MeaningA written grant from the sovereign power of a country conferring certain rights and privileges on a person.
- Licensed, contracted, agreed.
A Chartered Accountant therefore should mean an accountant who has been conferred certain rights and privileges by the country. Why does the country have to confer special rights to an accountant? What are the functions that the chartered accountants are supposed to carry on by using these rights? These can be understood by going through the following explanation.
Common/Joint expenses - How they are met?
In/of a Joint Family —Individuals earn. They satisfy their needs and the needs of their family members through their earnings. In case of a large family or a joint family, joint family expenses are met by contributions from the members of the family or through income from joint properties. The common needs of a family are satisfied by the contributions of the members of the family.
Each earning member bears a part of the joint expense.
In/of an Apartment Complex —Consider the case of a number of families living in an apartment complex. Who bears the joint expenses incurred in the upkeep of the apartment premises?
The residents of each apartment contribute a certain amount as generally called service/maintenance charges to a common pool and the expenses like premises maintenance, lift maintenance, common area lighting charges etc., are met from this common pool.
This in effect amounts each apartment in the complex, bearing a part of the total expense. which trickles down to individuals or earning members sharing/bearing the joint expenses.
In/of a Street —Consider the case of a number of houses in a street. Just like in the case of the houses in the apartment complex, the common expenses relating to the street like street lighting, road maintenance, drainage cleaning etc., are to be met by a common of pool created through contributions of the residents of the street.
All these are examples of individuals belonging to a group contributing towards the common expenses of the group. The contributions may vary depending on a number of factors like income levels, facility usage 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
Problem in ContributingConsider an individual who is an earning member of a family living in an apartment complex.
Apart from meeting the expenses of the family, he/she has to contribute towards the common expenses of
- the apartment complex.
- the street
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.
- the area in which the street is located
- the town in which the area is located
- the district in which the town is located
- the state in which the district is located and
- the country in which the state is located.
The problem with the contributions is in deciding how much one should contribute towards discharging 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.
Contributions for common expenses - How made?The contributions to be made by earning members are classified as (1) Local (2) State and (3) National. This idea is relevant in the Indian context.
to local governmentsEach town/city/village are considered as a unit. Contributions towards the common expenses of the town/city/village are made by paying local taxes such as land revenue, house tax, education cess, water tax etc annually.
to the State GovernmentContributions towards the common expenses of the state are made by paying state level taxes like sales tax, professional tax etc.
to the Central GovernmentContributions towards the common expenses of the country are made by paying to the central government, taxes like income tax, excise duty, customs duty etc.
Payment of tax is a statutory obligationUnlike in the case of a family where the obligation for individuals to contribute towards the common pool to meet the common expenses is moral, the obligation to contribute towards the common expenses of the locality, state, country is statutory.
Payment of tax is a statutory obligation on the part of individuals/organisations and not a voluntary contribution. Every legal entity has an obligation to contribute to the common pool based on his/her/its economical status and the rules laid down by law.
If you are required to pay tax, you have to. Trying to escape or not pay tax is a legal offense. However tax planning wherein you plan your activities in such a manner so as to reduce your tax burden is not a crime.
Direct TaxesDirect tax is a tax that is collected from the persons who bear the tax burden. The burden of such a tax cannot be passed on to another person or entity. Direct taxes are collected from individuals or organisations. The various kinds of direct taxes are:
Income TaxIndividuals earn through salaries. Individuals and other entities earn through owning and dealing in properties, doing business, investments etc. Income is what is left out after meeting expenses and other allowable deductions. The current year income of the business is Rs. 10 lakhs so the organisation pays a tax of Rs. 1,50,000. An individual earns a salary income of Rs. 5 lakh and as such has to pay a tax of Rs. 80,000.
Individuals or organisations paying such tax are conscious of the fact that they are paying it for clearing their obligation. As such these taxes on incomes are called direct taxes.
Wealth TaxAn individual or organisation having wealth in excess of a certain minimum value is bound to pay wealth tax (1% of the value of the wealth in excess of Rs. 15 lakhs). Wealthy individuals or organisations have an obligation to contribute to the common pool by paying tax. Even here the individuals/organisations paying such tax are conscious of the fact that they are paying it for clearing their obligation.
Professional TaxProfessional tax is a tax in respect of a profession, trade, calling or employment. This tax is levied by state governments or local municipal bodies and is distinct from income tax. Even in this case a payer would be aware that he/she is paying tax.
Indirect TaxesIndirect tax is a tax that is indirectly collected from the individuals/organisations bearing the burden of tax, in most cases without them being conscious that they are paying tax. It is levied on commodities and services. The burden of tax is capable of being passed on to another. The various kinds of indirect taxes are:
Sales taxA person buying a clock for Rs. 100 (including a sales tax of Rs. 10), thinks that he/she is purchasing 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".
Since it would be impractical to have such an arrangement, an obligation is cast on the seller to collect the sales tax on behalf of the government. That is the reason the buyer pays the seller Rs. 100 and not Rs. 90. This means that the buyer is paying Rs 90 to the shop and Rs 10 tax to the government, both of which are being collected by the seller.
The buyer is not even aware of the fact that he/she is bearing the burden of sales tax. The buyer will think that he/she is buying the clock for Rs 100. The tax is collected from the buyer indirectly through the seller.
Excise DutyConsider the above example of a clock sold for Rs. 100 (Rs. 90 sale price + Rs. 10 sales tax).
The Rs. 90 sale price collected by the shop keeper includes
— Rs 20 (his profit) + Rs 70 (paid to the wholesaler).
Rs 70 collected by the wholesaler includes
— Rs 10 (his profit) + Rs 60 (paid to the manufacturer).
Rs 60 received by the manufacturer includes
— Rs 20 (Cost of manufacturing) + Rs 20 (Excise Duty) + Rs 10 (advertisement) + Rs 10 (Profit).
All goods manufactured are subject to excise duty at the rates prescribed. The duty is to be paid by the manufacturer on completion of manufacture. This duty is to be paid irrespective of whether the manufactured goods have been subsequently sold or not. Unlike sales tax which is borne by the buyer and collected on sale, excise duty is first borne by the manufacturer and is to be paid on completion of manufacture before sending the goods out of the place of manufacture.
The Rs 100 paid by the buyer 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). In paying Rs. 100 for buying the clock, the buyer has borne the excise duty also. The burden of excise duty has been passed on from the manufacturer to the wholesaler, who passes it on to the dealer who then passes it on to the ultimate buyer.
The purchase has resulted in the buyer paying a tax of Rs 30 (Rs. 10 sales tax + Rs. 20 excise duty) without being conscious of bearing such a burden. The buyer has borne and the government has collected tax indirectly.
Customs DutyGoods imported into India are not manufactured in India and therefore a duty equivalent of excise is charged on them and is called customs duty. A person buys an imported product at a price that includes the custom duty and sales tax on it.
Who is bearing the burden of all these taxes?In case of direct taxes, the burden is on the person paying the tax. In case of sales tax the burden is on the buyer who may or may not be aware of the tax burden he/she is taking up. In case of other indirect taxes, the person initially paying the tax is not the person bearing the burden in most cases. The burden of the tax is passed on from the payer to the buyer ultimately. Even in this case the buyer may not be aware of the fact that he/she is bearing the burden of the tax.
Every citizen (even the daily wage laborer) is a tax payer.
Governments » Revenue - ExpenditureGovernments are responsible for collecting the taxes and utilising the same for meeting the common expenses. The major sources of revenue for governments are taxes. They may be direct or indirect.
IncomesIncome tax, Excise duty (except on liquors and narcotic drugs), Custom duty, Central Sales tax, Service Tax are collected by the central government.
ExpensesThe central government spends its revenue on salaries to central government employees, expenses of various central government departments, expenses on defence, science, education (central university, national institution - IIT, IIM etc), transportation (national highways) etc. It also allocates a certain amount of its common pool revenue to states as "budget allocation for states" to meet capital expenses and other needs.
IncomesSales tax (except on inter state sales), excise duty on liquor and narcotics, professional tax are collected by the state governments.
ExpensesSalaries to state government employees, expenses of various departments, maintenance of facilities relating to the state government, expenses relating to 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.
IncomesLocal governments like municipalities, panchayats collect house taxes, land revenue, education cess, etc.
ExpensesLocal governments spend on sanitation, street lighting, education (municipal, panchayat schools etc), roads within towns etc.
All GovernmentsAll governments on account of their obligation to take care of the poor and down trodden, also spend their revenue on social welfare schemes, like subsidized food, health care, housing programs etc.
Every rupee the governments' spend is Public (your) Money.
Businesses » Government RevenueThe areas where sales tax, excise duty and customs duty arise and are collected are to a considerable extent related to business.
Income tax is paid by salaried individuals who work in organisations, as well as by business organisations themselves. The income tax paid by business organizations also forms a considerable part of the income tax collected.
Thus we can say that trade, commerce, manufacturing etc are the most important activities/areas that provide income to the governments.
Government » Verification of business accountsSince the government derives a substantial part of its revenue/income from areas related to business it has to ensure that the accounts of business are being properly reported so as to avoid revenue loss on account of manipulations by business organisations.
For this purpose, it has to verify the accounts of businesses.
To carry on such a verification on its own, the government needs a large work force which would be impractical to employ. Since it would be practically impossible for governments to verify each and every individual businesses accounts directly through its own work force, it employs the services of professional accountants for this purpose.
Accountants are chartered by the government to check the business accounts on their behalf.
- checking, reviewing, inspecting, examining, assessing, appraising.
Auditing is not the only function of the CA's.
Who Charters?Governments instead of granting the powers to (chartering) each accountant, have delegated their power to the professional body of accountants (institute of chartered accountants of India in India). The professional body conducts courses/exams to grant membership to prospective candidates. The members of the body are deemed to have been chartered by the government.
CHARTERED ACCOUNTANTS [CA's] are people who are chartered as accountants, by the professional body on behalf of the government.