Know about Tax

Value Added Tax

VAT is the indirect tax on the consumption of the goods, paid by its original producers upon the change in goods or upon the transfer of the goods to its ultimate consumers. It is based on the value of the goods, added by the transferor. It is the tax in relation to the difference of the value added by the transferor and not just a profit.

All over the world, VAT is payable on the goods and services as they form a part of national GDP. It means every seller of goods and service provider charges the tax after availing the input tax credit. It is the form of collecting sales tax under which tax is collected in each stage on the value added of the goods. In practice, the dealer charges the tax on the full price of the goods, sold to the consumer and at every end of the tax period reduces the tax collected on sale and tax charged to him by the dealers from whom he purchased the goods and deposits such amount of tax in government treasury.

Sales Tax

Sales tax is levied on the sale of a commodity, which is produced or imported and sold for the first time. If the product is sold subsequently without being processed further, it is exempt from sales tax.

Sales Tax is a levy on purchase and sale of goods in India and is levied under the authority of both Central Legislation (Central Sales Tax) and State Governments Legislations (Sales Tax). The government levies Sales Tax principally on intra-state sale of goods. States also levy tax on transactions which are "deemed sales" like works contracts and leases.

In addition to Sales Tax, some states also levy additional tax, surcharge, turnover tax and the like. Ordinarily, Sales tax is recovered from the buyer as a part of consideration for sale of goods.

Sales tax is paid by every dealer on the sale of any goods made by him in the course of inter-state trade or commerce, despite the fact that no liability to tax is raised on the sale of goods under the tax laws of the appropriate state.

Tax 2011

‘New Tax codes‘ must have triggered a new ray of hope among those salaried individuals. However, they may be disappointed to know that the finalizing and implementation of this ‘New tax codes’ may take up to 2011 which means that they have to file their IT returns in 2010 and possibly 2011 as per the previous slabs.

Just as a reminder, the previous IT slabs were as follows:

Up to Rs.160000, there is no need to file a tax return

From Rs.160001 to Rs.3 lac, a tax rate of 10% is applicable

From Rs.300001 to Rs.5 lac, a tax rate of 20% is applicable

For Rs.500001 and above, a tax rate of 30% is applicable.

The No-tax payable slot for Women’s is up to Rs.190000 and Senior citizen’s is Rs.240000.

As per the ‘New Tax Code‘, if accepted and finalized, the slabs will be as follows:

The No-Tax payable zone remains the same as above including for Women and Senior citizen

For income from Rs.160001 to Rs.10 lac, the tax liability will be 10% of the amount which exceeds Rs.160000.

For income from Rs.10000001 to Rs.25 lacs, the tax liability will be Rs.84000 plus 20% of the amount that exceeds Rs.10 lacs.

For income greater than Rs.25 lacs, Rs.3.84 lacs plus 30% of the amount that exceed Rs.25 lacs will be the tax liability.

Apart from this Tax code for Individual, the Government also plans to decrease the Direct Tax’s of the Companies from 30% to 25%.

Tax Cuts Or More Government Spending to Stimulate the Economy?

There is really no fixed way to stimulate the economy. The degree of economic stimulation and the size of response during a recession largely depend on the cause of the recession. For any recession, the GDP make-up is the paramount determinant of the most effective stimulating mechanism.

When an economy runs into a recession, it is hard to believe that without any new action, the economy is somehow going to pull itself out. The inability of the economy to pull itself out with inaction indicates that the old ways of running business have to be significantly modified.

Although it is important to free up money so that consumers can purchase goods when a recession strikes, it is more important to channel this money towards the most efficient goods which increase productivity in the long run. Governments have the power both to free up and to channel the flow of money although bureaucratic constraints hinder the speed and the effectiveness of the response. During recessions, struggling private enterprises producing inefficient products are usually more interested in disposing unproductive goods in the market and staying in business. This renders government action all the more relevant.

The government's ability to initiate any kind of economic stimulus greatly declines with a decreasing ratio of government budget to GDP. Having a fixed government budget to GDP ratio enlarges the government if the GDP grows with time. This in turn renders the government so cumbersome that its efficiency wanes with time. This diminishing effectiveness could be mitigated by modelling government institutions like the non-profit private industry while using the rest of the government apparatus to play only a regulatory role. While this helps to boost efficiency, it also strengthens the government's ability to steer the country towards economic progress with less hindrance.

An economy in recession could either be stimulated through increase in government spending or tax cuts. A rise in government spending creates more government sponsored projects, jobs and increases the cash flow for working families. This money is then channeled to other businesses leading to an increase in jobs in the private sector. Increased spending would entail an increase in taxes thereafter in order to minimize the budget deficit.

On the other hand, tax reduction raises the amount of cash available for businesses and consumers. Consumers can buy more goods resulting in an increase in jobs in the private industry and the private industry could in turn embark on producing more goods.

Government spending implies the government directs where the money needs to be spent. In tax reduction, the private industry allocates where the extra cash goes. While the government often focuses on long term opportunities, the private industry's focus is usually not stretched out beyond 5 years considering that the average life span of a US company is 50 years and its infant mortality rate is 10 years.

A reduction in taxes for small businesses and consumers really does little to keep the economy booming in the long run. This reduction would result in a temporal increase in small businesses. Having more small businesses in a recession does not generate more investment, but encourages more consumption. Consumption is bad for economic recovery. US consumption alone is 70 % of the GDP. Stimulating consumption may postpone a depression in the short run but the recession will become more severe when consumption is exhausted with no investment. Consumption stimulation provides a parachute for a slower free fall with little hope to rise.

A tax cut on small businesses is only effective in stretching out and exhausting an already initiated growth. Tax cuts on small businesses do not initiate growth. More often, an economic crisis requires stabilization with an orientation towards the initiation of growth than the expansion of growth. The increase in small businesses during a recession only results in the production of similarly existing goods with little or no changes in efficiency. This ends up being an illusory economic growth.

In addition, tax cuts create many disunited multidirectional economic fights by many different businesses. The ineffectiveness of multidirectional fights could not be overemphasized because economic resources get scattered everywhere thereby diminishing their strength to meaningfully reshape any economic meltdown.

A better strategy for tax cuts would be not to have an across the board tax cuts, but a reduction in taxes for industries that are expected to become the new production frontiers for the next decade. That would be money well spent. An alternation of more targeted spending and focused tax cuts is a sure means to keep the economy very efficient.

It is easier to see the ineffectiveness of tax cuts through the provision of lower taxes to businesses that are failing. A failing business requires a lot of restructuring and tax cuts give it an incentive not to restructure. With the tax cut, prices will be brought down and the consumption of the same poor goods is encouraged. When the well of tax cuts is exhausted, more tax cuts would be required to keep the industry afloat. This only leads to a deflationary spiral.

As personal finances dwindle, other programs such as food stamps, tax rebates and unemployment benefits help ensure that many existing jobs are not lost which will worsen the downward spiral. Such programs therefore only act as stabilizing mechanisms.

The effectiveness of the government to transform policies into actions is the single most significant factor in restoring economic prosperity. Should the government become very inefficient, then there is no doubt that tax reduction would play a more effective role in stimulating an economy during a recession. The government is needed more in a severe recession to make swift, smart and steady corrective measures. Government investment lays a formidable groundwork for future growth.

Every fiscal policy has a threshold below which its effect is insignificant. An invaluable fiscal policy would be simultaneous increase in spending and tax cuts, but no country has the luxury of excess cash to effect such a concurrency beyond both thresholds. This leaves government spending as the more efficacious policy. The challenge is to know these thresholds in order to institute the right measures. With the government budget constituting a fixed and appropriate percentage of the GDP, the government is sure to have the machinery to launch congruous tax cuts for the short run economic stimulation and increased government spending for long run stimulation without the burden of excessive deficits.

Tax Planning Vs Tax Preparation

As soon as March rolls around, many of us get ready to welcome the Spring season but many worry about the Tax season. I am sure you are among millions of people trying to get your tax return filled and filed away by Apr 15. Many of you might use your good Internet skills and take advantage of on-line tools like Turbo Tax or Tax Act to file taxes. Others still don't believe the on-line tools does good job in getting you big tax refund and still depend on CPA's and tax preparers for tax help.

Either way, you will only get what you can get and you cannot change anything now at this point to get more tax refunds than eligible. Some don't understand, it is too late to think about getting more tax deductions unless you planned in advance. You can only reduce taxes so much by either by taking deductions or using credits. That's where Tax planning comes into play a key role.

Tax planning is many times confused with tax preparation, with only thought given to planning when preparing their annual tax return. However, little can be done to actually reduce your tax bill at that point. If your aim is to reduce taxes, you need to be aware of tax planning opportunities throughout the year.

Take time in the early part of year, may be during tax preparation process, to assess your tax situation, and look for ways to lower your tax bill. Consider a list of items, such as what kinds of debt you owe, which investments you own and need to dispose, how you are saving for retirement and kids education expenses and what tax-deductible expenses you incur. Also deciding whether you want to file separately or jointly, timing the sale of your capital assets, deciding on period of withdrawal of retirement funds, the timing and amounts of giving gifts and when to pay expenses are some examples of tax planning.

By thinking about tax consequences during the year on every big financial moves will prevent you from finding out later that there was a better way to handle every transaction.

Here are few examples of tax planning which might help you either to get better refunds or avoid shelling out on taxes during the filing time.

1. If you are an employee, you can avoid paying at the end of the year by increasing your tax withholding. It actually changes the mind set from "how much need to pay" to "how much I will get back as refund". But the problem is, more money will be taken out of your paycheck throughout the year and you need adjust your budget accordingly. That may sound like a good strategy but at the same time you don't want to give away Uncle Sam interest free money by withholding too much. A nice realm check is to use this year's return and keep the all deductions constant and see whether you withholding is right level. If you got too much refund reduce the withholding proportionately, on the other hand if you paid tax, increase your withholding accordingly.

2. If you have a stock which you been waiting for years to bounce back up but never seen any signs, don't lose heart. That loser stock can still bring you money by reducing your tax burden. Just wait till the end of year and sell it if you don't see the sunlight for the stock. Buy selling the loser stock for loss, it helps to balance out the capital gains for that year, plus allows to take another $3,000 deduction (married filed jointly) in regular income. But there is a caveat to it. You need to avoid wash sale. You cannot just sell the loser stock and buy the same stock with before or after 30 days of the sale. Then the losses you realized previously gets disallowed.

3. If you are expecting big medical expenses for that calendar year, you should be able to itemise the deduction by keeping track of the transactions and even medical miles driven. In order to do that, you need to plan and remember to save all the receipts of the expenses like hospital charges, co pays, medicines&prescription cost and much more. Track the medical miles driven and also add them in the deduction. Add these medical deductions on top of the health insurance paid from your pocket.

These are just few samples and there are lot more too tax planning. Will cover some more in the other article.