SCOPE OF WEALTH TAXATION

Introduction "It was only for the good of his subjects that he collected taxes from them, just as the Sun draws moisture from the Earth to give it back a thousand fold" – --Kalidas in Raghuvansh eulogizing KING DALIP. Other than Income-tax, there is another direct tax act called the Wealth-tax Act, 1957. It extends to the whole of India. It shall be deemed to have come into force on the 1st day of April, 1957. Wealth tax is an annual tax like income tax. It is charged for every assessment year for net wealth of corresponding valuation date on every individual, Hindu Undivided Family and company at the rate of 1% of the amount by which net wealth exceeds Rs. 30 lakhs from AY 2010-11. (Till 31-3-2009, the limit was Rs 15 lakhs). No wealth-tax is chargeable in respect of net wealth of any company registered under section 25 of the Companies Act, 1956; any co-operative society; any social club; any political party; and a Mutual fund specified under section 10(23D) of the Income-tax Act [section 45] The Wealth Tax Act is important direct tax legislation. It is tax on the benefits derived from property ownership. The tax is to be paid year after year on the same property on its market value, whether or not such property yields any income. Scope of Taxation The liability to wealth-tax depends upon the citizenship and residential status of an individual and in case of a Hindu undivided family upon its residential status alone. An individual or HUF may be resident, not ordinary resident or non-resident in India during the previous year ending on valuation date. The residential status of an assessee is determined in the same manner as for income tax purpose under the Income- tax Act. INDVIDUAL RESIDENT NON-RESIDENT ORDINARY RESIDENT NOT ORDINARY RESIDENT An individual is said to be resident in India if he satisfies any one of the following two conditions: • He is in India for a period or periods amounting in all to 182 days or more in the relevant previous year; • He is in India for 60 days or more during the relevant previous year and has been in India for 365 days or more during 4 previous years immediately proceeding the relevant previous years. Exceptions: • In case of an individual, who is a citizen of India and who leaves India in any previous year for the purpose of employment outside India, the period of 60 days shall be substituted by 182 days. • In case of an individual who is a citizen of India and who leaves India in any previous year as a member of crew of an Indian ship, the period of 60 days will be substituted by 182 days. • In case of an individual, who is a citizen of India, or is a person of Indian origin, who being outside India, comes on a visit to India in any previous year, the period of 60 days in the second condition given above, will be substituted by 182 days. 1. When an individual is said to be resident and ordinary resident in India? The condition to be an ordinary resident is not being prescribed. An individual shall not be not ordinary resident in India if he satisfies any one of the following two conditions: • He has been non-resident in India in 9 out of 10 previous years immediately preceding the relevant previous years, • He has been in India for a period of 729 days or less in 7 years immediately preceding the relevant previous years. An individual shall be resident and ordinary resident in India if he satisfies both the following conditions: • He has been resident in India for at least 2 out of 10 previous years immediately proceeding the relevant previous year. This means that he must have satisfied any one of the conditions, with exceptions/concession for being a resident for at least 2 out of 10 previous years immediately proceeding the relevant previous year. • He has been in India for 730 days or more, during seven previous years immediately proceeding the relevant previous year. 2. Residential Status of Hindu Undivided Family • Resident in India: A HUF is said to be resident in India in any previous years in every case except where during that year the control and management of its affairs is situated wholly outside India. • Non- Resident: If the control and management of its affairs is situated wholly outside India. • Resident and ordinary resident in India: If karta satisfies the following conditions: • He must be resident in at least 2 out of 10 previous years immediately preceding the relevant previous years, • He must be in India for at least 730 days during 7 previous years immediately proceeding the relevant previous year. Residential Status of a Company: Resident in India: In any previous year if: It is an Indian Company During the relevant previous year, the control and management of its affairs is situated wholly in India. Non- resident in India: In any previous year if: It is not an Indian Company During the relevant previous year, the control and management of its affairs is situated wholly or partially outside India. Under Wealth Tax Act, 1957, according to Section 6 the wealth tax incidence is as follows: In case of an Individual 1) Who is citizen and resident in India:  All assets in India, including deemed assets (but excluding exempted assets) and assets located outside India is chargeable to tax less;  All debts in India and outside India are to be taken in computing the net wealth. 2) Who is citizen of India but non-resident or not ordinarily resident in India  All assets in India except the assets exempt under Section 10 of Income Tax Act, less;  All debts in India, except the debt secured on any property or incurred in relation to any property or which wealth-tax is not payable  All debts and assets located outside India are not chargeable. Same is the position in case a person who is not a citizen of India (non-resident or not ordinarily resident). Hindu Undivided Family 3) Resident in India  All assets and debts in India or outside India are chargeable to tax. 4) Non Resident or Not Ordinarily Resident in India  All assets and debts in India,  All assets and debts outside India are not chargeable to wealth-tax. Assets in Wealth Tax by way of Illustration: Mr. A has the following assets on 31-3-2008: Asset Market value on 31-3-2008 Rs. lakhs Loan outstanding On 31-3-2008 Rs. Lakhs (loans taken acquire the asset) Security Given for Taking the Loan Gold and silver 80 6 Shares Shares 10 3 House B Residential House A 50 4 Gold Residential House B 42 38 Personal Commercial House C(used for Carrying on own business) 95 5 Personal Boat 8 12 Gold Motor cars 11 1 Silver Bank deposit 1 1 ------ Residential House D(let out throughout The financial year 2007-08) 55 40 House D Commercial complex (having 20 offices) 190 100 Commercial Complex SLIDE-V Answer Assets (Rs. Lakh) Debts owed Rs. Lakhs Gold and silver 80 6 Shares- not an “asset” within the meaning of section 2(ea ) ---- ---- Residential House A[exempt under Section 5(vi)] --- ---- Residential House B 42 38 Commercial House C(used for Carrying on own business-Therefore it is not an “asset” within the meaning of section 2(ea)) ---- ---- Boat 8 11 Motor cars 11 1 Bank deposit[not an asset within the meaning of section 2(ea)] ---- --- Residential House D(let out throughout the financial year 2005-06) –Residential house not an “asset” if let out for 300 days or more in the previous year. ---- --- Commercial complex (having 20 offices) not an “asset” within the meaning of section 2(ea) ---- ---- Total 141 56 Net wealth = Rs 141 lakhs minus Rs 56 Lakhs = Rs. 85 lakhs Statistical Analysis India's total wealth tax receipts are expected to be just Rs 425 crore in 2009 fiscal, barely double what it costs the government to collect this amount, Rs 216.3 crore. In fact, expenditure on wealth tax is budgeted to grow at a faster rate than receipts from it. While wealth tax is to increase by a meagre Rs 25 crore in 2009-10 to Rs 425 crore, the expenditure on the same is budgeted to increase from Rs 174 crore to Rs 216 crore The other important aspect need to be considered is:  For every Re spent, the Government collects Rs 60 of income tax (all categories)  For every Re spent, the Government collects Rs 701 of corporate income tax  Cost of collection (Direct Taxes) in other countries: ◦ Britain : 1.53% ◦ Germany : 2.35% ◦ Australia : 1.15% But for collection of Wealth Tax, for every Re. spent, the Government collects Rs. 1.97 of wealth tax. In today’s scenario, wealth tax is abolished  In Austria, Denmark, Germany, Finland, Iceland, Spain and Luxembourg wealth tax was abolished during the last decade  The concept of Wealth tax does not exist in Belgium and Great Britain. Proposal Related To Wealth Tax in Direct Tax Code Government proposes to pursue structural changes in direct taxes by releasing the new Direct Tax Code. In that code, the concept of wealth tax has been retained on the following grounds: "Wealth carries with it, a degree of security, independence, influence and social power. Wealth constitutes and independent tax base which can be legitimately taxed through an annual tax on net wealth. Wealth Tax, the code said also helps to partially capture the income tax avoided or evaded." The Direct Taxes Code proposes to substantially raise the threshold limit for levy of wealth tax to Rs 50 crore from Rs 30 lakh, a suggestion, if accepted, would save many people from paying tax on their wealth. Finance Minister Pranab Mukherjee in the budget for 2009-10 had doubled the threshold limit for levy of wealth tax to Rs 30 lakh.  Provisions in relation to the Wealth Tax are proposed to be applicable to every individual, Hindu Undivided Family and Private Discretionary Trust;  The Companies are proposed to be taken out of the Wealth Tax net;  The DTC has proposed to enhance the basic exemption under the wealth tax form Rs. 30 Lakhs to Rs. 50 crores. However, at the same time all the assets (including financial assets, productive assets, business assets, etc.) will be liable to Wealth Tax;  Rate of Wealth tax is proposed to be reduced from 1% to 0.25%. That means the tax on the net wealth is proposed to be 0.25% of the amount by which the net wealth exceeds Rs. 50 crores;  The term “assets” for the purpose of Wealth Tax is not separately defined under the DTC. Further, under the generic definition of the term ‘assets’ provided in DTC, all types of business as well as investment assets are covered. However, at present the wealth tax is not leviable on the agricultural land, business assets (such as motor car, yachts, etc.) and productive assets. The total wealth of India's 35 odd billionaires was recently estimated at $191 billion, more than the total wealth of around 800 million poor people. While talking of a growth rate of nine per cent and an increasing list of Indian billionaires, we cannot lose sight of the staring fact that about 400 million of our people do not earn enough to have two square meals a day and some 470 million people of our country cannot read and write. No wonder then that the Left, in its pre-Budget memorandum for the 2007-08 asked for the wealth tax rate to be raised from one to three per cent and to cover the rural and urban crorepatis into the wealth tax net. As India keeps producing more billionaires, thanks largely to a booming share market and a real estate market and as more and more Indians make it to the prestigious Forbes List, it is time to take a reality check on this tax.

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