The Tax Saving Game Behind Buying Expensive Number Plates Explained!
In recent years, we have seen people splurging on vehicle registration plates (more precisely 'VIP numbers' ). A recent incident from Kochi, Kerala showed a CEO spending 46+ lakh rupees on a VIP number for his Lamborghini Urus. Did you know that this purchase could potentially benefit the owner's business?
Why Do These Businessmen Spend So Much On Vehicle Numbers?
Well, there are several reasons for it, including having a personal identity on the registration plate, and making the vehicle recognizable. The most important, however, would be the financial prospects that such a purchase could bring about. Expensive number plates can save tax for business owners. Let's now take you on a deeper dive into the specifics of this.
How To Save Tax Buying A Car?
If you run a business, you can declare depreciable assets such as cars or SUVs as business expenses. The depreciation on the car can be claimed as a business asset under Section 32 of the Income Tax Act. At present, the depreciation rate on Internal combustion engine (ICE) vehicles is 15% while that on electric vehicles (EVs) is 30%, both on the written down value (WDV). This means that you'll have to pay income tax on the amount exclusive of this.
You can even classify the petrol bills, repair and maintenance costs and even insurance under 'Business expenses' and reduce the net amount from taxable income. This is, however, a long-term game plan and takes years to bring about significant cuts in taxable income.
Why Are Expensive Number Plates A Better Choice To Cut Taxes?
Now consider investing in an expensive number plate for your car or motorcycle. You buy the number plate for a huge sum (say 25 lakh rupees) and declare it as branding/ marketing expenses.
Before you get too excited, certain conditions need to be met to qualify for this. The plate should create a buzz or grab public or media attention, or it should add to your brand image and be vocal about your company. It should atleast be able to create buzz in the news or social media.
Long story short, the number should help people notice you- after all, that's the whole point of marketing! More importantly, it should be connected to your business and its branding, and not merely personal luxury.
The Keralite who bought the number KL 7 DG 7 for Rs 46 lakh qualifies for this, as the 7 could be directly related to his company 'Litmus 7'. Plus, the purchase has created much buzz and amassed huge media attention.
Circling back, assume that your actual taxable income is 1 Crore. With 25 lakhs being declared as marketing/branding cost (broadly 'Business expenses'), you qualify for deductions and the taxable income reduces to 75 lakh rupees.
In this case, the business owner ends up paying tax legally and smartly. He/she may, however, be required to produce proof like media articles, branding plan, board approval before the IT department. Failing to do so while scrutiny could get the claim rejected.
The benefits of these expensive plates do not end here. Not everyone would splurge on vehicle plates. Honestly, not everyone can! So when such an incident occurs, people, especially other successful entrepreneurs take note, and there is a high chance that the two end up having business relations or partnerships. Expensive number plates can thus contribute to the further growth and development of the company!