Budget summarised in a picture

A picture is worth a thousand words. But here’s a picture that can replace more than that. In my opinion, this picture perfectly summarises the budget! No point in saying more about it, have a look.

Budget 2006 summarised in a picture

The season of investments and tax planning!

The Financial Year 2005-06 is on the verge of getting over. People have started worrying about their taxes. Last few days are left for the investment under section 80C of the Income Tax Act, 1961. Grab this opportunity to save some tax and also for your future.

Here’s a small list of some of the very popular investments options. This list is not exhaustive.

1. PPF (Where else do you get 8% tax free returns?)
2. NSC
3. Life Insurance
4. Pension Plans
5. Tuition Fees

Till last year (FY 2004-05) we had section 88 that gave us rebate from the tax. Depending on the income, percentage of rebate varied. The calculation was pretty simple.

This year we have a new section 80C which has simplified the calculation even further. Simply deduct the allowed investments from the income. Maximum deduction is Rs. 100,000 (One Lakh). Quite simple!

Let me give an example. This is how it works as tax planning.

If a person has an income of Rs. 275,000/- without planning, his tax will be as follows:
First 100,000 – NIL
100,000 to 150,000 – 5,000 (10%)
150,000 to 250,000 – 20,000 (20%)
250,000 to 275,000 – 7,500 (30%)
TOTAL 32500 + 2% education cess i.e. 33,150/-

Now if the same person invests 100,000 then it will be as follows:
Taxable Income = 275,000 – 100,000 = 175,000
First 100,000 – NIL
100,000 to 150,000 – 5,000 (10%)
150,000 to 175,000 – 5,000 (20%)
TOTAL 10,000 + 2% education cess i.e. 10,200/-

That means a saving of Rs. 22,950 in taxes. Additionally, the investments will also earn some income.


How can ITEF oppose outsourcing?

ITEF, the Income Tax Employees Federation is opposing outsourcing of work (mainly refunds) even though it is well known fact that Income Tax refunds takes ages to come 👿 and higher authorities are continuously complaining about vacancies!

ITEF claims that its members were not given an “opportunity” to do their work 😡 and some of them don’t even have a place to sit. I want to ask them 2 questions.

  1. How many of them come on time to work?
  2. There are at least some of them who have a place to sit and work. 🙄 How much time do they spend working on their desk and for how long are they missing from their place/work/duty?

Whatever be the reason given by them. The main reason is that outsourcing results in loss of “revenue” for its members! 😡 The IT staff always takes months and continous follow up to issue refund cheques. Additionally, they take bribe before they issue any cheques of refunds and still behave as if they have done a big favour! Even after taking bribes, they hardly ever bother to calculate interest which is a legitimate claim of an assessee.

More than anything else, this loss of opportunity in earning extra revenue is their main grouse. 😡

Amnesty scheme, Registrar of Firms

The Government should come out with an amnesty scheme for all defaults in registration of partnership firms with Registrar of Firms.

Why an amnesty?
Under the Indian Partnership Act, 1932 (as is applicable in Maharashtra and consequently in Mumbai) registration of a partnership firm with Registrar of Firms (ROF) is compulsory. There are very drastic effects of non-registration. For example, if a partnership firm is not registered, it cannot file a suit against any one!

Continue reading “Amnesty scheme, Registrar of Firms”

Service Tax on co-op. societies! Simply outrageous!

I today read in the newspaper that all the socieities collecting more than Rs. 400,000 from their members in a year will be liable to pay Service Tax at 10.2%! Thats simply outrageous! The babus making and implementing laws have gone insane!

Wake up babus, get some common sense from somewhere. Think hundred times before you try to be sensational 👿 because most of the times you people land up looking more stupid!

The assumption here is that the society is providing service to the members and therefore it is liable to pay service tax. What they have missed out here is that the socieites are “co-operative” societies. There is an element of mutuality. Society is not providing service to members, but members are coming together for particular purpose and are providing service to themselves! Only for the purpose of convenience and because they are enjoying certain common amenities they have come together! Simply because the law treats the societies as separate legal entity from members individually, doesn’t mean the element of mutuality is lost. Thats the foundation of co-operative societies.

To take a very simple example, a co-operative society can be compared to 5 friends going out. One of them first collects money from all and then keeps track of accounts. At the end of the outing, they simply pay their balance share of expenditure or get a refund. Now where is the question of any taxable service here? 👿 🙄

Starting a new venture in India

Starting a new venture? Keep these basics in mind. There are a few popular alternatives for new enterpreneur/s.

1. Proprietory Business
2. Partnership Firm
3. Limited Company

There is one common step involved in all new start-ups – deciding on a name and looking for a .com.

Why a .com? Because that is the way to go! Having an online presence is so simple and economical that even a paanwala in Mumbai, Muchchad paanwala, has his website! Even if you don’t want to build a web-site, its looks pretty professional if your visiting card and other stationery has an email address like yourname@yourcompany.com. You can check the availability of a .com domain name at mailnspace

If the .com is not available, look for the country specific domain .in, .co.in, etc. If none are available, you may also consider other Top Level Domains (TLDs) like .info or .biz. However, none of these carry the weight of a .com or a .in. If the exact domain name of your company is not available, try variations like thecompany.com or companyindia.com or as a last resort change the name of the company! But in my opinion, it is pretty necessary to have a domain name that matches your comapny.

1. Proprietory Business (PropB):
This is the simplest form of business entity. Its very simple to start PropB. There are hardly any legal formalities involved. Have a rubber stamp made, open a bank account and your new business has started. All the best. 🙂

However, please bear in mind that depending on your type of business, turn over, profit, etc. you may need to go for registration under Service Tax, VAT, Excise, Income Tax (PAN & TAN), etc. PAN is used for filing your return of income and TAN is used for TDS returns. TDS stands for Tax Deducted at Source. To be on a safer side, consult your legal advisor, for ignorance of law is no excuse in violating it!

2. Partnership Firm (P’shipF):
You need to go through some legal formalities like documentation, registration, etc. to form a P’shipF.

First and foremost a Partnership Deed needs to be made. Provisions of the Indian Partnership Act, 1932 and Income Tax Act, 1961 must be considered while drafting the Deed. The Deed needs to be registered with Registrar of Firms. Registration is compulsory in Maharashtra, India. Check out the status in your city/state with your legal advisor. Consequences of non-registration could be fatal at times!

There are a couple of very important points to be kept in mind before deciding on a partnership.

One, as on today (15 Jan 2006) P’shipF are liable to pay 36.59% (35% + 2.5% Surcharge + 2% Education Cess) income tax on their net profit, which is higher than what is payable in case of individuals. So a certain amount of tax planning is necessary to bring down the net tax burden. One way of doing this is to provide for interest and salary to partners in the partnership deed.

Second, unlike limited companies, liability in the partnership is unlimited. That means that in case of loss, if the partnership assets are insufficient to pay the liabilities, even the personal assets of the partners may be attached/confiscated/sold to recover dues.

Third and the most important thing is that as per the Indian Partnership Act, 1932 each partner is an agent of the other partner! So if one partner takes a loan in the name of the partnership and disappears, the other partner/s will have to pay for it. This provision alongwith the provision of unlimited liability makes a partnership with stranger only a bit safer than gambling!

3. Limited Company (Co):
Out of all, this is the most complicated form of a new business. You have to first get your name approved from Registrar of Companies, then file a whole lot of papers and go through quite a bit of formalities. It is not possible to list out the complete procedure here because then this would not remain a blog and become a treatise. 🙂 The Companies Act carries detailed provisions for the formation of the company. The procedure is more complex if you want to promote a public limited company.

Out of all the 3 options, this option is the most expensive tax wise (mainly because of dividend distribution tax) and requires the most number of legal formalities to be observed. But the most appealing part of this option is limited liability. If the company runs into losses, no one can look to your personal assets for recovery.

Please note that these are just broad guidelines. Although what is mentioned above is legally true as on today (15 Jan 2006), I am not responsible for anything that you do on the basis of these. I strongly recommend you consult a professional for all the legal formalities and advice. This is not intended to substitute personal advice which is inevitable.

Income Tax at 30% is far lower than Service Tax at 10%!

On the first glance, a common man will feel that Income Tax (IT) which is 30% (highest income bracket) is very high and Service Tax (ST) which is at 10% is pretty ok. But go a level deeper and one will realise how high ST is! This is because ST is on Gross Receipts and IT is on Net Income!

Here’s one very basic example. Mr. A is an interior decorator with gross receipts of Rs. 50 lakhs annually. He will have to pay 10.2% (10% + 2% Education Cess) i.e. Rs. 510,000/- as ST.

For IT purposes, he will deduct all his expenses and arrive at net profit. Assuming that net profit is as high as 10% it will be Rs. 500,000/-. He will have to pay 30.6% (30% + 2% Education Cess) i.e. Rs. 153,000/- as IT! He can further reduce this liability to Rs. 122,400 by taking benefit of section 80C and investing in PPF, LIC, etc.

This makes it pretty clear that IT at 30% is far lower than ST at 10%! Even when compared with highest tax bracker, ST is more than 4 times IT.

ST was only 5% when it was introduced and only a few items were covered. Slowly it was increased to 8% and now it is as high as 10%! Now it also covers many more categories of services! At the rate the government is levying new taxes and changing older provisions in its favour I feel one day will come when we will have to pay taxes even for breathing!

Stamp Duty and Deemed Capital Gain – a fraud on general public by the State and Central government!

A new section 50C was introdcued in Income Tax Act a few years ago. It was introduced to reduce black money property transactions. Although the intent was right, the implementation is horribly wrong! 👿

This new section completely changed the Capital Gains Tax (CGT) scenario. Earlier, CGT was calculated from the real (or apprently real) sale consideration. Now the same is calculated from the deemed sale consideration.

The deemed sale consideration is calculated as per the values given in the Ready Reckoner (RR) for a year. The RR is published every year by the state government and gives values of property for the purposes of stamp duty.

State governments whisically and in complete disregard to the market realities keeps increasing the supposed market values of the properties every year to augment their stamp duty collection. Central government has now joined this bandwagon and saw it as an opportunity to increase tax collection and play a fraud on general public!

Under the new regime, the tax is on deemed gains rather than the actual gains, which, in my humble opinion, is a complete violation of the basis of charge of Income Tax. Now the tax is levied on assumed income. Whether it is actually earned or not is completely immaterial. I wonder why this provision has not been challenged as anti-constitutional so far in any courts.

From my practical experience I can say that at times, the CGT (which is supposed to be only 20% of gain) is more than the actual consideration received! How can they expect people to bear this? Our Finance Minister has one track mind of increasing revenue. When will the governments start thinking about increasing public convenience?

The tax scenario in India

When VAT was about to come into effect all over India and there was opposition from all and sundry, the Indian Government stuck to one argument that many countries around the world have implemented VAT. Agreed, sir. But how many countries in the world have as many other taxes as we have in India? Here’s a very basic scenario.

A manufacturer starts a new business, floats a partnership firm/limited company. He first has to pay stamp duty (ad valorem in certain cases).

He first purchases machinery and raw materials. He will pay Sales Tax/VAT (or Customs Duty in case of Imports).
Once his ready goods leave his factory, he pays Excise Duty.
On transporting his good from one place to other place, he pays Octroi.
On selling these things and earning profit, he pays Income Tax.

After paying all these taxes, if he still manages to accumulate some wealth, he pays Wealth Tax. And we have not even considered under the table taxes that he has to pay to anti-social elements in the government departments.

Earlier there ware two more taxes, Gift Tax and Estate Duty. Gift Tax Act was abolished and more logical provisions covering gifts were introduced in the Income Tax Act. Estate Duty was paid on inheritance of assets and was abolished just before it was Indira Gandhi’s turn to pay it.

When will government simplify the tax structure in India? Is there any inclination to do so?

I have not even mentioned here Service Tax, Interest Tax, Fringe Benefit Tax, etc. 🙄

The current finanace minister, Mr. P. Chidambaram, has a one point program of levying and collecting more and more taxes. But are they used in the right way? As per one newspapers report, Education Cess of 2% levied across all the taxes and helped the government amass more than 6000 crores. But it remains unused till date!