What is Wealth Tax?
A wealth tax is a direct tax aimed at reducing wealth inequality. Unlike Income Tax which is levied on the income of taxpayer, wealth tax is levied on the wealth of the taxpayer. Wealth Tax is governed by Wealth Tax Act, 1957.
Wealth tax was primarily intended to tax the ultra-wealthy people who had accumulated wealth through inheritance or their own efforts and thus had to contribute more to the public coffers. On earnings of exceeding Rs.30 lakh per annum, an individual, a Hindu Undivided Family, or a company had to pay a wealth tax of 1%. The net wealth is determined on a valuation date which is generally 31st March of every year and on that wealth tax @1% is levied.
However from Financial Year 2015-16 (i.e. Assessment Year 2016-17) wealth tax was abolished.
Basic Provisions of Wealth Tax
The basic provisions of wealth tax are as follows:
- It is levied on the net worth of ultra-wealthy people, corporations, and Hindu Undivided Families (HUFs).
- Though partnership firm is not liable to wealth tax, the value of the assets held by the firm is to be calculated and this will be distributed between the partners on the basis of profit/sharing ratio and will be subject to wealth tax in the hands of partners.
Similarly, in case of Association of Persons (AOP), the assets are charged to wealth tax in the hands of members .
- The following are not liable to pay wealth tax:
- Any company registered under Section 25 of the Companies Act;
- Any co-operative society;
- Any social club;
- Any political party;
- A mutual fund specified under Section 10(23D) of the Income-tax Act; and
- Reserve Bank of India.
- Indians residing within the country were taxed for their holdings abroad while non- resident Indians paid wealth tax for properties held within the country.
- One of the most important factors in determining a person's wealth tax liability was their residence status. On their global assets, resident Indians were required to pay a wealth tax. Non-resident Indians and foreigners, on the other hand, were only required to pay wealth tax on their holdings in India. A non-resident Indian's assets would not be free from wealth tax if he returned to India.
Assets Covered under Wealth Tax
The following assets are covered under wealth tax:
- On assets like real estate and gold, wealth tax was due. The wealth tax did not apply to "productive assets" like stocks, mutual funds, and securities.
- Boats, yachts, and airplanes were subject to the wealth tax.
- One residential property is free, however more than one of your own homes would be subject to wealth tax. However, if a property is used for business purposes or is rented out for 300 days or more each year, wealth tax is not imposed on it.
- A car's market value is taxed, with the exception of when it is utilized in a car rental business.
- Ornaments made of gold, platinum, and silver were subject to the wealth tax. Additionally, wealth tax is imposed on cash in hand over ₹ 50,000.
- Transferring assets to the spouse would not be considered avoidance of levy if a taxpayer was required to pay wealth tax since assets would still be regarded as the taxpayer's property even if they were gifted.
Assets Exempt from Wealth Tax
The following assets are exempt (free) from wealth tax:
- Investment securities such as shares, bonds, mutual fund units, and gold deposit scheme units.
- Residential properties rented out for 300 days or more per year.
- Homes with less than 500 square meters of space.
- Homes used as a place of business or profession.
- Vehicles for hire.
- Stock-in-trade assets.
Significance of Wealth Tax
Given that there are reportedly 800 million poor people in India, wealth tax has historically been a politically touchy topic and frequently appears in the country's "pro-poor" and "pro-industry" narratives. In the past, many political parties have called for wealth tax rates to be increased to 3% in order to allegedly force several urban and rural Crorepatis to pay more taxes.
How to calculate wealth tax in India?
Regardless of whether the assets produced any income or not, wealth tax was computed on the market value of all the assets owned. All individuals and Hindu Undivided Families were mandated to pay wealth tax if their net worth exceeded ₹ 30 lakh. Wealth tax would consequently be imposed on any assets purchased at the conclusion of a financial year since it was based on the valuation of assets as of March 31. However, the wealth tax would not apply to items sold during the year. Significantly, if taxpayers had already paid wealth tax in another country, some Double Taxation Avoidance Agreements (DTAAs) in the nation offered them respite from wealth tax.
Rate of Wealth Tax
The calculation of wealth tax was done based on the net worth of the total assets owned by a taxpayer or those passed in inheritance such as property, Jewelry, shares, cash etc. Wealth tax at the rate of 1% applied to those with a net worth above the threshold limit of ₹ 30 lakhs. Calculation of wealth tax was done on the amount above ₹30 lakhs on the date of valuation of the assets. The last date for filing wealth tax returns as well as income tax used to be the same. However, high net worth individuals (HNIs) were required to file both.
Example ; If your net wealth for the year was Rs.50 lakhs, wealth tax would be charged at 1% on Rs.20 lakhs i.e. (Rs.50 lakhs - Rs.30 lakhs). Amount payable = Rs.20,000.
Manner of computation of net wealth :-
Ascertain value of taxable assets as per valuation rules prescribed in this regard
Add : Assets clubbed with the assets of taxpayer(deemed assets)
Less : Exempt assets
Gross Value of Assets
Less : Debt i.e. , loan taken to acquire the assets
Due Dates and Penalties :-
- The due dates for filing the return of net wealth are the same as the due dates prescribed for filing the return of income under section 139 of Income-tax Act, inter-alia, if the taxpayer is liable to audit under Income-tax Act, the due date will be 30th September and in other cases, the due date will be 31st July.
- A belated return or revised return can be filed within a period of one year from the end of the assessment year or before completion of assessment, whichever is earlier.
- Interest @ 1% per month or part of the month is levied for delay in filing the return of net wealth.
- Penalty in case of concealment of wealth can be between 100% to 500% of tax sought to be avoided.
Why was wealth tax abolished?
Levying wealth tax on the richer strata of the society was aimed at bridging the economic gap between the rich and the poor. However, it backfired.
- The government had to sustain a high cost of collecting the tax over the years. Compliance was low, as was the tax inflow for the government.
- The whole process also posed a substantial administrative burden with valuers issuing a report detailing the valuation of assets.
- Focus on more governance and less government: In his budget statement, the finance minister listed the difficulty of doing business as one of the justifications for getting rid of the wealth tax. Additionally, the government has lessened the chance that some taxpayers may unfairly benefit from the wealth tax act's loopholes by repealing the wealth tax.
- Simplification of tax procedures: Experts claim that Indian tax regulations are often quite complex and subject to dispute because of their complexity. The government seeks to streamline processes to improve tracking and transparency.
- Poor return but high collection costs: In a nation where the number of billionaires is growing, the government only managed to collect a pitiful Rs. 1008 crore in wealth tax during the most recent fiscal year (2013-14), demonstrating how high the expense of collecting the tax is in comparison to its low yield. Additionally, wealth tax is not a significant component of India's collection of direct taxes (Rs.788.67 crore and Rs.844.12 crore were collected as wealth tax in 2011-12 and 2012-13 respectively).
- Increase the amount of money collected - The finance minister said in his budget statement that the government could raise up to Rs. 9000 crore in a fiscal year by eliminating the wealth tax and replacing it with an additional levy.
- More work on the administrative front - To determine their net wealth, taxpayers have to value their assets in accordance with the Wealth Tax Rules. Taxpayers were required to get a valuation report from a registered valuer for specific assets, such as jewelry.
- Increasing tax compliance and the tax base - The number of people who file income tax returns exceeds the number of people who file wealth tax returns, thus the government wants to include more people in its tax net.
- More information - In order to spell out their assets and liabilities in their income tax forms, taxpayers will need to provide some more information.
- Zero leakage - Officials will be able to match up the taxpayer's declared wealth and income with information about the assets listed on their income tax returns. Therefore, tax authorities may make sure that there is no tax "leakage." Previously, taxpayers might avoid making such declarations in their wealth returns by using non-productive assets like jewels that are difficult to trace.
- Low awareness - Rough estimates show that a significant portion of taxpayers in the nation are only vaguely aware of the wealth tax's existence. The majority of the time, notices for failure to pay wealth tax are therefore served to taxpayers. India has 1.15 lakh taxpayers who were subject to the wealth tax in 2011–12.
All of these reasons forced the discontinuation of wealth tax in the Union Budget (2016–2017).