Jun
I want to pay tax like a company!
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Almost every person who works always cribs about one thing, paying taxes. Taxes are a form of contribution to the government by every individual for all that the government provides (and most governments are inefficient). In my personal blog I have written a lot of posts criticising taxation practices but this article is however a little different.
The reason I say that “I want to pay tax like a company!” is because companies taxation rules are very different from individual taxation rules. The most important difference being …….
A company pays tax only on the profit while an individual pays tax on his income
So if a person earns around Rs 15 lakhs per annum he is in the highest slab of taxes and will approximately pay atleast Rs 4 lakh in taxes. Instead if a company makes Rs 15 lakhs per annum then ….
According to the above income statement the person will a maximum of Rs 2.2 lakhs in tax (this is assuming 33% tax and notax slabs, thus the amount will really be lower). I know people will claim that we do get tax benefit as HRA (House Rent Allowance, and Education Loan Benefits) but that can’t be compared as they all have a cap and hence do not reduce the taxable income too much.
Moreover I feel there are already some examples when people are paying taxes like companies!
- If you at Hollywood stars then you will actually realize that they do not pay a lot of taxes even when they earn a lot. The reason is because they also have a lot of expenses. So how do they manage it? A star, lets call him Mr A, will form a company A Star Limited to which he will lease his services for around $10 million. A Star Limited will earn $100 million over the year and also spend around $40 million maintaining Mr A (afterall a big house, new cars, make-up, dresses and all that). Thus A Star Limited pays tax only on $50 million and Mr A pays tax on $10 million. If Mr A did not form the company he would have needed to pay tax on $100 million. A person is paying tax as a company.
- Most of the businesses in India atleast pay for the housing expenses of the owner. In turn the owner’s expenses become companies expenses and hence the overall taxable profit gets reduced. A person pays tax as a company again.
The reason why people cannot be taxed like Companies is probably because then people will have no incentive to save any money. In such a system every individual would want to spend all the money, leading to no tax collection for the Government at all. On the other hand companies cannot be taxed on their revenue because profit margin as a percentage of revenue is very low.
Although I understand all these factors still I feel that I would want to pay taxes like a company. Maybe the tax laws can be changed and made better, untill then I guess I will keep wishing and people will keep cribbing about tax rules!
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12 Responses to “I want to pay tax like a company!”
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Nice post. My question to you – is this ethical? Also, do you think the income tax rates should be reduced, so that more people willingly give tax (as they wouldn’t gain much by evading it) than try to find ways to beat the system? That way the tax collected would come out to be more – because of the larger volumes.
The reason people don’t pay taxes like a corporation is they have non-corporation expenses. If you want someone else to own you and make all your decisions for you, feel free to be a corporation. A corporation’s books balance out at zero, remember.
Nice observation.. I completely share the sentiment. Though, the standard principle for income taxation is that all income should be taxed once and all income should be taxed just once. The income that we earn as salary is tax deductible (employee remuneration) for employers and therefore taxable for us. What we spend is income for someone (a firm) and therefore not taxable as we have already been taxed for it; the firm is taxed on the residual part.
Companies dont pay tax as a percent of revenue as margins of companies are totally different and that would give undue advantage to high margin companies (e.g. high margin companies like pharma will pay much lower taxes than low margin ones like say commodities)
Individual taxes are percent of revenue because that makes it solves the moral hazard problem u descrive and also much easier to manage for the govt (u cant have ‘auditors’ signoff individual income statements for all persons).
However its fairly common for self-employed or contracted individuals to setup companies and book their expenses under the company account thus making them pay a ‘corporate tax’
Nice post!
Ideally government can tax individuals on income, and cover for any shortfall by taxing expenses (consumption) like it does today through indirect taxes on goods & services.
Indeed, in the current dispensation, govt is taxing individual income twice, once at the overall earnings level and then again during consumption expenses…which looks even more unfair compared to companies
Interesting!
. There is a flaw in the system though the intent seems to be right!
I think this is a fairly common practice to evade tax, why even talk about the movie stars. Lawyers and other individual run businesses evade taxes by showing expenses in the office; while instead using them for personal use. I have seen washing machines as expenses on balance sheets of lawyers
Oh come on, there are so many flaws in the tax system – I think the author is not even speaking of them – he is speaking of a different issue
@Atul, is it ethical? Probably not.
@Darren, I think an individual can be considered management of his own firm. Assets – Liabilities = Equity which is what individual is worth.
@Abhishek, you are right but now money is actually being taxed twice.
@Kiren, exactly why companies can’t be taxed on revenues.
@Debashish, thanks for pointing out how we are bring double taxed. I too hate it.
@Gaurav, Agree everyone is misusing it.
@Kaushkik, there are many loopholes but this one really makes me sad.
Excellent article, got to know lot from the article. Thanks for explaining it in simple terms for a person who is lehman to the financial terms.
The only thing i would like to know is how are we taxed twice? can soem body enlightrn this point?
Celebrities part sounds very true and the system does tend to favour a bit the companies with higher margins. But i guess even if individuals get to be taxed like a company, incentive to save will be there as i feel both are independent. Infact govt then doesn’t have to bother about public infrastructure. But again lower tax regime I am not sure, plus right now i cant think of any exemplary model.
@Gaurav Choudhari
Hi Gaurav, the double taxation is being talked about when first you pay income tax (1st tax) and then when you buy anything you pay (sales tax) and many other taxes. Double taxation
Thanks for the comment Ruchir. The point is debatable whether savings will be there or not but the model is definitely worth exploring.
Hi All,
If people are taxed like companies, they wouldn’t have any incentive to save money (Safely assuming that a person saves for future expenses)simply because he can break up a future expenses into so called EMI’s which the market might be willing to offer and buy his needs today itself. With no saving, there wouldn’t be any growth as everyone does the same. Hence individuals need to be taxed for revenues and not profits.