Wealth Tax in India

Wealth tax is imposed on the richer section of the society. The intention of doing so is to bring parity among the taxpayers. However, the wealth tax was abolished in the budget of 2015 (effective FY 2015-16) as the cost of recovering taxes was more than the benefit derived.

Abolishing the wealth tax also simplified the tax structure. As an alternative to the wealth tax, the finance minister hiked the surcharge from 2% to 12% for the super-rich section. The super-rich segment includes individuals with an income of above Rs.1 crore and companies with an income of over Rs.10 crore.

Why was the Wealth Tax Abolished?

Low Revenue Collection: The wealth tax was not generating significant revenue for the government. The costs associated with administering and collecting the tax were high compared to the actual revenue collected. For instance, in the financial year 2013-14, the revenue from wealth tax was only about INR 1,008 crores, which was a very small fraction of total tax revenues.

Complex Valuation Issues: One of the major challenges of the wealth tax was the complexity involved in valuing assets. Accurately assessing the market value of diverse assets such as real estate, jewellery, and art was administratively burdensome and often led to disputes.

Difficulty in Enforcement: Ensuring compliance with wealth tax laws was difficult, leading to widespread evasion and underreporting. This reduced the tax's effectiveness and created an uneven playing field.

Loopholes in the Tax System: The government aimed to eliminate the practice of taking advantage of loopholes in the provisions of wealth tax that the majority of taxpayers had been taking advantage of. In addition, the Indian tax system was also convoluted and typically led to legal disputes and enforcement problems. By eliminating the wealth tax, the government simplified the process of taxation, reduced litigation, and improved overall compliance.

Who was Liable to Pay Wealth Tax?

Wealth tax applies to individuals, HUFs, and companies. The deciding factor for the applicability of wealth tax is the residential status. The thumb rule is that the resident Indians are subject to wealth tax on their global assets. However, NRIs fall under the ambit of wealth tax for the assets held in India.

Tax Charged on Wealth

If the total net wealth of an individual, HUF or company exceeds Rs. 30 lakhs, on the valuation date, tax @1% will be levied on the amount in excess of Rs. 30 lakhs.  Every person whose net wealth exceeds such a limit shall furnish a return of net wealth. The due date is the same as that of the Income tax return.

Computation of Net Wealth

Components of Wealth

Assets: An asset is a resource which is held and has future economic benefit

1. Any building or land appurtenant, whether used for residential/ other purposes, but doesn’t include:

• House allotted by the company/ employer to be used exclusively for residential purposes, where the gross total salary of the assessee is less than Rs.10 lakhs
• House which forms part of Stock in trade
• House occupied by the assessee for business/ professional purpose
• Residential property let out for a minimum of 300 days in the previous year
• Property in the nature of commercial establishment or complex

2. Motorcars, other than those used for running them on hire or those held as stock in trade

3. Jewellery, bullion, furniture, utensils or other articles made fully/ partly of gold, silver, platinum or such precious metals

4. Yachts, boats and aircraft other than those used for commercial purposes

5. Urban land situated in the Specified area, other than:

• Those classified as agricultural land and used for such purpose
• Those in which building construction is not permissible under any law for the time being in force
• The land occupied by a building, which was constructed with the approval of the appropriate authority
• Unused land held by the assessee for industrial purposes for a period of 2 years from the date of acquisition.
• Land held by the assessee as stock in trade for over 10 years from the date of acquisition

6. Cash in hand in excess of  Rs. 50,000

Deemed Assets: These are assets, though not legally belonging to the assessee, are clubbed as his assets while computing his net wealth

• Assets transferred to Spouse otherwise than in connection with an agreement to live apart.
• Assets transferred to a person/ Association of Persons for the immediate or deferred benefit of the assessee or spouse.
• Assets were transferred to the son’s wife.
• Assets transferred to a person/ Association of Persons for the immediate or deferred benefit of the son’s wife.
• Assets held by a minor child other than those acquired using the skills of a minor or those belonging to a minor with disability.
• The interest of the assessee in the asset of a firm/association of people where he is a partner or member.
• Self-acquired property that is converted as the property of the family/transferred with inadequate consideration.
• Assets transferred under revocable transfer.
• Gift of money made in books maintained by assessee, by way of mere book entries.
• Impartible assets held by the assessee
• Building allotted to assessee under a Homebuilding scheme.
• Building in which a person is allowed to take/ retain possession in part performance of a contract.
• Building for which the assessee has acquired the rights.

Exempted Assets: Assets which are not considered as a part of wealth for the computation of wealth tax

• Property held under trust/ for the purpose of charitable/religious purposes.
• Interest in coparcenary property of Hindu Undivided family.
• Jewellery in possession of any ruler not being his personal property.
• Money/Asset brought by a person of Indian origin/by an Indian citizen.
• In the case of an Individual/HUF, a house/ part of a house or plot of land not exceeding 500 sq. mt. in area.
• Agricultural land which is used to conduct farming activities.
• Productive assets investments such as shares, bonds, and mutual funds.
• Basic personal belongings which had an exemption value.

Exempted Entities: Entities that were not liable to wealth tax in India

• Companies Registered Under Section 25 of the Companies Act: These are companies formed for charitable or religious purposes. Their not-for-profit nature granted them exemption from wealth tax.
• Co-operative Societies: Owned and operated by their members, co-operative societies function democratically and were not subject to wealth tax.
• Social Clubs: Organizations established for social, recreational, or cultural activities also enjoyed exemption from wealth tax.
• Political Parties: Registered political parties were specifically excluded from the ambit of wealth tax.
• Mutual Funds Specified Under Section 10(23D) of the Income-tax Act: These are investment vehicles that pool money from multiple investors to invest in various securities. Recognized mutual funds under this section were not liable to pay wealth tax.

Reserve Bank Of India (RBI): The RBI was exempted from wealth tax primarily because it's a public entity with a crucial role in the Indian economy. The tax, which was eventually abolished, was considered complex, difficult to administer, and didn't generate significant revenue. The government's decision to exempt the RBI aligned with its broader efforts to simplify the tax system and reduce administrative burdens.

Conclusion

While India no longer has a wealth tax, the government has shifted focus to other forms of taxation to ensure that high-net-worth individuals contribute their fair share to the exchequer. This includes higher income tax rates for the wealthy, capital gains tax, and surcharges for high-income individuals. The abolition of the wealth tax aimed to streamline tax administration and enhance compliance.