Wealth tax is a form of direct tax, evolved after the commencement of the Wealth Tax Act, 1957 enacted for imposing the tax on the net wealth of an assessee. It is a tax on an individual’s wealth rather than on his income.
So, wealth tax is a tax on a person’s assets or his/ her worth. It is imposed on the richer sections of the society. However, wealth tax was abolished in the budget of 2015 as the cost incurred for recovering taxes was more than the benefit derived. Abolishing the wealth tax also simplified the tax structure.
Who are liable to pay?
- The tax is applicable to individuals, companies and Hindu Undivided Families (HUFs).
- The deciding factor for the applicability is the residential status.
- Indian resident – All assets whether owned in India or outside India would be included as assets in computing the wealth tax.
- Non-Resident Indian – If the individual is Non-Resident-Indian, (NRI) assets owned in India only would be clubbed as assets in computing the wealth tax. Assets outside India would NOT be included in wealth tax computation.
Properties under the Purview of Wealth/ Assets under the Act.
According to the Act, ‘assets’ includes property of every description, movable or immovable but does not include:
- Property held under trust/ for the purpose of charitable/religious purposes,
- Interest in coparcenary property of Hindu Undivided family,
- Jewelry in possession of Ruler, not being his personal property,
- Money/ Asset brought by a person of Indian origin/ by an Indian citizen,
- In case of an Individual/ HUF, a house/ part of house or plot of land not exceeding 50sq.m in the area,
- Property held for stock-in-trade,
- Gold deposit bonds,
- House given on rent for 300+ days in a financial year, and
- House allotted by the employer.
Commonly, components of wealth include:
- Residential property which includes houses, guest house, commercial property,
- Urban Land,
- Aircraft, Yachts, and Boats,
- Motor Car,
- Cash in hand (beyond a limit of Rs 50,000),
- Gold utensils, Gold, Silver, and
- Assets transferred to spouse or minor children without adequate consideration would be included in individual wealth for computation of wealth tax.
Mode and Extent of Assessment
The assessment year is a period of 12 months commencing on the 1st day of April every year (1st April of a year - 31st March of the following year). The value of an asset is as on 31 March (valuation date) of the financial year. The net wealth found on the valuation date of the previous year is assessed in the assessment year.
- The valuation of a property shall be determined in accordance with the Wealth Tax Act.
- For assets such as urban land, cars, yachts, boats, and aircraft, the valuation shall be based on a fair market value (FMV).
- For jewellery, bullion rates on the valuation date can be used to determine the FMV of gold and silver. If it is valued at over Rs 5 lakhs, a registered evaluator’s report must be submitted. Of course, the report is not binding and an assessing officer can determine FMV separately.
Debts incurred to acquire the assets shall be allowed as a deduction while calculating net wealth.
How much do we pay?
Wealth tax payable is 1% of the net value of taxable wealth if it exceeds Rs 30 lakhs as on valuation date for the financial year. The due date for filing wealth tax return is the same as for income tax return.
The repercussions of not filing wealth tax return or filing an incorrect return are harsh. The provisions of regular assessment that apply to income tax also apply to wealth tax. Interest at 1% per month is payable for failure to pay wealth tax on the due date. There are also provisions to impose a penalty and/or prosecute an individual for not filing wealth tax returns.
Disadvantages of Wealth Tax
According to wealth tax critics, it discourages creative and hardworking people from being creative and working hard and the accumulation of wealth, which they insist drives economic growth.
The tax is self-defeating as it prevents future assets from being created or accumulated.
Why Wealth Tax Abolished?
- The lack of ease of doing business.
- To simplify tax procedures and to enhance transparency.
- Incurs high collection costs but provides low yield.
- To increase the revenue collection.
Now, the wealth tax is replaced with a levy of an additional 2% surcharge on the individuals, HUFs, firms, cooperative societies, local authorities with income exceeding Rs. 1 crore.