Chartered Accountancy :: An understanding

01. What /Who is a Chartered Accountant? [An explanation to enable you to understand this]
What would you tell a prospective student about chartered accountancy? This is what we need to explain in trying to make a person understand what a chartered accountant and chartered accountancy is. To have an understanding on what a chartered accountant does,
ca,icwa,cs,cima,icma,acca,cpa,accounting,profession
you have to understand some relevant aspects which are explained below. Please be patient enough to read through. It would give you a clear understanding of what a chartered accountant is?

Who meets the Common/Joint expenses?

In/of a Joint Family —

Each individual earns income to satisfies the needs of himself and his family members through his earnings. The common needs of a family are satisfied by the income earned by the members of the family.

In/of an Apartment Complex —

Consider the case of a number of families living in an apartment. Who is going to bear the joint expenses incurred in the upkeep of the apartment premises? The residents of each apartment contribute a certain amount as service charges to a common pool. The common expenses like premises maintenance, lift maintenance, common area lighting charges etc., are met from this common pool. Each house is bearing a part of the total expense.

In/of a Street —

Consider the case of a number of houses in a street. By the same analogy the common expenses relating to the street like street lighting, road maintenance, drainage cleaning etc are to be met by a common of pool of income created from contributions of the residents of the street.

This amounts to individuals belonging to the group contributing towards the common expenses. These contributions may vary depending on the income levels etc.

In a similar way the common expenses of

  • an Area are to be met by the Residents of the Area
  • a Town are to be met by Residents of the Town
  • a District are to be met by Residents of the District
  • a State are to be met by the Residents of the State
  • a Country are to be met by the Residents of the Country

Contribution for common expenses
» Responsibility of earning members belonging to the group !!!

Say you are an individual who is an earning member of a family living in an apartment complex. You have to contribute towards the common expenses of the apartment complex.

Since the apartment complex lies on a street, each individual living in the complex will also have the responsibility to contribute towards the common expenses of the street on/in which the apartment is located. Similarly each individual living in the apartment complex has a responsibility to contribute towards the common expenses of the area in which the apartment/street is located, the town, the state and the country.

Though this sounds logical, the problem arises in deciding how much one should contribute towards each of these responsibilities. Deciding the contribution for the common expenses of the apartment complex is possible. But beyond that it would not be possible to think in terms of contributions by individuals. Moreover, if the contribution relating to each of these is to be paid and collected separately it would be chaotic. Therefore the contributions an individual has to make are grouped into three areas viz. (1) Local (2) State and (3) National. This idea is relevant in the Indian context.

The local governments

(municipality, panchayat etc) collects — land revenue, house tax, education cess, water tax etc annually from you to cover their common expenses.

The State and Central Governments

— collect taxes from you to cover their common expenses. Some of the taxes they collect are direct and some indirect.

Payment of tax is an obligation

The most important thing that one has to note regarding taxes is that — Tax is an obligation on the part of an individual and not a voluntary contribution to the common pool. Every person has an obligation to contribute for the common expenses. In a similar manner every citizen of a country has an obligation to contribute to the common pool based on his/her economical status.

Moreover unlike in the case of a family where the obligation is moral, here it is legal. If you are bound to pay tax, you have to. Trying to escape or not pay tax is a legal offence. However you can plan your activities in such a manner so as to reduce your tax burden.

Direct and Indirect Taxes!!

Direct Tax

Direct tax is a tax that you consciously pay to the government. The payment makes you feel the pinch. You know that you are paying tax and are bearing it. The various kinds of direct taxes are:

Income Tax

There are several routes/ways for one to earn income. You earn income through salaries, through professions, through business, etc. Your income in the current year is Rs. 10 lakhs so you have to pay a tax of Rs. 3 lakhs. This would be how it would sound. Here you know that you are paying tax and are deliberately paying it for clearing your obligation.

Wealth Tax

If you have wealth in excess of a certain minimum then you are bound to pay wealth tax. Since you are wealthy it is assumed that you can contribute a certain sum to the common pool as tax (1% of the value of your wealth in excess of Rs. 15 lakhs). The greater your wealth the greater the tax you pay. Here also you know that you are paying tax and are deliberately paying it for clearing your obligation.

Indirect Tax

Indirect tax is an amount that you unconsciously pay to the government as tax. You never feel that you are paying tax though you are bearing the burden. The various kinds of indirect taxes are:

Sales tax

When you buy a clock for Rs. 100, you think that you purchased the clock for Rs. 100.
But this is what the reality is. The real price of the clock is Rs 90. The sales tax on it is Rs. 10. The sales man would have to say, "Sir you have to pay Rs 10 sales tax to the government, so please go to the office of the sales tax department or to a bank and pay it to the government".

What can the government do if the person buying the clock (you) does not pay the tax. It has to take steps to locate you and make you pay up the tax. This sounds rather impractical.

Therefore an obligation is cast on the shop/person selling you the clock to collect the tax (income due to the government) and pay it to the government. The shop is collecting the tax from you on behalf of the government. That is the reason you pay them Rs. 100 and not Rs. 90. This means that you are paying Rs 90 to the shop + Rs 10 tax to the government both of which are collected by the shop itself. You always feel that you are buying the clock for Rs 100 and you never considered that you have paid tax. That is the reason it is called an indirect tax.

Excise Duty

The Rs. 90 the shop keeper has collected from you includes the following
— "Rs 20 (his profit) + Rs 70 (paid to the wholesaler)".

Rs 70 (paid to the wholesaler) includes the following
— "Rs 10 (his profit) + Rs 60 (paid to the manufacturer)".

Rs 60 paid to the manufacturer includes the following
— "Rs 20 (Cost of manufacturing) + Rs 20 (Excise Duty) + Rs 10 (advertisement) + Rs 10 (Profit)".

Every manufactures has to pay excise duty on manufacture immediately on completing manufacture irrespective of whether it is subsequently sold or not (unlike Sales tax which is to be collected by the shop only if it sells the clock). The Excise duty is to be paid by the manufacturer before he sends the clock out of his factory gate.

Therefore the Rs 100 you have paid includes "Rs 20 (manufacturing cost) + Rs 10 (advertisement cost) + Rs 10 (manufacturer profit) + Rs 10 (wholesaler profit) + Rs 10 (retailer profit) + Rs 20 (excise duty) + Rs 10 (sales tax)".

This in effect would amount to your paying Rs 30 as tax without thinking that you are paying tax. That is you are paying an indirect tax of Rs. 30.

Customs Duty

Goods imported into India are not manufactured in India and therefore a duty equivalent of excise is charged and is called customs duty. If you buy an imported product, the selling price you pay includes custom duty and sales tax.

Who is bearing the burden of all these taxes?

In case of sales tax, the burden is levied only at the time of sale. It is borne by the buyer. In the case of Excise and Customs, though initially the burden is borne by the manufacturer or importer as the case may be, it is ultimately transferred to the buyer by including the same in the selling price charged.

Where do Governments derive Revenue from » On what do they spend them

The major sources of revenue for governments is taxation. It may be direct or indirect. The major sources of revenues for governments are:

Central Government

In :

The income tax, Excise duty (except excise duty on liquors and narcotic drugs), Custom duty, Sales tax on inter state sales are collected by the central government. This forms the common pool for the central government.

Out :

The central government spends its revenue on salaries to central government employees, expenses of various departments, maintenance of facilities relating to the central government, income on common expenses like defence, science, education (central university, national institution - IIT, IIM etc), national highways etc. It also allocates a certain amount of its common pool revenue to states as "budget allocation for states" to meet capital natured expenses and other needs.

State Governments

In :

The sales tax (except on inter state sales) and excise duty on liquor and narcotics is collected by the state governments which forms the common pool to meet its expenses.

Out :

The state government spends its revenue on salaries to state government employees, expenses of various departments, maintenance of facilities relating to the state government, and on common expenses like roads, irrigation projects, education (university, government schools, colleges etc). It also allocates a certain amount of its expenses to local governments to meet capital and other expenses.

Local Governments

In :

The local governments like municipalities, panchayats etc., collect house taxes, land revenue, education cess, etc.

Out :

A local government spends on common expenses like sanitation, street lighting, education (municipal, panchayat schools etc), roads within towns etc.

All Governments

The governments as a part of their obligation to look after the needy people also spend their revenue on social welfare schemes, like subsidized food, health care, housing programs etc.

Relevance of Businesses to Government Revenue

Since the areas where sales tax, excise duty and customs duty arise are related to business, study of commerce is important. Trade, Commerce, manufacturing etc are the most important areas that provide income to the governments.

Income tax is paid by individuals as well as business organisations. The income tax paid by business organizations is of a considerable amount and forms the major part of the income tax collected.

Governments need to verify business accounts

Since the government derives its income from areas related to business it has to verify whether the accounts of business are properly being presented to them. If it loses income on account of manipulations done by business organisations, it is a national loss. The government has to ensure that the taxes, duties are being paid properly. For this it has to verify the accounts of businesses. To do this on its own, the government needs a large work force which would be impractical to employ.

How do Governments verify accounts of businesses?

Since it would be practically impossible for governments to verify each and every individual businesses accounts, it takes the help of people who are competent to do this. The governments entrust this responsibility to "Chartered Accountants" (chartered = licensed). The CA's work on behalf of the government and audit the accounts of businesses and certify them to be proper (for which service they charge a fee to be borne by the business).

Chartered

Licensed, contracted, agreed.

Auditing

checking, reviewing, inspecting, examining, assessing, appraising.

Auditing is one of the core functions of a CA

This is the relevance of CHARTERED ACCOUNTANTS [CA's] i.e. people who are chartered as accountants, by the government.

Note that this is not the only function of the CA's.


The politicians give you nothing from their own pockets.
Instead they live by your money.
It is you/we who meet all the expenses that they are incurring.
It is our money they spend lavishly.
Every rupee
the governments' spend
is Public (your) Money

 
Author Credit : Team Future Accountant  

© Krishbhavara ♣