Tax Identification Number

Taxation is a powerful instrument to determine the fiscal policy of a nation and help to build up the economic structure of a country. Tax is a compulsory payment to the government.

Taxation is in the nature of a compulsory levy and there is no quid pro quo between the amount paid and the services provided by the government.

The primary purpose of taxation is the mobilization of resources and canalizing the same for productive investment. Taxation can also be used as a measure to promote equity and reduce disparities or to encourage or discourage consumption of particular items.

Tax structure in India

The system of taxation in India is very much primitive. For development of any nation and for civilization, imposition of tax within the framework of logical tax structure is utmost necessary. On this basis, system of taxation is broadly classified into two categories- Direct Taxes and Indirect Taxes. In fact, direct taxes include those taxes which the taxpayer pays directly on his income, wealth, etc. Direct taxes are mainly Central’s subject except professional tax and Agricultural Income-tax.

The difference between the two types of taxes is that in the case of direct taxes the burden or ‘incidence’ is borne by the tax-payers themselves whereas in the case of an indirect tax, the burden can be shifted to another person.

Authority to collect taxes is conferred on the Central and State Government by the Constitution of out country.

Another feature of the Indian tax structure is the tendency to increase the proportion of indirect taxes. This had come down drastically to 16% by 1991. However, there has been some improvement in the subsequent years. For the year 1998-99 the ratio between indirect and direct taxes was 70:30. It had improved to 62:38 in 2001-02. Even at this rate, the economic consequence is that the burden will fall disproportionately on the poorer section, as indirect taxes, especially on commodities, affect the poorer sections more.

It must, however, be admitted that India’s tax effort since independence has been quite appreciable. The tax to GDP ratio (centre and states together) was 6% in 1950-51. In rose to 11% by 1970-71. Compared to many developing countries, India’s record of resource mobilization through taxes has been satisfactory.

‘Tax’ refers to payment of fund to governmental authorities against which no direct benefits may be expected by the tax payers. The governmental authority of any modern country is found to require huge financial resources to discharge various functions. The functions done by modern government may be of two basic types which are- (i) compulsory functions and (ii) optional functions. Traditional compulsory functions refer to the areas of activities relating to the defence of the country and maintenance of internal law and order. To discharge these compulsory functions any modern government is required to maintain security and police forces. Huge financial resource is essentially required to discharge such functions. Optional functions refer to various activities relating to improvement of socio-economic conditions of the people. In relation to such areas of activities a modern government, based on social welfare concepts is required to spend huge fund for development of economic infrastructure in the form of road and railway development, power generation, telecommunication development, educational and health care development and even implementation of various schemes for development of agricultural and industrial sectors of the country.

Federal Tax Identification Number

All the business has its own image and entity and the tax identification number is used to identify this entity. Simply to be said that it is used to identify employer’s tax accounts. It is also known as Employer Identification Number (EIN) or Taxpayer Identification Number (TIN). The Federal Tax Identification Number or Employer Tax Identification Number or EIN is a nine digit number and it is used to fulfill most of your business needs. It is to be mentioned that, Internal Revenue Service (IRS) assigns the federal tax ID number to identify the business.

The employer, sole proprietor, trust, non profit organization, partnership or other business entities may use this tax ID number. One can easily apply for a new tax identification number though there is already an EIN, due to the changes of ownership or some certain circumstances.

Before applying for EIN either telephone or fax, you have to complete Form SS-4. The federal tax identification number is applied on online also. It is open an avenue to the customer. Therefore you have to fill the form and other necessary criteria through online. You can also collect your Tax ID Number through online. In this whole process there may not be need to registration. The application process is proceeds to fill up the form.

Last of all it is to be said that, a business need a Federal Tax Identification Number or Employer Tax Identification Number, so that they can maintain their own image or entity in the market. It is to be noted that, the tax ID number could not be transfer in case of the transferring of any business. If the structure or ownership would be changed then a new tax ID number is required for the business. But above all you have to collect the relevant information to get an EIN.

Why Would Businesses Prefer GST Over Other Tax Structures?

The GST reform has been successfully passed in both the houses of Parliament and the Government is ready to roll out the new tax structure in coming months, i.e. from 01 July 2017, to be precise. So what is GST? GST stands for Goods & Service Tax which will simplify the tax structure in India. This tax system will be beneficial for both businesses as well as individuals. As far as businesses are concerned, GST will be quite beneficial as it will lessen the burden of several return filings and will also eliminate the geographical barriers for trading companies. GST’s integration with Tally ERP 9 will be a great value addition for businesses looking to automate their return filings as compared to manual.

Organizations would prefer GST over current tax regime

Being a dual concept tax system, it’s vital to comprehend GST’s essentials. This system lets both the State as well as Centre governments to manage, collect as well as share the tax based on how the transaction is done. Undoubtedly, its way different from the current tax regime and once into implementation will make the life of people and small and medium sized businesses easy. Now, let’s see what GST brings in new as compared with the current tax regime.

  • The current tax regime in India includes different laws for different taxes, whereas in GST there will be only one law as this tax structure will incorporate different taxes
  • Current tax regime has different rates whereas this system would include a single CGST rate and a constant rate of SGST across all states
  • The credit of CST and the fact that many taxes aren’t allowed in the current tax system will lead into a spilling effect. GST won’t give a rise to this situation as the concept of CST will be completely removed after IGST gets introduced.
  • The current tax regime levies heavy taxes on the tax payer thus putting a lot of tax burden on him/her. When GST gets introduced, the tax burden is likely to be lessened as all the taxes will be integrated which will further divide the tax burden.
  • Some taxes get included in the cost due to the presence of cascading effect. However, in GST the burden of the cost is reduced as the effect is eliminated by the mechanism by providing credit.
  • The current scenario doesn’t empower both the State and Centre on similar subject matter in the current tax system. However, in GST both the authorities will be commended with the power to make law on GST as the constitution will allow it to do so.
  • In the current scenario, the tax structure is quite complex as there are several laws to be followed along with their necessities. In GST, the tax structure is extremely simplified as it would be governed by only a single law.

Many believe that GST is the best thing to happen to Indian tax system. Further, its integration with Tally ERP will make it reach millions of people. Also, the implementation of GST will further lead to more productivity and efficiency in delivering time based solutions.

Tax Saving Entity Structures

I find that most people have a good grasp of the basics when it comes to entities, but are often missing the little things that can have a huge impact (good and bad) on tax savings. I have a real-life story that captures this well.

Pierre is starting a business and calls his tax preparer to ask what type of entity he needs for his business. Pierre’s tax preparer responds with what Pierre refers to as “confusing accountant talk,” but Pierre is able to translate enough to learn that S Corporations are best for businesses. So Pierre forms his S Corporation and is off and running his new business.

At the beginning of the next year, it’s time for Pierre to do his tax returns. Pierre’s new business had losses its first year, which Pierre expected. While Pierre is not excited about the losses, he is excited that at least the losses will offset his wife’s salary so they will pay less in tax.

But Pierre is shocked and surprised when he receives his tax returns! First, he learns he can’t take his business losses currently because he didn’t fund the losses personally. Instead, his S Corporation funded the losses by getting a bank loan that Pierre guaranteed. Second, not only does Pierre have an unexpected tax liability, he also has higher tax return preparation fees because he now has 2 tax returns to file – his personal tax return and his S Corporation tax return.

Better Tax Results with a Sole Proprietorship than an S Corporation! Really? In this tax story, Pierre would have had better tax results if his business was taxed as a sole proprietorship. In a sole proprietorship, the losses would have been fully deductible and the business activity would have been included in Pierre’s individual tax return so there would have been only 1 tax return to file. Plus, this could have been done in such a way so Pierre could still have his business taxed as an S Corporation in the future.

Pierre was shocked to learn this! He had always heard that sole proprietorships were terrible and to avoid them by any means necessary!

STOP RIGHT HERE! The first time I shared this story, I received some emails from readers telling me I was crazy. Was I really suggesting a sole proprietorship over an S Corporation? The answer is yes and no. Yes, for tax savings purposes. No, for legal purposes. The good news is you can have it both ways because…

Tax Terms Do Not Have the Same Meaning as Legal Terms

Tax strategies and asset protection planning use the same terms but they have very different meanings.

Let me give you an example. You buy a rental property and put it in a Limited Liability Company (LLC). You are the only member of the LLC.

For legal purposes, your rental property is owned by an entity – your LLC. For tax purposes, your rental property is treated as if you owned it directly – meaning it is taxed as a sole proprietorship.

In this case, there is a sole proprietorship for tax purposes but not for legal purposes.

LLCs are extremely flexible in how they are treated for tax purposes, making it possible to have a sole proprietorship for tax purposes and an entity for legal purposes. Even better, LLCs can also be taxed as Corporations (C or S Corporations), so they are extremely effective when creating tax saving entity structures.

Why Didn’t Someone Tell Me This? Pierre learned all of this too late and of course asked his tax preparer, why didn’t I know this? And that’s the heart of this issue. Pierre did the right thing by asking his tax preparer about the entity early on, but it was an issue of – you don’t know what you don’t know.

In a perfect world, the tax preparer would have asked the right questions to learn more about Pierre’s goals and situation and would have translated “confusing accountant talk” into something clear and understandable. In general, S Corporations are good entities for businesses. But, they can be terrible when there are losses, and losses are common when a business first begins.

Expert Advice in a Cash Crunch

Tax advice is very specific to each person. When I first work with a new client, I spend at least 3 months with that client focusing on their goals in order to create a tax structure that works for them. And I coach them on the triggering events they need to be aware of that will change their tax structure so they learn when they need to ask questions.

Business owners and investors need expert advice when they are starting their business or investing and this is the same time when they feel the greatest cash pinch! It’s clear from the business owners and investors I talk to that they all want the expert advice, some believe (right or wrong) that they just aren’t in a position to pay for it at that moment. What they usually do is get a quick answer (like Pierre) and deal with it later. Unfortunately, the nightmare stories people share with me end with “deal with it later” meaning paying much more later.

Cost Effective Solution

Many people ask me if I have a “cost effective” solution. Translation: “I’m willing to spend a few hundred dollars, do some of the leg work myself and I want a lot of bang for my buck!”

I learned quickly that business owners not only want, but need, an inexpensive way to get up to speed on entities and tax structures so they can better prepare themselves to meet with their tax preparer.

Over the past year I have taken the key points, questions and scenarios I use to coach clients and created a “cost effective” solution – a 5 part teleseminar course designed to create awareness about the little things that have a huge impact on tax savings.

Behind Every Secret Remember, behind every one of my secrets is knowledge – the type of knowledge that makes you aware of what creates massive tax savings so you begin to see your daily routine a little differently…like the huge impact entities have on your tax savings!