Wealth Tax

FINAL WEALTH TAX Accepting the recommendations of N. Kaldor to introduce “integrated direct tax system” in India, Wealth Tax Act, 1957 was enacted. The Act was amended from time to time. The major objective of wealth tax has been attainment of equity objective of tax policy because wealth is considered as the major source of inequalities. The wealth taxation in India is applicable to all citizens of the country and is also called the wealth tax act, 1957. This is also considered to be direct taxes of the country. It is paid on the benefits of property ownership and the person who owns the property has to pay for the wealth tax for the time period for which he retains the ownership. It must be noted that the person has to pay for wealth tax even if it is not gaining any income.
Reasons for levying Wealth Tax The wealth tax act is important direct tax legislation. It is a tax on the benefits derived from property ownership. Stated objectives behind introduction of bill for wealth tax were (a) That it would reduce the possibility of tax evasion (b) That it would take into account the taxpaying capacity of an individual (c) That it had a large measure of egalitarianism built into it both conceptually and operationally without disincentive effect.
Levy of wealth tax was described as a measure to alter the tax structure in a way that would ensure more effective and at the same time a more equitable basis for taxation.
Who to pay for the Wealth Tax in India The person who pays for the wealth tax is called an assesses and he may belong to the categories mentioned below: * A Hindu undivided family * Non corporate taxpayers * A representative of dead individual, or administrator and the executor * A Company * An agent of Non-resident * A body of individuals or as association of persons It should be noted that the tax will be considers on the total income earned from the collections of joint family in case of a Hindu Undivided Family. However, in case of non-corporate payers, they are supposed to pay the tax as per the existing tax rate as their accounts are being audited.
Incidence of Wealth Tax Incidence of tax in the case of an individual depends upon his residential status and nationality. The scope of liability to wealth tax is as follows: (a) In the case of an individual who is a citizen of India and resident in India, a resident HUF and company resident in India;
Wealth tax is chargeable on net wealth comprising of * All assets in India and outside India; * All debts in India and outside India are deductible in computing the net wealth. (b) In the case of an individual who is a citizen of India but non-resident in India or not ordinarily resident in India, HUF, non-resident or not ordinarily resident in India and a company non-resident in India; * All assets in India except loan and debts interest whereon is exempt from income-tax under section 10 of the Income-Tax Act are chargeable to tax. * All debts in India are deductible in computing the net wealth. * All assets and debts outside India are out of the scope of Wealth Tax Act. (c) In the case of an individual who is not a citizen of India whether resident, non-resident or not ordinarily resident in India: Same as in (b)
Wealth Tax Chargeable Assets
Below mentioned are the assets on which the wealth tax has to be paid by the assesses: * Guesthouses, urban farmhouse, residential house and commercial property. * Automobiles for person purposes. * Precious items such as utensils, bullions, jewellery and furniture. * Aircrafts, Yachts and boats which are used for non-commercial purposes. * For the cash in hand which exceeds 50,000 for Hindu undivided families and individuals. * Urban land which is under the authority of cantonment board or municipality and having a population over 10,000.
The following are not regarded as assets while computing the wealth tax:- * A residential real estate property that has been allocated to a full time employee by either the company or the director or an officer with a gross yearly salary lesser than 5 lakh rupees * A commercial or residential real estate property that is part of a stock-in-trade process * Commercial real estate property being used for official or business purposes * A residential property that has been put on hire for a minimum of 300 days in the immediately earlier year * A commercial complex or establishment * A land where construction is illegal * A land where the building has been set up with approval from proper authorities * An unused land owned for industrial purposes. However, the land should remain unused for 2 years after acquisition * A land that has been owned by an assessee for 5 years as a stock-in-trade According to the section 4(l) (a) of the Wealth Tax Act, 1957 following are regarded as deemed assets: * Assets transferred between spouses * Assets transferred as per revocable transfer * Assets owned by minors. If a specially-abled child owns any asset it will not be grouped with his or her parents’ net income and will be assessed separately * Assets provided to son’s wife or to another person or group of individuals for the benefit of son’s wife. * Asset that has been transferred to an individual or a group of people. This transfer must benefit the providers or their spouses in either short or long term Exemptions: (a) Wealth-tax need not be paid in respect of one house of an individual/ HUF or on a plot of land which does not exceed 500 square metres. (b) No tax need to be paid on any residential property that is let out for a minimum of 300 days in the relevant previous year, nor on any property which is held for business purposes. (c) Motor cars that are held by an assesses for running them on hire or held as stock in trade are also not liable to wealth-tax. (d) The same applies to jewellery that is held as stock in trade for the purpose of business. (e) Assets such as investment in fixed deposits, shares or intangible property are not subject to wealth tax in India. (f) Property held under a trust or other legal obligation for any public purpose of a charitable or religious nature in India subject to the satisfaction of the stipulated conditions.

Valuation Date Wealth Tax is levied on the net wealth of a person as on a particular date. This date is known as valuation date. The valuation date is the last day of the previous year relevant to the assessment year. Hence, valuation date is March 31, immediately preceding the assessment year.

Calculation of Wealth Tax Taxable value of the assets = Value of assets as on March 31 - Debts owed against the assets principally, wealth tax is levied on non-productive assets of assesses. Thus the assets listed above used for commercial purposes will be excluded from taxation.

Wealth Tax Rates in India The maximum marginal rate of wealth tax, applicable to net wealth above Rs 15 lakh was quite high at 8 per cent till the year 1975-76. It was drastically reduced to 2.5 per cent the following year 1976-77. In a reversal of policy of low rates, it was reduced to 3.5 per cent in 1977-78 and further up to 5 per cent in 1979-80. In 1985-86, it was again lowered to 2 per cent and made applicable to net wealth over Rs 20 lakh. In 1992-93, it was further reduced to 1 per cent. Flat rate of 1 per cent on wealth exceeding Rs. 15 lakh. Tax rate is 1 per cent on amount by which ‘net wealth’ exceeds Rs 30 lakhs from AY 2010-11. (Till 31-3-2009, the limit was Rs 15 lakhs). No surcharge or education cess is payable. The Tax Reforms Committee,1991, suggested that wealth tax should be charged at the flat rate of 1 per cent with a basic exemption of Rs.15 lakh instead of the then existing Rs 5 lakh. These recommendations were accepted and incorporated in the Financed Act, 1992. Thus following the recommendation of the Tax Reforms Committee, 1991, the scope of wealth tax both in terms of base and rate was drastically reduced, presently wealth tax has only decorative value for the statute book. Tax Reform Committee 1991, recommended tax on wealth should be abolished in respect of all items of wealth other than those which can be regarded as unproductive forms of wealth or other items whose possession and use could legitimately be discouraged in the social interest. The Committee also recommended wealth tax at the rate of one per cent of value of taxable items of wealth. Thus wealth tax shifted from wealth to unproductive assets. Since wealth tax is based on current market value of unproductive assests, valuation involves disputes. As a result, the administrative and compliance cost of the tax has been much higher. In view of the meagre revenue and problems of administration and compliance the Task Force on Direct Taxes, 2002 recommended the abolition of wealth tax. As Bhoothalingham Committee reported,” the wealth tax system should continue if for no reason then for ensuring in the long term that income tax is properly administered”. The share of wealth tax has always been less than one per cent and even if it is abolished the revenue impact will not be much. But it serves the objective of reducing inequalities and also provides a mechanism through which evasion of income tax can be minimized.

Annexure -I YEAR | Wealth TaxRs in Crore | Percentage of GDP | Percentage of GTR | Percentage of Direct Tax | Growth | 1990-91 | 231 | 0.04 | 0.40 | 2.0 | ---- | 1991-92 | 307 | 0.04 | 0.45 | 2.0 | 32.9 | 1992-93 | 468 | 0.06 | 0.62 | 2.5 | 52.4 | 1993-94 | 154 | 0.01 | 0.20 | 0.75 | -67.1 | 1994-95 | 165 | 0.01 | 0.11 | 0.38 | -31.8 | 1995-96 | 74 | 0.006 | 0.06 | 0.22 | -29.5 | 1996-97 | 78 | 0.005 | 0.006 | 0.21 | 5.4 | 1997-98 | 113 | 0.007 | 1.13 | 0.23 | 44.8 | 1998-99 | 162 | 0.009 | 0.11 | 0.34 | 43.3 | 1999-00 | 133 | 0.006 | 0.07 | 0.22 | -17.9 | 2000-01 | 132 | 0.006 | 0.06 | 0.19 | -0.75 | 2001-02 | 135 | 0.005 | 0.07 | 0.19 | 2.2 | 2002-03 | 154 | 0.006 | 0.07 | 0.18 | 14.0 | 2003-04 | 136 | 0.004 | 0.05 | 0.12 | -11.6 | 2004-05 | 145 | 0.004 | 0.04 | 0.10 | 6.6 | 2005-06 | 250 | 0.006 | 0.06 | 0.15 | 72.4 | 2006-07 | 265 | 0.006 | 0.05 | 0.12 | 6.0 | 2007-08 | 315 | 0.006 | 0.05 | 0.10 | 18.8 | 2008-09 | 380 | | | | |

Source: Government of India; Economic Survey, various issues

In 1990-91, the collection of wealth tax was Rs 231 crore and it contributes 2.09 per cent to direct tax. The collection increased to Rs 468 crore in 1992-93 and contribution to direct tax reaches to 2.5 per cent. Afterwards the revenue collection from the wealth tax decreased and also the contribution to direct tax decreased. In 1995-96, the revenue collection from wealth tax was only Rs 74 crore. After 1995-96, the wealth tax collection was increased but very slowly and contribution of wealth tax to GDP and direct tax was negligible, because of small revenue from wealth tax the Task Force on Direct Taxes, 2002 recommended the abolition of wealth tax. The growth of wealth tax was also very slow. In most of the years the growth rate was negative. The revenue collection from wealth tax in 2006-07 was Rs 265 crore and the share of wealth tax to direct tax was only 0.12 per cent. In 2007-08 the revenue collection increased to Rs 315 crore and the share of wealth tax to direct tax decreased to 0.10 per cent.