Just focusing on ways to evade taxes will leave you with low quality assets.Just focus on ways how to clean your records and files. Pay taxes on your income on a regular basis so that even your next generation will not face any troubles on the taxation issues.
The puny two-wheeler was called Spitfire. It was 1988 and employees of my husband’s company were being offered this 50cc bike at a concessional rate.
One had to run with it for a while and at some point the engine would come alive and one jumped onto the seat. But what was a tea company like Brooke Bond doing with 50cc bikes? The answer to that question holds many stories about the stupid decisions that businesses and individuals in India routinely take with a single objective—tax saving.
Brooke Bond was then a hugely profitable business. Those were the days of the MRTP Act that restricted expansion of business. It was also not easy to return the profits to the foreign owners thanks to FERA. So what did they do with the money they were making? They bought over a sick motorcycle business called Mysore Scooters. They set up a paper plant in Bilaspur. They bought a meat processing unit at Aurangabad. None of these made any strategic sense to their core business of making blended tea. But they saved taxes.
There are many examples of unrelated diversification prompted by the eagerness to save tax. The decisions did not make businesses better, but bled them instead. This practice is also rampant among individuals. Anything that saves taxes baits them all. There are millions who still buy Ulips to save taxes. They refuse to believe it is a long term product and are convinced that if they pay for five years, they will get something in the future. Worse, many sign up for large insurance premium that they struggle to pay. They convince themselves it is a good way to save taxes and also build assets.In a year or two they realize that they cannot pay the premium as it is too high, and then find out that stopping the policy leaves them in losses.
Compulsory saving brings us to the other popular choice—housing loans. Many think the tax concessions on buying property make it a fantastic investment. They like the ideas of tax saving and owning an asset. What they fail to see is that the money they pay with interest is quite substantial, even after allowing for taxes, and the asset they acquire is very inflexible, indivisible and quite a pain to sell if need arises.
Like the strategic investments that Brooke Bond made many years ago, they won’t help the core activities of the household positively. When we hear stories of parents selling property to educate their children, we are speaking of those who are pushed to that point, as they have no other asset to fall back on.
Our tax saving urbanites, who have invested in small flats in distant suburbs, would neither sell nor make use of that asset. There are non-salaried individual earners who will do anything to reduce their tax burden. While some of the practices are downright tax evasion, the general view among this class is paying taxes is naïveté. They viciously dislike service taxes and GST as they are thereby compelled to register and report incomes and revenues and pay taxes on them.
The strategic investment decisions of this group is driven by the active need to not disclose income, or do whatever it takes to reduce the tax burden. Thus money is spent lavishly so it is not accounted for, or investments are made in a large number of assets, from gold to property to a host of business enterprises. Businesses are set up with structures that are questionable and weak. These practices do not always end well. While some of the money and assets are available to use, a lot more is frittered away and invested with little regard for the long-term strategic interest of the family or the intended beneficiaries.
While many opt for creative accounting of expenses and tax deductibles, and falsification and fictitious transactions are par for the course, these practices also needlessly complicate matters for inheritors and other beneficiaries.
What can be done instead? For the individual salaried taxpayer, the primary tasks are two: First, record your accounts, investments and assets. They are bought with your post-tax income and are squeaky clean. File returns and keep the records.
Second, every rupee should serve your goals. Don’t stash money away in low return investments and poor quality assets just to save tax. For those with professional incomes and enterprises, where they are sole proprietors, subject yourself to the rigors of tax audit, keep clean business records and account for expenses correctly.
If you want to sell off your business, or if your child wants to take over and expand it, having clean books will help. A due diligence by the private equity investor will show up your business correctly, for its revenue growth and profit potential. Don’t let your tax saving shenanigans undervalue your business.
Keeping good records and paying taxes as due will also make it easier for you to get loans and additional capital when you plan to expand. It also helps if you invest surpluses into your business strategically rather than stash it in assets that you won’t use.
Don’t clutter your income records with inflows you cannot account for. The taxman only cares for the sources of your income, and whether your assets are commensurate with your known sources of income. Pay taxes on incomes, including investment income. If we are only goaded by tax saving, we will end up with investments and assets we don’t need or won’t use.
If what we like and need also comes with some tax saving, that is a good thing. But directing all investment decisions with an eye on taxes alone can end up badly like that eyesore called Spitfire that sat uncomfortably on the porch of an otherwise sensible and profitable tea company.
Courtesy: ET Wealth Date: – 26 Nov 2018(Uma Shashikant)