Wealth Tax Liabilities and Calculations
By Accommodation Times Bureau
By CA.Dr.Rajendrakumar Jain
Until few years ago it was a popular notion that “wealth tax” is for super rich citizens and not for common people. But rising prices of property, gold, silver have changed the scenario. Now a decent flat costs nearly crore rupees, gold costs 2800 a gram, this price rise made majority middle class people overnight “Crorepati” this change will bring a majority of the citizens in the wealth tax net. Hence, it is imperative to know about wealth tax.
Background: How to raise revenue has always been a challenge for any government. Particularly at the time of independence, our country had scarce resources, moreover, “95% of the nation’s wealth was in the hands of 5% people and remaining 5% wealth was with 95% people”. This uneven distribution of wealth was a great challenge for the government. In order to make the equitable distribution of wealth and to raise the source of revenue, in 1957 the Government had for the first time introduced the Wealth Tax, and subsequently it became a permanent feature of Direct Tax. Even the forthcoming Direct Tax code proposes to continue with wealth tax , so it seems that now wealth tax has occupied permanent place on statute book and we have to live with it .
It is customary that in every budget some changes are incorporated in the direct taxes provisions as per the need and thought process of the law makers. In wealth tax too, from its introduction every year some or the other changes have been incorporated. But in 1992, the then Finance Minister brought about a revolutionary change in budget proposal. It was announced that, “ in order to boost the economy and build the capital, wealth tax will be levied only on non-productive assets and exemption limit of wealth tax was raised from the then existing Rs. 2,50,000/- to Rs. 15,00,000/- and the tax rate was also changed from progressive tax to uniform tax rate i.e.1%”.
As compared to the 1992 scenario, the situation turned completely in 2011. The gold prices shot up from 4200 tola to 28000 per tola, silver prices inflated from 6000 Kg. to 62000 Kg. Real estate prices touched the sky, and started quoting in Crores. Whereas wealth tax exemption limit which was 15 lac in 1992, it has been raised to 30 lacs in 2010.
With the growth of economy the wealth has started flowing in the hands of the masses and as a result a second flat / farm house / second car, are become a common feature. The flip side of this growth is it brought most of the people in the wealth tax net.
It is expected that tax laws should be easy and simple to comply and understand , but Our Direct Tax Laws are flooded with deeming fictions, these deeming fictions give very “irrational and unbelievable “ meaning to a word, which makes tax laws and its compliance complicated . Inspite of all the claims made by the government for simplification of the law, it is a nightmare for a common man to comply with tax laws. And non compliance attracts very heavy penalty and harassment. Therefore, it is better to get acquainted with legal provisions .
Wealth tax is applicable only on three entities – Individuals, HUF and companies (both private limited and public limited).
Under wealth tax only specified assets are taxable and not all the assets held by the assessee. Taxable assets are defined in Sec.2(ea) of Wealth Tax Act, Rest all assets irrespective of its value are exempt from wealth tax.
Following are the specified taxable assets .
Land and building – [sec 2 (ea)(1)]
Under sec 2 (ea)(1) each and every building or part of a building / flat is covered whether used for residential or commercial purpose or for the purpose of maintaining a guest house Including a farm house situated within twenty five kilometers from local limits of any municipality ( whether known as municipality , municipal corporation , or by any other name ) or a cantonment board.”
As explained earlier, the law makers wanted to tax only non productive assets. A few exceptions have been provided in this section like Residential house given by a company to its employees , house / flat held as stock-in-trade or house used in own business or profession or residential house given on rent for minimum 300 days during the previous year.
This is the most disputed and controversial taxable asset class which raises so many questions like, what will be tax position if the possession of the property is taken for the first time and it has been rented out for less than 300 days or what will be the tax treatment in case of deemed let out house property or using the house property for own business but not forming a part of the block of depreciable assets.
Motor cars – [sec.2(ea)(ii)]
Any motor car is an asset except motor cars used by the assessee in the business of running them on hire, and motor cars treated as stock-in-trade. It is irrelevant whether you own a single motor car or a fleet of motor cars, whether a car is meant for personal use or business purpose it will be added to your wealth. But motorbikes are exempt from the clutches of wealth tax.
Jewellery, bullion, utensils of gold, silver etc. – [Sec.2(ea)(iii)]
Indians are known for their love for precious metal especially gold and silver. For a middle class Indian family to hold 50- 60 tolas of gold is very common. This section covers gold, silver, any precious metal, stone or its alloys or any combination of it, excluding items held as stock-in-trade.
Gold ETF (Equity Traded Fund) are out of the purview of wealth tax i.e. gold traded funds are the funds and not the gold, people are holding the fund certificate and not gold as defined in the act even though the underlying asset in the certificate is gold.
Yachts, boats and aircrafts – [sec.2(ea)(iv)]
It is not very fashionable except for super rich people to keep yachts, boats and aircrafts hence not elaborated on it .
Urban land – [sec.2(ea)(v)]
With growing urbanization and increasing prices of land, this asset class will have great impact on your wealth tax liability. Urban land includes both, agricultural and non agricultural land, which are situated within municipal limits or with in the radius of 8 km of municipal limit.
To this section the following exceptions are provided
Land on which construction is not permissible under any law like, land reserved for public purpose like play ground, garden etc.
Land occupied by any building which has been constructed with the approval of the appropriate authority.
Any industrial land upto 2 years from the date of its acquisition.
Any land held for stock-in-trade for a period of 10 years from the date of its acquisition.
Cash in hand – [sec.2(ea)(vi)]
Cash held, more than Rs.50, 000 by individual and HUF is taxable and in the case of companies, any amount not recorded in the books of accounts. Therefore, unlike individuals and HUF there is no monitory limit for companies to hold cash.
While computing taxable wealth in addition to above assets “deemed assets” are also included and “exempted assets” are excluded. Also debts ( loan /borrowing ) in relation to taxable assets will be deducted from taxable wealth .
Under sec. 5 of the act various assets have been exempted. But the most important is sub section VI whereby one house or part of house belonging to either Individual or HUF is made exempt.
Secondly, a plot of land comprising of an area of 500sq.mtrs or less is out of the purview of taxable assets, this is a great respite to public at large.
Valuation of assets
The wealth tax liability depends on the market or net realizable value of the asset on the valuation date. The valuation date is 31st March of any year. Now the question arises, how to do valuation of asset? The valuation of asset shall be taken in the manner laid down in the schedule III of the act. Various formulas are given in the said schedule, like, In case of house property the valuation depends on gross maintainable rent and net maintainable rent. Actual price of the property or book value of the property or Market price or ready reckoner price has no relevance for calculating taxable value of the property.
While valuing gold ornaments all the factors which are considered while selling gold need to be considered, ornaments are generally made in 22 caret gold and not 24 carets. There is always a rate difference in gold sale rate and buy rate, while selling gold, 7 to 8 % is deductable on account of impurity / mixing in the gold ornaments.
Another important feature of tax scheme is, it is not necessary that all the assets must appear in the balance sheet of the assessee, but asset must belong to him. Wealth tax is always payable by the owner of the asset. Few exception of deemed assest is given in the statute where the assessee has to pay tax for the property held by other person .
Incidence of wealth tax depends on two criteria-
Residential status and
In case of an Indian citizen, who is a resident, his global wealth is taxable in India. In all other cases only their local wealth (i.e. wealth situated in India) is taxable.
We have DTAA (Double Tax Avoidance Agreement) for wealth tax with few countries. In countries with which India doesn’t have a treaty, but the citizens of India pay wealth tax in that country, a relief can be claimed by such citizens while paying Indian taxes.
The author CA.Dr.Rajendrakumar Jain is a Mumbai based practicing chartered accountant and can be contacted on firstname.lastname@example.org or mob. 9869081100