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Earn, spend, then pay tax

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But deductions are a part and parcel of the US tax system and most other tax systems in the world, including India’s. The biggest beneficiaries of such deductions are the corporates, where a lot of the costs of running the business are allowed to be subtracted from the gross profits.

The permissible expenditure is usually revenuebased, but write-offs, such as depreciation on capital expenditure, are also allowed. Individuals are not blessed with such deductions, though. The salaried individuals pay tax on their gross income. They get exemptions and deductions, but these pertain to investments made in instruments that carry tax benefits, such as insurance premium.

The question is: shouldn’t individuals be brought on a par with corporates? Salaried individuals suffer expenses to be in their jobs and stay competitive. For instance, just to reach their offices on time in city traffic would mean spending more on first class railway passes or cab fares that would not generally be reimbursed by most employers. In fact, given the pressure most office workers are under, office work often intrudes into one’s personal space.

For example, an executive working in a financial services company would have invested in buying a computer for his home and getting a fast broadband connection just to keep abreast of all happenings connected with his work. His company would not pay him for such expenses.

“It is an unfair situation; even the perquisites are taxed through the fringe benefit tax,” says tax philosophy Bombay-based Jayant Thakur, a chartered accountant specialising in company law.

A company, on the other hand, has a wide array of deductible expenditure to bring down its net taxable income. The corporate and accountancy laws allow for ‘miscellaneous, or other, expenditure' that are never spelt out in detail in publicly-disclosed financial statements.

There needs to be a level playing field in the way income of individuals and corporates is taxed. Otherwise, corporations would be thought of, as Robert Kiyosaki, an investor-cum-businessman says in his book Rich Dad, Poor Dad, as being the secret weapon of the rich to shelter themselves from heavy taxation.

Even one of the most influential economists of the last century, the late Milton Friedman, talked of allowing occupational expenses in an income tax regime. In an interview with an American newspaper in 1978, he said, "(if ) I could design my ideal tax system… it would be a flat-rate tax on all income, from whatever source derived, less only a personal deduction and strict occupational expense, and that kind of income tax, I think, would be the least inconsistent with a strong free enterprise system."

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Businessworld Issue 25 Feb-3 Mar 2008

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