Huge amount of trouble, little amount of “Tax Evasion”

             We in daily life hear some words like “Tax planning” and “Tax evasion”. But due to the lack of awareness or I should say knowledge of tax provisions of the country involve in tax evasion activities and think that we are planning our tax liability. But you must be aware that these two words have a huge difference. In simple words, if I define tax planning I would say tax planning means reducing tax liability by taking advantage of the benefits provided by the various provision of the tax act, in this we comply with the requirement of the provisions of the tax act. For example, as per section 1(12) of schedule 1 of the Income Tax Act, 2058 if we take a life insurance policy and pay a premium then we are allowed to deduct up to Rs. 40,000/- to arrive at taxable income. On the other hand, if we try to reduce tax liabilities by claiming those benefits which are not available in the tax act itself then it is tax evasion. For example, the provision of section 1(12) of Schedule 1 says you are allowed to deduct up to Rs. 40,000/- if you pay a life insurance premium that means if your actual premium payment amount is less than Rs. 40,000/- then you are allowed to claim the actual amount only. Thus, availing benefits with compliance with the requirement of the provisions is tax planning, and if we pay only Rs. 30,000/- as an insurance premium in an income year and claim Rs. 40,000/- as a deduction at the time of computing of tax liability then it’s tax evasion.

            Now let’s discuss a misconception spread in society regarding one of the provisions of the Income Tax Act, 2058 i.e. “Couple Assessment”. Couple assessment is a facility or I should say the benefit provided by section 50 of the Income Tax Act, 2058. Which says that husband and wife by an application to the department may elect to be assessed as an individual (practically called a couple assessment) and as per section 1(2) of Schedule 1 if the couple elects to be assessed as individual u/s 50 then the minimum tax-exempt income slab is Rs.6,00,000/- instead of Rs.5,00,000/-.

            But practically you are not required to apply to the department even though the provision requires so and you do not have to calculate your tax liability by yourself and pay to the tax department(IRD). Instead, your employer computes your tax liability and deposits the tax amount with the tax authority on your behalf in the form of TDS u/s 87. But you must be aware that just being married does not mean that you (you and your spouse) are eligible for assessment as an individual i.e. couple assessment and avail the benefit of section 50. Your employer just asks you whether you are married or single and if you reply as married he blindly assesses your tax liability as a couple in other words he claims the benefit of section 50 for you. But you may not be eligible for the benefit of section 50 and you should be assessed separately. There are some conditions for availing the benefit of Section 50. First, you are married second, you are earning from employment third, and most important your life partner is a non-earning partner i.e. he/she is a homemaker. That means you are eligible for couple assessment only if you are married and your partner is earning nothing instead he/she is taking care of the home. If your life partner is an earning partner, then you should be assessed separately and your partner will be assessed separately and you are not eligible for the benefit of couple assessment. Let’s first understand the impact of separate individual assessment and couple as an individual assessment by an example.

Example 1: - Let’s assume you are earning Rs.10,00,000/- from your employment with ABC Ltd. And your spouse also earning Rs.10,00,000/- from his/her employment with XYZ Ltd. And if as per the requirement of the Act you are assessed separately then tax liability will be, ignoring SSF, CIT, and other deductions

Slab	Tax rate	Tax Liability
		Your	Spouse’s
Up to 5,00,000	1%	5,000/-	5,000/-
5,00,001 to 7,00,000	10%	20,000/-	20,000/-
7,00,001 to 10,00,000	20%	60,000/-	60,000/-
Total Tax Liability		85,000/-	85,000/-

 Your tax liability is Rs. 85,000/- and of your spouse’s is R.85,000/-, in aggregate your tax liability is Rs.1,70,000/-

Example 2: - Let’s assume the same as in Example 1 except that instead of the requirement of Act you and your spouse both are assessed as a couple by your and your spouse’s employer then tax liability shall be  

Slab	Tax rate	Tax Liability
		You	Your spouse
Up to 6,00,000	1%	6,000/-	6,000/-
6,00,001 to 8,00,000	10%	20,000/-	20,000/-
8,00,001 to 10,00,000	20%	40,000/-	40,000/-
Total Tax Liability		66,000/-	66,000/-

  You evaded a tax amount of Rs. 19,000 (85,000-66,000) and your spouse evaded a tax amount of the same i.e. 19,000/- and in total, you evaded Rs. 38,000/-.

Example 3: - Let’s assume the same as of Example 1 except that here your employer assessed your tax liability as a couple and your spouse’s employer was aware of the requirement of provision and assessed your tax as a separate individual then the tax liability will be

You pay the tax of

Slab	Tax rate	Tax Liability
Up to 6,00,000	1%	6,000/-
6,00,001 to 8,00,000	10%	20,000/-
8,00,001 to 10,00,000	20%	40,000/-
Total Tax Liability		66,000/-

 

Your spouse pays the tax of

Slab	Tax rate	Tax Liability
Up to 5,00,000	1%	5,000/-
5,00,001 to 7,00,000	10%	20,000/-
7,00,001 to 10,00,000	20%	60,000/-
Total Tax Liability		85,000/-

            Here you evaded Rs. 19,000/- tax and your spouse evaded no tax, so in aggregate, you evaded Rs. 19,000/- and paid Rs.1,51,000/- in total.

Example 4: - Let’s assume you are only the earning partner and your spouse is a homemaker and you earn Rs.10,00,000/- then as per the spirit of the provision of section 50 tax liability will be

Slab	Tax rate	Tax Liability
Up to 6,00,000	1%	6,000/-
6,00,001 to 8,00,000	10%	20,000/-
8,00,001 to 10,00,000	20%	40,000/-
Total Tax Liability		66,000/-

Here you and your spouse evaded nothing.

So, examples 1 and 4 are as per the spirit of the Act and examples 2 and 3 are examples of tax evasion practices of which you may be a part due to lack of knowledge of the provisions of the Income Tax Act, of 2058.

Now, you may argue that my employer paying taxes as per example 2 or 3 on my behalf for many years but nothing had happened till day and we should not be worried about the same in the future. If your argument is the same then you are going to face a huge amount of trouble very soon. How? Let me explain that the current scenario is that the Income Tax Department does not have a strong tracking system to track who is paying tax as per the spirit of the tax act and who is evading tax. But this scenario will not prevail in the country for a long time and the department will come up with a solution to this problem in the coming years or I should say possibly within 3-4 years. You may be hearing or reading news that the government is making “Rashtriya Parichaya Patra” mandatory for some services like driving license etc. so, you should expect that government will start to link your PAN with your “Rashtriya Parichaya Patra” very soon.

What if the government linked your PAN with “Rashtriya Parichaya Patra”? your whole information will be available to IRD and the department will be in a position to track who is evading tax and who is paying as per the spirit of the tax act. And in that case, as per section 101 income tax department has a right to assess your tax liability even after four years, and in case of fraud without a time limit and you have to pay not only the evaded tax amount, penalty as per section 120, interest as per section 119 but you may be prosecuted for involvement in such activities.

So, in conclusion, if you are married and your spouse is an earning partner then ask your employer to assess your tax liability separately and deposit with the tax authority instead of as a couple. Opposites of that if you are married and your partner is a non-earning partner ask your employer to assess your tax liability as per section 50 i.e. couple assessment. There are other ways to save taxes like a deposit in social security account, CIT account, taking life insurance, medical insurance, house insurance, etc. Don’t involve in tax evasion activities and avoid the huge amount of trouble you may face due to such practices.

 

Thanks for your time

Krishna P Bhusal

 

Source: - Income Tax Act, 2058, Income Tax Directive(Amended), 2066, and www.ird.gov.np