Should you start a business?

Corporate vs. Individual Taxation in India

In recent years, there has been a noticeable shift in how taxes are collected in India. Corporate tax, which was once significantly higher than individual income tax, has seen a decline in comparison. About five years ago, corporate tax collections stood at ₹5.5 lakh crores, while individual income tax collections were slightly lower at ₹4.92 lakh crores. However, this trend has reversed, and now individual income tax collections have surpassed corporate tax collections by about 10-12%. This has raised concerns about why corporations seem to be getting more favorable tax treatment compared to individuals.

Why Corporates Are Paying Less Tax

One reason for this shift could be the government’s desire to encourage businesses to invest more in growth and development. By reducing corporate taxes, companies have more money available to reinvest in their operations, which can lead to increased production, job creation, and economic growth. Countries like the UAE and Singapore have very low individual taxes, and some people argue that reducing corporate taxes helps boost overall economic activity. However, from an individual’s perspective, paying higher taxes while corporations get a break can feel unfair.

The Impact on Consumption

While reducing corporate taxes might help companies grow, it can negatively affect consumer spending. If individuals are left with less disposable income due to high taxes, their ability to buy goods and services diminishes. This could slow down consumption, which is a critical driver of economic growth. So even if companies are producing more goods, there may not be enough consumers with the financial power to purchase them. This creates an interesting situation where the government is trying to balance corporate growth with individual spending.

Tax Rates: Corporates vs. Individuals

Most corporations in India now pay between 22-25% in taxes on their profits. Meanwhile, individuals in the highest income bracket are paying as much as 42%. The difference is significant, especially when considering that corporations can deduct many of their expenses before calculating taxes, something individuals don’t have the same flexibility with. The individual tax system in India is often viewed as restrictive and burdensome, leaving many to feel that they are paying more than their fair share.

Why Many Want to Start a Business

Given the disparity in tax rates between individuals and corporations, it’s no surprise that many people are exploring the idea of starting their own business. Running a business offers opportunities to offset personal expenses and reduce the overall tax burden. Small business owners can claim deductions for things like home offices, vehicle use, and employee costs, which can bring down their effective tax rate to well below 25%. For someone paying 30-40% in individual taxes, this can be a highly attractive option.

Starting a Side Business: A Growing Trend

While starting a business might not be feasible for everyone, many people are attempting to run side businesses or trade stocks and investments to reduce their tax burden. By dedicating a few hours a day to a side business, individuals can potentially create an income stream that one day allows them to leave their salaried job. Traders and investors are also pursuing this path, hoping to turn their side hustle into a sustainable income. This shift reflects a growing desire among individuals to take control of their finances and reduce their tax liabilities.

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