Seshanaraya owns three residential properties, including inherited and purchased. He has also invested substantially in gold and diamonds. Seshanaraya had meticulously filed his income taxes and declared all his income correctly every year.
One can just about imagine his utter shock when he received a notice from the Income Tax Department for not filing Wealth Tax returns. Many like him were under the impression that by filing Income Tax returns and paying the due taxes, they have ensured complete compliance on the personal tax front. Well, it is time to say “Hello” to Wealth Tax.
In the a nut shell, the Wealth Tax Act, 1957, provides that every Individual, Hindu Undivided Family and Company whose net wealth exceeds the threshold limit of Rs. 30 lakh is subject to Wealth Tax payment. Net wealth is the aggregate value of all assets (including deemed assets), belonging to the tax payer on the valuation date, minus the aggregate value of all debts owed by the tax payer on the valuation date. The wealth tax is one per cent on the net wealth that exceeds the basic limit of Rs. 30 lakh. For example, if the net wealth of Seshanaraya is valued about Rs.75 lakh, his wealth tax liability for the year is Rs.75,000.
So how does the Act define wealth? Wealth, in terms of the Wealth Tax Act refers to any asset owned which is not put to productive use.
For example, in addition to one self-occupied house property which is exempt, the house property rented out may not be included on the Wealth Tax return as an asset. But, a piece of vacant land will constitute an asset since the land is unproductive in its current form. Of course, agricultural land is not subject to Wealth Tax.
The major component that forms part of taxable wealth is gold, silver, motor cars, vacant land etc. Any loans or liability associated with the taxable asset can be reduced for the purpose of computing net wealth. Any asset that is transferred without adequate consideration has the chance of being clubbed with the transferor’s net wealth.
What will be the advantage of filing my Wealth Tax return ? Generally, assets such as cash, gold or silver not accounted in the Income Tax return can be seized by the Tax department in the event of a search.
However, if the tax payer had declared the jewels and cash in the Wealth Tax return, the same cannot be seized by the Tax officials and the same cannot be questioned.
At current gold rates, owning 125 sovereigns of gold jewellery will put the person over the Wealth Tax threshold limit. Considering the fact that Indian families traditionally invest in gold and cultural practice of gifting jewels to daughters during auspicious occasions, 125 sovereigns is not huge and thereby many middle class Indians will also be subject to Wealth Tax net. Perhaps, it is time for the new Government to consider an upward revision of the basic limit of Rs.30 lakhs.
Nevertheless, taxing the rich according to their wealth serves the canon of equity in taxation and provides much needed financing to the government.
(G. Karthikeyan, a Coimbatore-based chartered accountant)