In this blog, we’ll discuss the intriguing dynamics of wealth, taxes, and the legal avenues employed by the rich to minimize their tax burdens. The financial landscape, particularly in India, raises questions about the disparity between soaring riches and nominal tax payments.
Let’s take the case of Amazon, a corporate giant with turnovers in the thousands of crores. Astonishingly, their tax contribution stands at zero. This raises a fundamental question: how do the affluent manage to legally sidestep significant tax obligations? The legendary investor Warren Buffett provides a glimpse into this phenomenon by asserting that he pays less in taxes than his secretary.
Financial education, a crucial aspect of navigating wealth, is notably absent from our traditional education system. Teachers, while deserving of respect, often grapple with meager salaries, making it challenging for them to impart financial wisdom. The deficiency in financial education perpetuates a cycle of employees rather than fostering an environment that nurtures financial literacy and independence.
The discrepancy in income between teachers and the business world sheds light on the systemic issues within our education system. Teachers, with their commendable academic knowledge, might excel in exams, but this doesn’t translate to financial prosperity. The current system inadvertently shapes individuals to become employees rather than encouraging entrepreneurial thinking.
This brings us to a critical revelation—the government, perhaps unknowingly, participates in a money-draining mechanism affecting employees. A disparity exists between the tax benefits available to businessmen and the tax burden borne by employees. The essential question arises: why does this gap persist?
The crux lies in the delicate ecosystem of business and government. A mere 3 crore taxpayers exist in India, and shockingly, 2 crore of them contribute negligible amounts in income tax. The burden, therefore, falls heavily on the remaining 1 crore individuals. If the government were to press these businesses too hard, there’s a genuine risk of them relocating operations to more tax-friendly destinations.
The potential departure of these businesses raises alarming concerns. Who will employ the workforce left in their wake? Unemployment has become a pressing issue, prompting citizens to turn to the government for solutions. To avert this, the government resorts to offering tax benefits to attract and retain businesses. This strategic move is not solely about attracting investments; it is also a preventative measure against job loss and subsequent public outcry.
Now, let’s dissect the legal strategies employed by businesses to minimize tax burdens. When a business generates profit, a portion goes to employee salaries, typically around 20%. The remaining 80% becomes the playground for tax management. Unlike employees who pay tax before expenses, businessmen enjoy the luxury of deducting legitimate expenses before tax is applied.
Consider a scenario where both an employee and a businessman earn 1 crore rupees. The employee, despite utilizing deductions and exemptions, succumbs to a significant tax burden. The government effectively ‘loots’ around 27 lakhs from this individual. On the other hand, the businessman, leveraging legitimate expenses, reduces the taxable income. This meticulous process often results in a significantly lower tax liability, ensuring that the government’s share remains relatively modest.
The critical distinction lies in the treatment of post-tax income. While an employee must allocate the remaining income after tax to personal expenses, a businessman strategically utilizes the post-tax income to further business growth. The businessman’s ability to claim expenses on various aspects like travel, technology, and family-related activities compounds the advantages.
This is where the narrative shifts. The businessman, having spent 99 lakhs out of 1 crore, is left with a profit of 1 lakh rupees. Taxation on this amount, after applying for possible exemptions, is a fraction of what the employee pays. The businessman’s ability to leverage legitimate expenses not only reduces the tax liability but also facilitates continuous business expansion.
The disparity between the tax burdens of employees and businessmen becomes more pronounced in this context. While the employee pays tax before expenses, the businessman strategically navigates a system that rewards investment, growth, and job creation.
Consider the broader implications of this dynamic. The businessman, with a reduced tax burden and ample post-tax income, contributes to economic growth by reinvesting in the business. This, in turn, generates more employment opportunities, creating a positive cycle that benefits both the entrepreneur and the workforce.
Yet, our traditional education system remains silent on these intricacies. The allure of government jobs overshadows the potential for financial independence through entrepreneurship. People across states, from Bihar to Jharkhand, from Odisha to UP, echo the sentiment of job security. However, the truth is that not everyone secures the job they desire, leading to the realization that years have been spent in pursuit of a career that may not align with one’s aspirations.
The overarching message is clear—entrepreneurship holds untapped potential, and the benefits extend beyond individual prosperity. While the risks and challenges of business are acknowledged, the legal avenues available for tax optimization provide a pathway to sustainable growth.
Embarking on the journey to success in the business realm requires a nuanced understanding of financial strategies and tax management. In this discourse, we will explore the legitimate ways in which businessmen navigate the complex landscape of taxation to safeguard their wealth. The realm of tax planning, a key concept in financial literacy, is illuminated as a legal and strategic method for businesses to optimize their financial standing.
Tax planning, a pivotal component of financial education, involves meticulous strategizing to minimize tax liabilities within the bounds of legality. It stands in stark contrast to tax evasion, an illicit practice that we will refrain from discussing in this discourse. The focus here is on lawful methods that pave the way for financial growth and success.
To comprehend the avenues available for legal tax optimization, one must grasp the twin pillars of tax planning—expenses and investments. These pillars serve as the cornerstone for businesses seeking to navigate the intricate web of taxation.
Let’s look into the first pillar—expenses. In the business realm, every rupee spent strategically can become a shield against excessive taxation. When a businessman incurs expenses, such as salaries, office rent, or equipment purchases, these costs contribute to reducing the overall profit. Given that tax is calculated on profit, a decrease in profit through legitimate expenses translates to a lower tax liability.
Consider the scenario where a businessman invests in a laptop. Beyond the immediate utility of the device, the businessman gains the additional advantage of claiming depreciation on the laptop. This depreciation, a recognized expense, aids in further reducing the taxable income. A similar principle applies to other significant expenditures, such as purchasing a car. The depreciation on the car can be claimed, providing a legal avenue for tax reduction.
The intricacies of tax planning extend beyond traditional business expenses. Even personal expenses, when strategically approached, can offer benefits. For instance, if a businessman uses a personal asset for business purposes, such as installing an air conditioner in a home office, the GST paid on the air conditioner becomes an expense claimable against income. This illustrates the adept maneuvering that businessmen employ to legally minimize their tax burdens.
Contrast this with an individual in traditional employment. Personal expenses, such as a laptop for work purposes or an air conditioner for home office use, do not typically yield tax benefits. The dichotomy between the treatment of expenses for businessmen and employees becomes apparent in these scenarios.
Moving on to the second pillar—investments—the terrain becomes equally fascinating. Businessmen often venture into real estate investments, a realm where strategic planning can lead to substantial tax savings. Consider a businessman investing ₹3 crore in real estate. After a decade, selling the property for ₹6 crore triggered a nuanced response from the government.
The government recognizes the impact of inflation on the property’s value over the years. Consequently, it allows the businessman to adjust the property’s price to account for inflation. In this scenario, if the adjusted cost of the property is deemed to be ₹4.5 crores, the businessman legally incurs no tax on the ₹1.5 crore profit. Moreover, if the businessman reinvests the profit, subsequent investments can also be shielded from taxation, creating a domino effect of tax savings.
The contrast between these legal avenues for businessmen and the tax implications for employees is stark. The businessman, through strategic expenses and investments, not only reduces immediate tax burdens but also fosters an environment where wealth creation is accompanied by tax optimization.
Now, the discourse shifts towards a broader perspective on wealth creation. The digital era has ushered in new possibilities for budding entrepreneurs. The call to embrace digital entrepreneurship echoes loudly in an age where online businesses thrive. The investment required to commence a digital business is notably low, making it an accessible avenue for many.
The Fast Track Millionaire training program emerges as a beacon for those seeking to delve into the realm of digital entrepreneurship. With an investment in this training program, participants invest in their cognitive prowess, acquiring the skills necessary to navigate the digital business landscape. The program serves as a gateway to online wealth creation, offering insights into the world of digital entrepreneurship.
As the world evolves, the conventional wisdom of job security is increasingly questioned. The blog advocates for a shift in mindset, encouraging individuals to explore entrepreneurial endeavors. The argument extends beyond the individual level, emphasizing the economic benefits of a society with a robust entrepreneurial spirit.
The overarching message resonates with the idea that financial freedom is within reach for those willing to embrace new paradigms. The call to action extends beyond the blog itself, urging individuals to share their insights with others and contribute to a collective shift toward financial literacy and independence. As the digital age unfolds, the potential for wealth creation is no longer confined to a select few but is open to those who dare to venture into the realm of entrepreneurship.