India’s tax system involves many different types of taxes and one of them is wealth tax (a.k.a. net worth tax, capital tax or equity tax). The government abolished wealth tax as announced in the budget 2015. In its stead, the government decided to increase the surcharge levied on the ‘super rich’ class by 2% to 12%. Super rich are persons with incomes of Rs.1 crore or higher and companies that earn Rs.10 crores or higher. The abolition was a move to do away with high costs of collection and also to simplify the existing tax structure thereby discouraging tax evasion.
It was a form of direct tax payable by individuals/entities on their wealth. What does wealth mean? How is wealth tax calculated and paid. What are the main features of wealth tax and other considerations that a taxpayer should know about. All this and more are dealt with in detail below.
What is Wealth Tax?
The tax levied by the government on a person’s personal net wealth or capital is called wealth tax. Net wealth is the net value of a person’s assets. The Wealth Tax Act 1957 lays down the rules governing wealth tax in India. It applies to three kinds of assessees viz. Individuals, HUFs and companies. Personal assets refer to an assessee’s land (urban), house, car, boats and yachts, aircrafts, precious metals in various forms like jewellery, furniture etc. and cash (hand).
Wealth Tax in India:
Introduced in late 1950s, with the aim to reduce inequalities in India, wealth tax is a form of direct tax, charged on the net wealth of super rich individuals, Hindu Undivided Families and companies. Wealth tax is a levy of tax on the net wealth (the aggregate value of assets minus the aggregate value of debts or liabilities as on the valuation date) of super rich individuals/HUF/companies at the end of a fiscal year. Wealth tax was essentially aimed at taxing the super-rich taxpayers who both by inheritance or on their own, accumulated wealth and therefore, had to make a larger contribution to the exchequer. An individual, a Hindu Undivided Family or a company had to pay a wealth tax of 1% on earnings of over Rs. 30 lakh p. a.
Significance of Wealth Tax:
Given that India reportedly has around 800 million people in poverty, wealth tax has been a politically sensitive subject and therefore, often figures in the ‘pro-poor’ and ‘pro-industry’ narrative in the country. Many political parties have, in the past, demanded wealth tax rates to be raised to 3% to reportedly make several urban and rural crorepatis pay more taxes. Also, according to experts, wealth tax holds special significance in today’s India, what with the growing number of billionaires in the country, owing to several factors including booming entrepreneurship and foreign direct investment in specific sectors among others.
What’s the difference between Income Tax and Wealth Tax?
While income tax is payable on the income earned by individuals regularly, wealth tax is payable on the assets bought with the income after paying income tax.
It’s curtains for Wealth Tax!
Wealth tax has been abolished (w.e.f April 1, 2016 for wealth held as on March 31, 2016) by the central government, as announced by the finance minister, in his budget speech, in March, this year. Super rich taxpayers, therefore, need not file their wealth returns for the financial year 2015-16.
Why has Wealth Tax been abolished?
Some of the main objectives cited by experts behind the move include the following:
- Focus on more governance and less government: Finance minister, during his budget speech, cited the lack of ease of doing business as one of the reasons for abolishing the wealth tax. Also, by abolishing wealth tax, government has reduced the scope of some taxpayers taking undue advantage of the loopholes in the wealth tax act.
- Simplification of tax procedures: According to experts, Indian tax laws are, by and large, very complex and therefore, prone to litigations. Government wants to simplify procedures for easier tracking and enhance transparency.
- Incurs high collection costs but provides low yield: In a country with increasing number of billionaires, government collected a meagre Rs. 1008 crore as wealth tax last fiscal, exposing how the cost of collecting the tax is much higher compared to the low yield. Also, wealth tax does not form a major chunk of collection of direct taxes in India (Rs.788.67 crore and Rs.844.12 crore were collected as wealth tax in 2011-12 and 2012-13 respectively).
- Increase the revenue collection: By abolishing the wealth tax and replacing it with additional surcharge, government can collect up to Rs. 9000 crore in a fiscal year, opined the finance minister in his budget speech.
- Additional administrative burden: Taxpayers had to value their assets as per the Wealth Tax Rules to compute their net wealth. For certain assets such as jewellery, taxpayers had to obtain a valuation report from a registered valuer.
- Tax compliance and widening the tax base: Government wants to bring more persons under its tax net given that individuals who file income tax returns outnumber those who file wealth tax returns.
- Additional reporting: Taxpayers will have to do some additional reporting of information in their income tax returns in terms of listing out their assets and liabilities.
- No leakage: Details about assets submitted by the taxpayer in the income tax returns will help officials correlate declared wealth with the declared income. Tax officers can, therefore, ensure that there is no tax ‘leakage’. Earlier, unproductive assets such as jewelry which cannot be readily tracked would allow assessees to skip making such disclosures in their wealth returns.
- Low Awareness: According to rough estimates, many assessees in the country are only dimly aware of the existence of the wealth tax. Consequently, more often than not, assessees are served with notices for failing to pay wealth tax. In 2011-12, the number of wealth tax assessees in India stood at 1.15 lakhs.
Impact on Super-Rich Taxpayers:
As a result of the proposed abolishment of the wealth tax, taxpayers will re-examine their portfolios in that most may consider investing in land in urban areas among other assets which had hitherto come under the purview of wealth tax. As per the new proposal by the finance minister, if you hold more than one plot in an urban area, you don’t have to pay wealth tax and should pay only capital gains tax upon sale. Also, at the time of the sale, you can reduce your liability by investing in a residential house or bonds, if the property has been held for 36 months. Taxpayers can also invest in gold under the Gold Monetisation Scheme.
Surcharge on super-rich’ replaces wealth tax:
Wealth tax will be replaced with a levy of additional 2 % surcharge. The surcharge would be applicable to the following:
- Individuals
- Hindu Undivided Families
- Firms
- Cooperative societies
- Local authorities with income exceeding Rs. 1 crore.
The central government has proposed an increase of surcharge by 2% to 12% on the super-rich individuals earning an annual income of Rs. 1 crore and above in addition to firms with an annual income of Rs. 10 crore or more. Companies with incomes between Rs. 1 crore and Rs. 10 crore would have to pay a surcharge of 7%. The term super-rich’ covers all taxpayers earning more than the threshold specified by the government.
Super-rich will pay more:
The super-rich will pay more owing to an increase in surcharge by 2%. The peak tax rate for the super-rich has been raised from 33.99% to 34.61%. The previous central government had announced a surcharge of 10% in 2013 for individuals with annual incomes of Rs.1 crore or above (as per rough estimates, there were around 42,800 persons in the country who fit the income criteria to pay wealth tax at the time).
IT forms to be amended:
The information pertaining to assets which was required to be furnished in the wealth tax returns will, henceforth, be included in income tax returns. The new income tax returns forms will be accordingly tweaked to include details of assets.
How is surcharge calculated?
To calculate the net taxable income, taxpayers should deduct their investments and expenditure which qualify for income tax deduction from their total gross income.
Example:
Akhil Sharma, a 36-year-old businessman, has a gross total income of Rs.1.1crore. He invests Rs.1.5 lakh in equity-linked savings scheme and public provident fund, which is tax deductible as per section 80C. Akhil also has a home loan, for which he pays Rs.2 lakh p.a as interest, which is also eligible for tax deduction. After deducting Akhil’s investments, his net taxable income works out to around Rs.115 lakh. Given that Akhil’s net taxable income is over Rs.1 crore, he has to pay a surcharge (which has currently been increased from 10% to 12%) of around Rs.3.98 lakh.
Wealth Tax Rules:
Who does wealth tax apply to or who has to pay wealth tax and how is it applied?
The residential status of an individual was one of the key parameters to ascertain wealth tax liability. Resident Indians were liable to pay wealth tax on their global assets. However, non-resident Indians and foreigners were liable to pay wealth tax on their assets in India only. If a non-resident Indian returns to India, his assets would not be exempt from wealth tax. Assets acquired by NRIs within one year of their return are also exempt.
Assets which were covered under wealth tax:
- Wealth tax was payable on assets such as real estate and gold. Assets such as shares, mutual funds and securities termed as ‘productive assets’, were exempt from wealth tax.
- Yachts, aircraft and boats came under the purview of wealth tax.
- While one residential home is exempt, more than one own house would come under the purview of wealth tax. However, wealth tax is not applicable on a property if it is used for business or rented for 300 days in a year.
- Tax is levied on the market price of a car, except when used in a car hiring business.
- Gold, platinum and silver ornaments came under the purview of wealth tax. Also, wealth tax is applicable to cash-in-hand above Rs. 50,000.
- If a taxpayer had to pay wealth tax, transferring his or her assets to the spouse would not result in evasion of levy, since assets even if gifted, would be considered the property of the taxpayer.
Wealth Tax Exemptions/Limits:
Assets not covered
- Investment securities viz. shares, bonds, units of mutual funds, units of gold deposit schemes
- Houses/plots of area below 500 sq. Mts.
- Houses as place of business/profession
- Residential properties rented out for 300 days or more in a year
- Vehicles for hire
- Stock-in-trade business assets
Calculation of Wealth Tax:
Wealth tax was calculated on the market value of all the assets owned, irrespective of whether they yielded any returns or not. All individuals and Hindu Undivided Family with net wealth above Rs. 30 lakh were required to pay wealth tax. Wealth tax was based on the valuation of assets as on March 31 and would, therefore, be applicable on any assets acquired at the end of a financial year. However, assets sold during the year would not come under the purview of wealth tax. Significantly, some Double Taxation Avoidance Agreements (DTAAs) in the country, provided relief to taxpayers from wealth tax, if they had already paid it in any other country.
Wealth Tax Rate:
Wealth tax was calculated at 1% on net wealth above Rs.30 lakhs. E.g. If you 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.
Wealth Tax Returns – E-Filing VS. Wealth Tax Return Form:
The CBDT had, in 2014, made it mandatory for wealth tax returns to be filed online only i.e. E-filing of wealth tax returns, effective FY 2014 -2015. The form would be filled and submitted using a digital signature. This, however, would not apply to those who are not liable to be audited. Such persons could file returns on wealth tax through the traditional means i.e. through paperwork.
FAQs:
- Can resident taxpayers hold assets within or outside India sans disclosures as a result of abolition of wealth tax?No. While there will be no wealth tax levy, taxpayers must make the required disclosures.
- What was the main reason cited by the finance minister to abolish the wealth tax?According to the finance minister, wealth tax had high collection costs but a low yield. However, experts suggest a variety of reasons behind the move including streamlining of data, reining in black money and minimising tax evasion among others.
- Where should taxpayers furnish all the particulars which were hitherto submitted in wealth tax returns?Wealth held including all details about assets will be listed in the income tax returns. Income Tax authorities will administer the proposed law.
- How much wealth tax was collected in the last fiscal?
The central government collected a meagre Rs.1,008 crore in the financial year 2013-14. Wealth tax has not showed any significant growth over the past few years, according to experts.