Everything About Wealth Tax and Its Abolition in India

Just as income earned is subject to income tax , the wealth of the taxpayer can be subjected to tax as well. Such a tax is a direct tax that increases the government’s exchequer and bridges the gap in affluence in the country. This is achieved by taxing the super-rich population and imposing a tax on wealth, whether inherited or earned.

Wealth tax in India is defined in the Wealth Tax Act 1957. The Act imposes a tax of 1% on wealth exceeding the value of Rs 30 lakhs per annum. The value of the wealth is determined on a valuation date, generally 31st March.

Wealth tax is levied only on an individual, a Hindu undivided family (HUF) or a company. Persons other than these three categories are not liable to pay wealth tax.However, individuals involved in other entities can be levied a wealth tax. For instance, while wealth tax is not applicable to a partnership firm, the assets of the firm can be taxed in the hands of its partners. This is recognised as “Interest in a partnership firm”. To determine this, the value of the assets owned by the partnership is determined and distributed between its partners. Thereafter it is taxed normally in the hands of the partners. If one of the partners is a minor, the interest of the minor in the partnership firm is included in the net wealth of the minor’s parent.This is also applicable in the case of an association of persons (AOP, other than a co-operative housing society) where the assets of the AOP are taxed in the hands of its members.

Here are the entities that are not liable to pay wealth tax -

• Companies registered under section 25 of the Companies Act
• Co-operative societies
• Social clubs
• Political parties
• Mutual Fund specified under section 10(23D) of the Income-tax Act
• Reserve Bank of India

Wealth tax is applied to the net wealth of the taxpayer as of the valuation date. Simply put, net wealth or taxable wealth is -Gross assets = (The value of taxable assets as per valuation rules + Assets clubbed, i.e., deemed assets) - Exempt assetsTaxable Wealth = Gross value of assets - Debt taken to acquire own and deemedWealth = 1% of (Taxable Assets - Rs 30,00,000)No surcharge or cess is applicable. Also Read: Filing wealth tax Returns: 5 Things You Should Know

The taxability of an asset will be determined on the basis of the residential status and the location of the asset.Wealth tax is paid on assets owned by the resident and ordinarily resident Indian individual citizens, resident and ordinarily resident HUFs and resident companies. The residential status is determined under income tax laws.Assets located in India are taxed even when owned by -

• An individual who is not a citizen of India
• A resident but not ordinarily resident individual, and a resident but not ordinarily resident Hindu Undivided Family
• A non-resident (may be individual or HUF or company)

However, assets owned by them outside India are not taxable. Also Read: Who is Liable to File Wealth Tax Return?

For wealth tax purposes, an asset that is possessed by someone and has a future economic benefit is taxed. This includes -

• Any building or land, whether used for residential/other purposes excluding
• House property maintained as stock in trade
• A residential home given by the employer to an individual with a net gross salary below INR 10 lac
• House occupied by the individual for professional use
• A complex or commercial establishment
• Residential property which was let out for 300 or more days in the previous year
• Bikes other than those used for riding on hire or those held for trade
• Jewellery, furniture, utensils, bullion, or other articles made partly or full of precious metals like silver, gold, platinum, etc.
• Boats, yachts, and aircraft other than those utilised for commercial use

The following are not considered wealth for taxation purposes -

• Assets held under trust or for charitable/religious purposes
• Money/asset brought by a person of Indian origin/by an Indian citizen
• Interest in coparcenary property of a HUF
• In the case of an Individual/HUF, a house/ part of a house or plot of land not exceeding 50 square metres in area
• Jewellery in ownership of a director not denoting his personal property

Assets that don't belong to the assessee but are included in the calculation of net wealth are known as deemed wealth. Deemed assets include -

• Assets transferred to the spouse but without an agreement to live separately
• Assets transferred in favour of the wife of the assessee’s son
• Assets transferred to an AOP for the benefit of the assessee or their spouses
• Assets belonging to a minor child, other than assets acquired through the use of skills of the minor or if the minor has a disability
• A self-acquired property that was converted into a family property or transferred without an adequate consideration
• Assets of a firm in which the assessee has an interest as a partner
• An impartible asset belonging to the taxpayer
• A building obtained by the assessee through a homebuilding scheme or in which he has acquired rights or the right to retain/take possession

Infographic Idea Wealth tax is applicable on the following items -

• Jewellery, bullion, gold/silver utensils
• Urban building and land
• Vehicles
• Yachts, boats, and aircraft
• Arts and artefacts
• Cash

Along with the abolition of wealth tax, an additional surcharge of 2% was introduced. This was applicable to people with taxable income of over Rs 1 crore. The government simplified the income tax structure by inserting this additional tax surcharge that will be applied only to high-paying tax citizens only.For taxpayers that are individuals, the surcharge is applicable when the taxable income is above Rs. 1 crore. For taxpayers that are companies, the surcharge is applicable when the net taxable income is above Rs. 10 crores

Wealth tax was abolished in India from the financial year 2015-16, i.e., the assessment year 2016-17.It was levied on the assets owned by the affluent sections of society. The general expectation from the tax was that it would force the richer class to pay taxes and add to the government’s revenue. However, the government saw little merit in continuing with it as the costs involved in collecting wealth tax outweighed the benefit derived from it. Also Read: Wealth Tax: What Is The Net Wealth Of A Taxpayer?

The government had cited cost-benefits and simplification as the main reason for the abolition of wealth tax in India. Here is a look at the reasons that saw wealth tax abolished - Loopholes in the taxation system - The government wanted to eliminate the practice of finding loopholes in the wealth tax rules. Many taxpayers would take undue advantage of these loopholes in the Act. Besides, the complicated nature of the Indian taxation system meant that it was prone to litigation. The government’s removal of wealth tax simplified the taxation process. Simple tax procedures - Wealth tax abolition helped reduce the complexity and multiplicity of Indian tax laws. Replacing it with an income tax surcharge helped the government simplify procedures for easier tracking and increased transparency in taxation. No cost benefit - The cost of collecting the revenue was becoming too much for the authorities. The wealth tax department was costing the government money rather than earning it. Besides, as a revenue stream, wealth tax formed a smaller portion of the direct taxes collected in India.For instance, only Rs. 1,008 crore was collected as wealth tax for FY 2013-14 despite the rise in the super-rich population. Increased revenue - The government also highlighted that with wealth tax abolished and the additional surcharge in place, it collected an additional revenue of over Rs 9000 crore in a financial year. Administrative burden - Wealth tax assessment was a cumbersome process. Taxpayers were supposed to value their assets as per Wealth Tax Rules and calculate their net wealth. For certain assets like jewellery, a valuation report from a registered valuer was required. Wider coverage - A smaller percentage of taxpayers filed wealth tax returns compared to income tax returns . The Indian Government used the bigger tax coverage of income tax to bring more taxpayers into the net. Improved reporting - The reporting of assets and liabilities continued even after the abolition of wealth tax. The taxpayers paying the additional surcharge provide additional reporting of information in their income tax returns regarding their assets and liabilities. Prevents evasion - As taxpayers submit details about assets in their income tax returns, along with their declared income, it is easier for authorities to correlate the two. It becomes easier for the tax department to prevent tax evasion and leakage. Low awareness - The awareness in the country around wealth tax was poor. Many taxpayers would often receive notices for various wealth tax-related non-compliances. It was reported that there were only 1.15 lakh wealth tax assessees in FY2011-12

Since 2018, India has been home to more new millionaires every year than any other country in the world. According to the Hurun Richlist 2021, India added a new billionaire every week during the year. The top 10% of the country’s population controls 57% of its income.The absence of tax on health and inheritance makes it easier to maintain wealth compared to annual income. Notably, there is a progressive tax structure in India that taxes the rich at a higher rate. Besides, there are taxes on gifts, capital gains, and surcharges too.Taking all of this into consideration, India is unlikely to return to a wealth tax regime and continue with simpler tax administration.Ready to make the most of your money? Start your tax planning journey now!