The word tax is conceived as a very negative word in India. People indeed imagine like they are in the movie Lagaan where they are slayed and forced to pay tax. However, it is our responsibility to pay tax as the citizens of our country. Tax that the common man pays to the government is utilized for developmental activities in the country and for providing facilities to the needy. The Tax moneys are utilized for the army and hence the country’s defense depends on the tax you pay. Now suddenly it seems patriotic to pay taxes.
Now, the rules and laws regarding taxes varies with every country, and so I’ve made this revolve a little bit around the Indian system. Ofcourse, this can be helpful for people residing in other countries too. It’s just that some of the specifics might not hold in your respective country like it does in India.
I have tried compiling the FAQ’s with respect to taxes in this post. Here it goes –
1. What are the different types of taxes?
Taxes are differentiated as Direct and Indirect taxes. An example for direct tax in India is Income tax (Tax to be paid on income) and Wealth Tax (Tax on Wealth). It is called direct tax as the taxes are directly levied on the individual. We need to pay taxes on the income we earn in the particular Assessment year.
On the other hand, the Indirect taxes are VAT, Service Tax, etc. These taxes are taxes on the product you purchase (VAT) and the services you avail. VAT is the tax on the value addition of a product. The VAT is to be paid at every stage of value addition (For example: the manufacture, packaging, final product, wholesaler, retailer). However, the VAT suffered by the retailer would be transferred to the consumer and hence we pay tax indirectly. The tax will be collected by the seller of the product and remitted to the government. Same in case of Service tax, but service tax is levied on the service.
2. Is payment of Tax compulsory?
Sometimes we have such basic fundamental questions like these. Yes, payment of tax is compulsory as the Government is empowered from the constitution to levy taxes. As being born as citizens of India we are responsible to pay taxes to the government. Now you may say that you haven’t signed the constitution saying that you would pay taxes. But our forefathers have signed it and on our behalf. Hence we are bound to pay taxes.
3. Can I escape tax?
Tax can be avoided yes, but there are legal and illegal means to do it. Tax planning is process of planning the incomes so that the tax payment would be at a minimum. Here you are just reducing the tax liability but using the loopholes in the Law. However, Tax evasion includes certain illegal means by which you do not disclose a particular income to avoid tax on such income. It is necessary to understand the line between planning and evasion.
4. Can anyone else except the government impose tax?
Constitution says that only Government can levy taxes. And hence, any other body imposing tax would amount to extortion. If government charges 100% tax too, it doesn’t amount to extortion. Yes I know the feeling, this is the law of taxation.
5. What is black money?
Black money! The money held in Swiss bank accounts by our beloved political leaders. That’s all most of us know. But what exactly is Black money and how is it generated? Some questions I too had before I started studying tax. But the answer was simple. Black money is the moneys which are not disclosed to the government by an individual and hence not taxed. So you sell your apartment and get 2 Crores for it, if you aren’t disclosing it in your Income tax return and don’t pay taxes on it, it is indeed black money. The various scams and bribes that are accumulated by government officials are piled up in Foreign bank accounts and hence kept as a secret from a government. $1,456 Billions is the estimated amount of black money of Indians in the Swiss bank alone. The bank account holders can just pay tax on that and it turns out to be white! Revenue if taxes are paid on those would be approximately $ 400 Billions.
6. What is the impact if taxes are not paid?
If let’s say you have loads of unexplained income and you haven’t paid taxes on it, if the same comes to the notice of the tax officials, you can be severely penalized or jailed or both based on the gravity of the situation. It is our responsibility to pay taxes and we indeed can make a difference in the economy of the country by responsibly paying taxes.
7. Should you pay Income tax even if don’t reside in India?
Residential status is a very important topic under the Income Tax Act, 1961. The law says that you are supposed to pay taxes on the any income accrued or arise in India. So if you are an American and you have a source of Income in India, remit taxes to the Indian government on that particular income that has been earned in India.
8. What is TDS?
TDS stands for Tax Deducted at Source. In certain cases it is mandated by the law that the service receiver deducts tax payable on that particular bill and remits it to the government on the service provider’s behalf. This also works as a check on the tax evasion.
9. How can I compute my tax payable?
The income of the Individual under Salary, Business or Profession, Capital gains, House property income and other incomes shall be calculated separately and tax payable shall be calculated based on different slab rates. The tax levy on the above different sources of income is unique and involves a lot of analysis. Several online tax calculation templates are available for your use.
10. What are IT Returns?
The income computation and tax payable shall be filed to the government in forms called ITR – Income Tax Returns. These returns are evidence that the income has been disclosed and the tax has been paid on the same. The last date to file Income tax returns for an individual is 31st July of every year.
Taxation has evolved through the sands of time and now the Indian taxation system is among the best in the world. Tax is a huge subject to study and interesting and never is it routine. Tax consultancy is one of the highest earning jobs as there is a huge scope for tax planning. It is important for us to understand the taxation effects and the impact of your tax on the society you live in.
In my line of work I have had the opportunity to study in depth about taxation and it is a never ending subject. In this post, I have tried to keep the points as precise as possible. Any further queries regarding this and you can post a comment here, and I’ll get back to you in no time.
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