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Monday, January 10, 2011

Dont forget the 'Wealth Tax'

With stock markets hitting an all-time high, property market looking up again, and the prices of precious metals such as gold and silver soaring like never before, the Indian economy is on a roll, giving a new fillip to the wealth of Indians. The Credit Suisse Research Institute’s inaugural Global Wealth Report, for instance, finds that total wealth in India has tripled in the past decade to $3.5 trillion, and could nearly double to $6.4 trillion by 2015, if the nation’s economy continues on its current trend. Similarly, the 2010 Asia Wealth Report, produced by Capgemini and Merrill Lynch , estimates the number of high net-worth (those with more than $1m in investable assets) Indians rose to 126,700 by the end of 2009 compared to just 84,000 in 2008, riding on the surge in market valuations and improved economic growth.

Clearly, wealth creation by Indians is in full swing and is also likely to be on the fast lane in the years to come. However, before you start basking in the glory of your new-found wealth, you will do well to remember that this might also require you to pay a different tax called ‘wealth tax’. Wealth tax, in fact, is an annual tax like income tax and is levied on the market value of the property for the benefits derived from ownership of such property, irrespective of whether the property derives any income or not.

“Wealth tax is charged on the net wealth of the tax payer, where net wealth means the aggregate value of all the assets, excluding exempt assets, belonging to the tax payer on the valuation date less the aggregate value of all debts owed by him which have been incurred in relation to these taxable assets,” says Girish Batra, chairman and managing director of NetAmbit Infosource & e-Services.

Wealth tax is currently levied at a rate of 1percent per annum of the net wealth exceeding `30 lakh on the valuation date (i.e. March 31). These provisions are governed by the Wealth Tax Act, which came into force on April 1, 1957. In fact, “every individual, Hindu undivided family (HUF) and companies are liable to pay wealth tax if the combined value of certain assets they own at the end of a fiscal year exceeds Rs 30 lakh. However, the scope of liability of wealth tax depends on the residential status and nationality of the tax payer,” says Vineet Agarwal , director, KPMG .

Thus, if your net wealth stands at `50 lakh, you will have to pay `20,000 as wealth tax for the given year.
Pensioners, retired persons or senior citizens have not been accorded any special benefits under the Wealth Tax Act. However, there are certain entities exempt from wealth tax, which include any company registered as a not-for-profit organization, any co-operative society, any social club, any political party and any specified mutual fund.
Currently wealth tax is payable on buildings/houses, including farm houses situated within 25 km from the local limits of any municipality or cantonment board (subject to certain exceptions), motor cars, jewellery, yachts, boats and aircraft, and cash in hand in excess of `50,000 for individual and HUF.

Thankfully, there are certain exemptions and exceptions available for taxable assets. For instance, one house, part of a house or a plot of land belonging to an individual or HUF is exempt from wealth tax. Similarly, residential property that has been let out for a minimum period of 300 days in the previous year does not attract wealth tax. Similar is the case with houses for residential or commercial purposes which form part of stock-in-trade as well as houses which the tax payer may occupy for the purposes of any business of profession carried on by him.

Motor cars used by the tax payer for business or running them on hire or as stock-in-trade are also exempt from wealth tax, and so is jewellery that forms part of stock in trade, as also gold deposit bonds. Yachts, boats and aircraft are also exempt if used for commercial purposes. “The Act also provides exemptions with respect to an individual who is either a person of Indian origin or Indian citizen and who must have returned to India from a foreign country for settling down permanently. The exemption is available on the money, value of assets brought into India and value of assets acquired by an individual out of such moneys. This exemption is available for a period of seven years after the person returns to India,” says Agarwal.

There are, however, stiff penalty provisions for non-payment of wealth tax. Under the Wealth Tax Act, concealing particulars of chargeable assets or furnishing inaccurate particulars thereof is construed as evasion. A penalty may vary from one to five times of the tax sought to be evaded. Tax evasion can result into imprisonment of the tax payer of up to seven years along with fine if the tax evaded is over Rs 1 lakh and up to 3 years with fine if tax evaded is lesser than `1 lakh. Delayed filing can result into a penalty of Rs 100-200 per day.

Wealth tax is required to be paid before filing the return of income. The due date for filing the wealth tax return is July 31 following the end of the previous year.

However, if your stress level has peaked, then here comes the breather. In line with the proposals laid down in the revised discussion paper, the Direct Tax Code ( DTC )) 2010 proposes to levy wealth tax at the rate of
1 percent on net wealth exceeding `1 crore (against the existing threshold limit of `30 lakh under the Act). “The proposed change is definitely a welcome step for high net worth individuals who will now have to pay tax on wealth in excess of Rs 1 crore,” says Agarwal.

Batra has a similar view. He says, “Keeping inflationary considerations in mind, it will be a positive step towards the tax payer which is genuinely required in present times. These current limits were fixed way back in 1992 and have not been updated since then. But due to inflation, the valuations have gone up considerably and, thus, the exemption limit does perform the required balancing act.”

Although from the point of view of the government, such a step would necessarily erode the tax base and would hamper the tax revenues from wealth tax. “But considering the fact that the present revenues are not very significant, it would be beneficial for the government too in the long run, provided the list of assets is made more exhaustive,” he adds.

It is, however, pertinent to note that while the proposed law may seem more liberal to many, the trouble is that it has included archaeological collections, drawings, paintings, sculptures, wristwatches worth over `50,000, besides cash in hand above `2 lakh, among other things, into the list that forms wealth. With this there would certainly be disputes over the valuations of these pieces as there is no uniform method to evaluate these things. In other words, there seem to be some taxing times ahead for HNIs! 

Curtesy: ET

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