Scope for Wealth Tax in India

In India, wealth tax is a regular stream of tax collection. The underlying principle for imposing   wealth tax as well as its continuance comes out of the socialistic objectives of Indian planning. Wealth tax is basically a direct tax levied on the ownership of certain assets by individuals and Hindu Undivided Families (HUFs) even though these assets may not generate any income. It targets unproductive, non-essential and idle assets. Presently, wealth tax is levied at 1 per cent of the net taxable wealth exceeding Rs 30 lakh. It is paid when an individual’s net taxable wealth minus his total outstanding debt on all such assets (that are eligible for wealth tax) is more than Rs 30 lakh on valuation date (March 31 of a financial year). Last year, it contributed Rs 866 crore to the total revenue collection of Rs 1,038,036 crore.

Scope

In India, the scope of taxable wealth for individuals differs with their residential status. Net taxable wealth for a resident Indian will include all assets in India and abroad while net taxable wealth for non-resident Indians includes only those assets which are in India. The assets chargeable to wealth tax are residential house, guesthouse, farmhouse, motor cars, precious metals including those in the form of jewellery, gold, furniture, utensils or other articles, aircrafts, yachts, boats, urban land and cash in hand in excess of Rs 50,000. In addition to these, all assets transferred by individuals to their minor children and to a spouse for inadequate consideration also attract wealth tax. It is pertinent to mention here that assets such as financial instruments, a house held for business or profession, any property in nature of commercial complex, a house let out for more than 300 days in a year, gold deposit bond, etc., are exempted from taxation under the Wealth Tax Act.

In India, the concept of wealth tax was introduced to wipe out excess gains arising out of property and wealth to reduce inequalities of income and wealth. Interestingly, the Indian taxpayers consider wealth tax as trivial. This approach is prevalent probably because the Central Board of Direct Taxes gives more preference to other important taxes, such as income tax, corporate tax, excise, etc. However, evasion of wealth tax may attract strict penalty. Incorrect declaration of wealth can invite a fine of up to 500% of the evaded tax. One can also be jailed for up to seven years if the tax due is over 1 lakh. Moreover, wealth tax evasion can easily be detected as the assets are tangible and undervaluation is not difficult to prove.

Wealth tax, just like income tax, has always cleared the considerations of benefits and ability to pay. This is the reason why it can be viewed as a useful supplement to income tax. Taking social considerations into account, it cannot be denied that taxing wealth along with income tax is absolutely prudent as it provides horizontal equity. When the concept of wealth tax was initially introduced, rate of wealth tax was 15 percent, combined with income tax. This made the affluent section opt for extensive evasion and avoidance of wealth tax. However, later the rate was reduced to 2 percent. After 1993, the wealth tax rate was further reduced and it was now chargeable in respect of net worth exceeding Rs 15 Lakhs to 1 percent only. This ended up ensuing substantial reduction in tax collection from this source and it somewhat also reflected government’s casual approach towards wealth tax.

In India, wealth tax on unproductive assets was introduced on the lines of recommendations made by the Chelliah committee. It was further stated by the committee that taxable wealth would not be liabilities incurred in acquiring such assets. By making real investments unproductive, the committee aimed at directing all the resources towards financial savings. However, the committee while making recommendations overlooked the capability of Indian households to invest in highly unpredictable stock market. In addition, the very definition of productive assets was also flawed. The policy is obviously not growth favoring since financial flows by themselves do not add to productive capacity of economy, it’s the real investment through which capital formation is done. Present situation demands the continuance of wealth tax along with income tax. It is further advised that the distinction between productive and unproductive assets should be done away with. This will make the wealth tax equitable also on the grounds of vertical equity.

Model Question

Throw light on the position of Wealth Tax in taxation in India.  Do you agree with the view that in a country like India, a tax on wealth would be a more useful supplement to income tax? Argue giving reference to J.Chelliah tax reforms committee report.