This short post describes an equitable approach to planning your taxes. As a conscious citizen, it is helpful that you pay your fair share of taxes. There is no need to pay more, and This is a companion post to the India version of Harold Pollack’s Index Card – Pollack’s Index Card: All the financial advice that you ever need – India version
Indian Context – Tax Receipts and Spending
There is always a debate about the government’s spending of taxpayers’ money. There are multiple levels of government – Central, State, Area, Local, and there are multiple taxes levied. Fortunately, most taxes in India are levied by a single level of government. Income tax is levied by the central government, Road tax is levied by the state government, Property tax is levied by the local government, and so on. And no, we would not go into who levies GST!
The Central government does levy a fair number of taxes and collects a large part of the tax revenue. As a proxy for the other taxes, let us look at the projected income and expenditure of the Central government. The Budget for 2019-20 was presented in early 2019. This file provides an overview of the budget numbers. Budget At A Glance The numbers are large and often are represented as ‘lakh crores’ or ‘billions’. The net tax receipts of the Central government are projected to be a bit more than 17 lakh crores – an impressive number. This includes direct and indirect taxes. So most Indians contribute to this figure. Sp, if you take a per person basis, it is a little more than 13,000 per person. Please let that sink in – the tax receipts of the Central government are just a bit more than Rs 13,000 per person in a year. This is net of the revenue shared with the states – which is about half of the figure.
On the expenditure side, the total expenditure per person is a bit more than Rs 21,000 in a year. If you have had some education in a government institution, you have used up many years of expenditure! It is not my idea to argue that there is no waste in the expenditure – there definitely is. However, there still is not a lot of expenditure. Increased tax revenue is one of the key inputs required to advance the country to a ‘Developed Country’ status. Of course as an individual, you have every right to optimize the taxes that you pay.
Tax Planning vs Tax Avoidance vs Tax Evasion
These terms are used with varying levels of interchangeability. This article has a clear explanation of the differences between these. As a summary:
- Tax Planning – Reduction of tax liability by using the provisions in the Tax Act
- Tax Avoidance – Reduction of tax liability by using the ‘loopholes’ in the Tax Act (All laws have loopholes)
- Tax Evasion – Reduction or elimination of tax liability by concealing the income
Tax Planning is something that you should do. This blog too has articles on how you can approach this. Put the right focus on tax savings and Saving Tax – What Not To Do This is both legal and ethical. Tax Avoidance is legal too – there have been clear judgements in India saying that a person can arrange their finances to avoid taxes. Often, the law catches up with the practice and prohibits it explicitly. Tax Evasion is of course illegal. There is no argument that this is rampant in India. But there is also no argument that this is harmful to everyone involved – the individual, the society and the country.
So, Plan your Taxes, Avoid avoiding Taxes, and definitely Don’t Evade Taxes.