Why taxes are an appreciating asset ?

Why “taxes” are an “appreciating asset”?

Taxes are a cost, a cash outflow from the pockets of the hardworking promoters; how can they become an asset, let alone an appreciating asset?

 

Most small businesses in the country start as one-man enterprises, with more dependents than earners, typical of all families. The business starts with an idea (of making money) and then grows in time, as does the entrepreneur. Evolution is necessary to keep going.

 

And as the story goes with all single incomes, every penny saved is a penny earned. This is where the Indian genius normally wakes up. Saving and especially saving taxes is very much a part of our rich cultural heritage. As a start-up, taxes saved usually mean the fulfilment of a family necessity. As a medium scaled enterprise, it is seen as the “smart” thing to do. But is it really?

 

Most small businesses, within the first year of operations, scale enough to call for investments. Sometimes, even earlier, when raw material forms a large part of the costs of the business in itself. Taxes (indirect) apply in every step of the manufacturing process; and cannot be easily avoided. But they are collected from customers in Toto, hence do not impact the business or the promoters. Taxes (direct); are applicable on P&L statements; and usually show between EBIDTA and Profits for Distribution. Direct taxes are easily saved. Booking sales is the start point. Inflating expenses is the next. Closure is in hiring professionals to plan taxes (minimize to zero is the goal). But what does this process achieve? There is always the Minimum Alternate Tax that the Government chooses to apply.

 

Banks exist to lend money to businesses. Their income is the NIM (Net Interest Margin) between the interest outflows (to depositors) and inflows (from borrowers). Banks, therefore by design; are the easiest to source funds from. Funds are disbursed on the merits of the proposal. This is calculated from the EBIDTA and Net Profits. This also indicates the ability of the business in servicing a loan (interest and principal payable in specified time periods). The higher the earnings, the higher the taxes, the better is the credit-worthiness of the business. The converse is also true, the lower the earnings, the lower the taxes, means a lower ability to borrow. The funds infused into the business aid in working capital and business expansion, creation of capital assets and processes, acquisition and retention of productive professionals. In time to come, all of these in tandem (along with an interesting concept called branding) lead to wealth. Wealth or net worth of the business leads to greater capital and bigger returns. And when the business goes public (in its sourcing of funds), wealth shows up as market capitalization. These mere words often sum up the entire set of aspirations of most businesspersons in this country.

 

In effect, taxes paid today, create wealth in a foreseeable future. As taxes grow, so do investments and as a result, so does wealth. And the rate of appreciation is definitely more than what can be ascribed to real estate, raw stock and stock of finished goods. In this respect, it is safe to conclude, “taxes” are an investment that result in appreciating returns. Hence proved, the title of this story.

 

Does this argument work against tax planning? Not really. There are several investments and permitted deductions that the taxpayer can seek. One such area is Corporate Social Responsibility (CSR). Contribute in the development of the local community, and the Government shows its appreciation by allowing a deduction from taxes payable. True, this is equally a cost (for those who are sincere about it). But it is also another “appreciating asset”. To cut a long story short; if a business invests in simply cleaning the community area around it and creating some social infrastructure (playground, traffic island, school, plant nursery etc), it will attract better talent from the local community, thereby cutting on manpower costs (hiring and retention of good people), profits through productivity, pride of association and goodwill. Which in turn, keep turning the cycle of wealth creation. More on this later, but tax planning is good as long as it is sincerely acted upon, not merely as a paper contribution to an NGO with extra receipt books.

 

To conclude, if you are business less than 3 years old, start thinking of taxes and tax planning as an investment today. Somehow the entries will always appear on the Liabilities side of the Balance Sheet, but the results will always show in the P&L and in the market, at a future date and time.