is the most practical thing to do. In my opinion, any attempt at evading or even saving taxes is probably more expensive than the payment of tax itself.

How is evading tax more expensive than paying it?

Let me try and elaborate on this statement.

What we need to understand is that a government’s spending is independent of its receipts.

It makes a certain estimate of where the money will come from and where it will be spent.

Let’s say the government expected to collect a certain amount of money from income tax. Due to tax evasion on the part of some people, the government collects less than the expected amount.

Do you think that it will not spend or spend less? If tax collection falls short, it will introduce another tax. If direct tax collection is insufficient, it will increase the rate of some indirect tax.

What is the difference between a direct tax and an indirect tax?

Direct taxes are those which, if you have to pay, are collected directly from you by the government, such as income tax.

Indirect taxes are those in which you pay someone else and that person pays it to the government, such as the goods and services tax (GST).

I would any day prefer to pay direct taxes than indirect taxes. This is because direct taxes can be collected according to the ability to pay. Take income tax, for instance. The government can tell one person, your income is too low and there is no need to pay anything, and tell another person, since you are relatively richer, you must pay at a higher rate to make up for those who can’t.

However, indirect taxes hit everybody uniformly. If you buy something from a grocery shop and pay 10 as VAT, a beggar wishing to buy the same item will also have to pay 10.

If the government still cannot manage to collect the required amount, it will resort to printing notes, which will result in inflation and reduction in the value of our money.

What I’m trying to say is that eventually it is you and I that have to pay. And if we must pay any which way, then the cheapest and the best way of paying is the original way in which we were supposed to pay.

So, attempting to save or evade taxes is actually a mug’s game. One has spent all that time and energy (and maybe lost one’s peace of mind in the process too) and in the end gained nothing.

There is an even more sinister dimension to tax evasion.

Let me first show you the brighter side of the picture.

Let’s take the case of income tax alone. I receive income and I pay tax on it.

What do I do with this money? I have needs. I am a salaried person and I have been waiting to receive my salary so that I can purchase a shirt for myself. I receive my salary, pay income tax and then go and spend this money on a shirt. This money goes from my pocket to the pocket of the shirt seller. It becomes the shirt seller’s income. She pays tax on it. Maybe she has been wanting to buy a pair of shoes. When she spends this money,
it becomes the shoe seller’s income. The shoe seller pays tax
on it. Do you realize each time a rupee merely changes hands it becomes somebody’s income and the government gets a share of it?

It has been estimated that out of every rupee that is made, more than 97 paise goes back to the government by way of income tax alone. (Once I was thinking aloud: Why only 97 paise? Why not 5 rupees? And someone pointed out that is probably because by the time 97 paise get collected, the rupee must be worn out and discarded.)

And this is income tax alone. I earn a rupee, I pay income tax.
If I use that money to purchase an asset, and if I still own that asset on 31 March, it becomes a part of my wealth on which I must pay wealth tax. And having paid income tax and wealth tax, a little later, in one of my generous moods, if I gift the item to somebody, I am supposed to pay a gift tax. And a little later, if I happen to die, somebody on my behalf is supposed to pay estate duty on the wealth that I leave behind.

Let’s first understand the difference between a tax planner and a tax evader.

Those who are supposed to pay tax can broadly be classified into two types: tax planners and tax evaders.

Who is a tax planner? What is a tax planner trying to achieve? A tax planner is a person who is trying to arrange his affairs in such a way that the tax liability gets minimized or eliminated.

What is a tax evader attempting to do? Also trying to minimize or eliminate the tax liability.

The end result of the actions of both is that the government loses tax revenue. But the former is considered to be a respectable citizen and the latter a crook.

Why is that so?

The difference obviously lies in the methods adopted by them. How does a tax planner save taxes?

The Income Tax Act provides several avenues of saving and investing money that also give tax relief.

To learn more, order your copy of Eye on the Bottom Line today!

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