Question

Why do people avoid paying taxes? How to compute total income and tax liability?

Answer 1

There are various reasons why people avoid paying taxes. There are two terms known as Tax evasion and Tax avoidance. Tax evasion constitutes an illegal activity which involves not paying taxes which one owes. It involves purposefully avoiding taxes which are supposed to be paid. Tax avoidance is a behavior that involves keeping away from the legal obligation to pay taxes. The basic reason one keeps away from paying taxes could be the dissatisfaction caused due to poor management of Tax revenues. The increased number of corruption and bureaucracy makes the tax payers lost their trust in the motive behind collecting taxes. Another reason could be existence of loopholes in the system which might compel someone to avoid paying taxes.

In order to file the Income Tax Return, one should collect all the necessary information required to file them. For the purpose of computing taxable income, the income of a person can be categorized in to 5 heads. A person could have salary income and he could compute their income by using the TDS Certificate issued by his/ her employer. The salary income would include the Basic salary, Dearness Allowance, taxable House Rent Allowances and any other kind of emoluments. The total income derived thereby is known as the Gross Salary. There are certain items that would be allowed as deduction from Gross Salary such as Exempted portion of HRA, other expemted portion of emoluments. The net income after deductions will be termed as Net Income from Salary. Capital gains/ losses are another head under which the tax payer could have gains on sale of a capital asset. There could be Long term Capital Gains or Short Term capital Gains depending upon the nature of Capital income derived. The rent received by the tax payer on let out house would come under the head income from house property. The assessee will have to determine the Gross Annual Value from the rental income and deduct the Municipal Taxes and the annual interest cost paid on the amount of loan, if any. The net Income derived will be the Net Annual Value. Any business income or gains including professional income would come under the head profits and gains from business or profession. Computation of Business income involves adding back deductions that are disallowed, substracting deductions allowed under the relevant law, on the value of Net Profit appearing in the books of Accounts. Any other miscellaneous income such as dividend income or interest on deposits etc would come under the head Income from other sources.

Gross Total Income is the sum of income from all the 5 heads after deducting all the losses under the relevant heads of Income. From the Gross Taxable Income, various deductions which are qualifiable in nature as per the relevant statute are allowed as deductions through which Net Income will be derived.

After classifying the income into different heads of income and attaining the Net Income, various tax rates relevant for the Financial year are applied on such taxable income depending upon the type of income one earns and also according to the prevailing tax slab rates.