1. What is tax? Why do we pay tax? To whom are we paying tax? Benefits of paying tax? | Finance
What is tax? Why do we pay tax? To whom are we paying tax? Where all this tax money are used for? Let's talk about all these in this blog.
Think about the government as a big organization. For this organization to function in its day-to-day activities, they need money. Our government is doing their part of the job like building infrastructures, roads, hospitals, running government organizations, etc. for us, for the people, right.
Thus, they take a part of our income, which is called tax to run their day-to-day activities.
The Indian tax system is well structured and has a three-tier federal structure. The tax structure consists of the central government, state governments, and local municipal bodies.
Taxes are used by our government for a variety of purposes like:
Funding of public infrastructure
Defense and Scientific research
Salaries of state and government employees
Operation of the government
Public education, and so on.
Advantages of paying tax
Apart from paying a part of your income as tax, you will also get additional benefits from paying tax such as:
Loan approvals: When applying for a loan, especially home loans, vehicle loans, etc., major banks can request a copy of your income tax returns. This can be your ITR from the last 2 to 3 years. Having ITR can even help to get a higher loan amount or to get your loan application reconsidered if it got rejected the first time. This is because banks calculate your ability to repay the loan based on your income. Income tax returns provide a clear picture of the income and the taxes that were paid on it in the previous years.
Visa applications: Many foreign consulates require you to furnish your income tax returns for the previous years during the visa interview. This is mandatory for the UK, US, Europe, and Canada, but not so much for southeast Asian countries and the Middle East. This is because income tax returns are proof that you are not trying to leave the country to evade taxes.
Carrying forward of losses: Short-term or long-term capital losses are usually carried forward to be adjusted against the capital gains made in the subsequent years. For example, the long-term capital loss of one year can be carried forward for up to 8 consecutive years that immediately succeed the year in which the loss had occurred. However, this can only be availed if income tax returns have been filed.
Claiming tax refunds: Any refunds that are due from the IT Department can only be claimed if income tax returns have been filed. Even if income is below the tax exemption bracket, there could be refunds from different savings instruments that can be claimed if ITRs are filed. An example is fixed deposits, on which there is tax deducted at source at 10%.
High-cover life insurance: Life cover or a term policy with a sum insured that ranges from Rs.50 lakh to Rs.1 crore can be availed only by furnishing income tax returns which helps in the verification of annual income. Such a high insurance cover is only given when there is a high income for which income tax return receipts are necessary.
Compensation: For self-employed individuals, ITR receipts may have to be furnished in order to claim compensation in the event of a motor vehicle accident that results in a disability or accidental death. This is because, in order to arrive at the appropriate compensation, the income of the person is to be established first.
Penalty for not Paying Taxes
The government can impose penalties of varying degrees on any individual or legal entity that evades taxes. The penalty is dependent on the category of the tax that has not been paid. This means that the amount that is owed as taxes should be paid and in addition to that, the fine which accumulates as interest is to be paid as the penalty.
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