The Hindu Business Line : Demystifying income tax

Today, we are going to talk about something rather humourless. Something that is inevitable. Yet agonising. It is a phenomenon that rears it head once every month in a minor way and then wreaks complete havoc just before the onset of summer every year. You are absolutely right; I am talking about virulent dhobi's itch!

Ha ha! I jest. Instead, we are going to talk about the cruel phenomenon that is, shudder, `income tax'.

Now most of you new managers should be making a tidy little packet every month as salary. The job market is booming. So I assume most of you are cashing in on the opportunity big time.

But even if you don't, it's ok. Don't worry. Keep your focus, stay dedicated and work long and hard hours. Then one day, late into the night, your boss will depart leaving you in the office alone with the fax machines, servers and other expensive office automation equipment. There is a thriving black market for these items. If you have a large enough office, you can even rent the place out for marriages, book launches and such events. But whatever the source of your income, the reality remains: You need to pay your taxes.

Today, we will talk a little about income tax and demystify the phenomenon. After all, financial rationale apart, you are a responsible citizen and must pay your fair share of the tax burden as well: Between 20 and 30 rupees, every two or three years.

Before we jump into the complicated machinations of tax management, we must get our fundas on income tax in place. Where did the tradition of income tax begin? How did it begin? Who established the first tax system? Why in God's name would he do such a thing? Income tax was first established way back in the year 10 A.D., a year renowned for its sharp winters, remarkable Chardonnay and astounding ease of representation in Roman numerals. For the first time ever, an unprecedented tax of 10 per cent of profit was levied by the Emperor Wang Mang (real name) on Chinese professionals and skilled labour. (Two days later, on a Wednesday, the concepts of "consultant" and "expense account" were also invented by the compulsively innovative Chinese).

And, as a harbinger of things to come, the Chinese promptly packaged income tax with a manual in lousy English, wrapped it all up in bubble wrap and exported the idea all round the world at abysmally low prices. Governments around the globe were ecstatic:

King: "What the... We just decide on a percentage and the citizenry coughs it up... No questions asked?"

Minister of the Exchequer: "Of course, they can dispute it."

King: "But then we could behead them or something."

Minister: "I was thinking more of a stint in the dungeons. But hey, whatever works for you man."

King: "So be it. Declare a 30 per cent flat rate and a 2 per cent cess on education."

Minister: "Yipee"

Soon, nations around the world rapidly caught up with the Chinese and began to tax their citizens. Of course, in return they offered them services like social security, armed forces, a vast and inefficient Government machinery and, most importantly, public sector undertakings that gave astounding market share and ever increasing profits to private sector competitors .

Independent India also realised the need to tax its citizens in order to fuel the fledgling nation's rapid growth. So, shortly after independence (around 4 pm), our founding fathers sat around to decide on a taxation system. They mutually agreed to devise a fair and balanced tax system that would also ensure efficient tax utilisation. Then, after a hearty laugh, they quickly decided on a cruel and crippling tax regime. Now, some might feel like questioning the right of our Government to tax its citizens. I would not recommend this.

The more knowledgeable among us know that the Central Board of Revenue has powers conferred by Section 295 of the Income-tax Act, 1961 (43 of 1961), and Rule 15 of Part A, Rule 11 of Part B and Rule 9 of Part C of the Fourth Schedule to that Act that allows it to tax anybody, anywhere, at any time of the day including bank holidays. Any dissent is punishable by a fine equivalent to three time your net worth and /or forced reading of the entire Income Tax Act of 1961 including all annexures, maps, diagrams and companion multimedia DVDs!

So really you have no option but to pay your taxes. If you know what's good for you.

However, the Government does allow you to plan out your income and use of money in such a way that your tax liability is brought down to an absolute minimum. Let us see how we can plan our income tax in the most optimal format.

Now by income, the government means any money you make from anywhere: salary, house property, business, capital gains, other sources, selling of employer's assets, supari projects undertaken on alternate weekends for friends in the Mumbai underworld and so on. Now, you don't need to pay any tax as long as your income is below a certain minimum amount. But subsequent to this Rs 75, you have to pay tax on a slab-based system.

Then, of course, there is the deduction up to Rs 1 lakh. This can be in a variety of savings instruments, insurance policies, loan repayments and so on. You also get rebates on housing loans and a little extra benefit if you are female or an elderly citizen.

So, the first strategy is to prove to the Government that even though you are a management trainee fresh out of business school, you are, in reality, a 70-year-old woman who is simultaneously buying several homes in Nariman Point and Chanakyapuri.

That should take care of most of your problems. The next step is to have an open and frank tête-à-tête with the finance/payroll guys in your company. With some persuasion, they will understand that while you may be receiving your salary every month in the bank there is no reason why you should be receiving your exact payslip. Nor must they use your exact PAN.

The finance/payroll guys normally see your side of the argument, but get them to do all the paperwork before they have had one too many Margheritas.

So there. That was a nice little overview of the income tax system was it not? I hope you put it to good use and quickly become a master of your own tax liability.

Or move to Dubai.

(The writer, an alumnus of IIM-A, was a management consultant before quitting to work on a book and a full-time writing career)

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