Taxation

What is Wealth Tax in India & why was it abolished?

What is Wealth Tax in India & why was it abolished?

Background

A wealth tax is imposed on individuals, HUFs, and companies in India if their net worth exceeds Rs. 30 lakhs on the valuation date, which is the last day of the preceding year. This tax was first implemented in 1957. Only a few specific assets are deemed to be taxable net wealth. The removal of the Wealth Tax entirely, starting with the Financial Year 2015–16 was announced in Budget 2015. The imposition of an extra surcharge on high-income assessees would make up for the lost revenue caused by the repeal of the wealth tax.The assessment of a surcharge is simple to monitor and collect, and it has no negative consequences for the administration department or the taxpayer in terms of non-compliance.

Wealth taxes, which are levied on the wealthier portions of society with the goal of achieving parity among taxpaying citizens, were repealed in 2015 for the straightforward reason that raising revenue was more beneficial. In order to replace this tax, the finance minister increased the surcharge on the ultra-rich from 2% to 12%. Individuals and businesses having annual incomes of more than 1 crore rupees are included in the category of wealth tax.

The surcharge rates, which now stand at 15% for income between 1 and 2 stand rupees, 25% for income between 5 crore rupees and 37% for income beyond 5 crore rupees, were dramatically raised by the finance minister in the budget for 2019.

Reason for Wealth Tax Elimination

On the advice of the Chelliah Committee, the Wealth Tax Act1, which was first established in 1957, underwent a significant revision in 1993. The Chelliah Committee had recommended against the repeal of the wealth tax for all assets other than those that could be considered to be unproductive types of wealth or other things whose acquisition should be rightfully discouraged in the interest of the community.

Although the wealth tax only generates a little amount of income, it places a heavy compliance burden on taxpayers and an administrative burden on the department. This is due to the fact that the taxpayers must appraise the assets in accordance with the terms of the Wealth Tax Rules in order to calculate their net worth, and for some goods, such as jewellery, they must acquire valuation reports from the reports.

The wealth tax has not improved significantly over the years and has only led to an unfair compliance burden on taxpayers and an administrative burden on the department. This is because the assets that are specified for the levy of wealth tax, such as jewelry and luxury cars, are difficult to track, creating an opportunity for undervaluation of the productive assets.

 In India, the wealth tax has been eliminated for the aforementioned departmental reasons. The government would receive compensation for the lost revenue caused by the repeal of the Wealth tax.The additional penalty is imposed on high-income earners who file income tax returns in India.

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Wealth Tax Responsibilities in India

It should be mentioned that the following are subject to this type of tax:

The residential status is the determining criterion for the imposition of the wealth tax. According to the law, resident Indians must pay wealth tax on their international holdings. NRIs, on the other hand, are not subject to pay of the Indian wealth tax for assets.

Liability To Pay Wealth Tax In India

It may be noted that this form of tax applies to the following:

 Liability to pay wealth tax in India
  • Individuals;
  • Hindu undivided families;
  • Companies.

The deciding factor for wealth tax applicability is the residential status. The rule is that the resident Indians are subject to wealth tax on their global assets. However, in the case of NRI, they fall under the purview of wealth tax for assets in India. 

India’s Wealth Tax Calculation

Whether or not the assets produced profits, the wealth tax was based on their market worth. This tax was imposed on all persons and HUFs with a net worth above Rs.30 lakh rupees.

This tax would be applicable to assets acquired after the end of a fiscal year because it was calculated based on asset valuation as of March 31. The wealth tax does not apply to the assets that were sold during the year, nevertheless.

  • A 1% percent wealth tax was applied to net income above 30 lakh rupees.
  • Components of wealth assets that are subject to the wealth tax in India
  • Any structure, including apartments on the land, whether it is utilised for residential or other purposes, but excluding the following:
  • a home was given by the employer to be utilised only for residential purposes where the assessee’s gross total annual pay is less than 10 lakh rupees;
  • a house that is included in the stock of the company;
  • a home that the assessee uses for business or professional purposes;
  • real estate that was rented out for at least 300 days the year before;
  • Property in a complex or building of a similar nature.
  • automobiles, excluding those used to operate them for hire or those kept as stock.
  • furniture, bullion, jewelry, and other items manufactured totally or partially of platinum, gold, silver, or other precious metals.
  • Aside from those that are used for business, yachts, boats, and aircraft.
  • urban land located in the designated region, with the exception of agricultural land designated as such and used for such purposes;
  • those where building construction is not permitted;
  • occupied land, where the landing was constructed with the necessary authority’s approval;
  • Unused land held by the assessee for industrial purposes for a period of two years; land kept by the assessee for trading stock for a period of ten years or more from the date of purchase.
  • Holds cash of more than 50,000 rupees.
  • Assets that are excluded from the calculation of wealth under the wealth tax include:
  • properties used for trustee functions;
  • HUF-owned Interest of the public coparcenaries;
  • jewellery owned by the ruler but not his personal property;
  • written by a person with Indian ancestry;
  • In the case of individual/HUF, a specific house, a portion of that house, or a plot of land (not exceeding 500 square metres).
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Why meters individuals abolished In India?

The main justifications for its abolition are as follows:

  • Due to the difficulty of conducting business, to make tax procedures simpler;
  •  to limit the number of taxpayers who take advantage of expensive allocations;
  •  to boost government income;
  •  to lighten the administrative burden; to improve reporting and to stop tax leakage;
  • Due to India’s lack of awareness of wealth tax;
  • costs a lot to collect yet produces little in the way of production.

Conclusion

The national government of India eliminated the wealth tax because it had significant expenditures for collection but poor revenue. A new fee has been imposed in place of the wealth tax.

Frequently Asked Questions (FAQ)

Who is eligible for wealth tax in India?

Every person whose net worth exceeds such a level shall provide a return of net wealth. If the entire net wealth of an individual, HUF, or company exceeds Rs. 30 lakhs on the valuation date, tax @1% will be levy on the amount.

Who is liable to pay wealth tax in India?

The following are the fundamental provisions of the Wealth-tax Law that should be remembered: Wealth-taxes are imposed on a firm, a Hindu undivided family (HUF), and an individual are the only three entities subject to wealth taxes. Wealth tax is not applicable to entities other than individuals, Hindu Undivided Families (HUFs), and corporations.

What is the applicability of wealth tax in India?

A person’s net wealth as of the valuation date, which is the 31st of March each year, is subject to wealth tax. On net worth beyond Rs. 30,00,000, a wealth tax of 1% is applied.

Which persons are exempted from wealth tax?

The basic rule of the wealth-tax law are as follows: only the people listed below are subject to the wealth-tax: A person, A Hindu Undivided Family (HUF), A business. Individuals, Hindu Undivided Families (HUFs), and businesses are the only types of people subject to the wealth tax.

Who abolished wealth tax in India?

In the Union Budget (2016–2017) delivered by Union Finance Minister ArunJaitley on February 28, 2016, wealth tax was repealed.

When was the wealth tax abolished in India?

The Wealth Tax Act of 1905 governs wealth tax. It should be noted that the Wealth-tax Act of 1957 is no longer in effect as of January 1, 2016.

Why is wealth tax abolished in India?

The Chelliah Committee had advocated abolishing the wealth tax for all assets other than those that could be considered unproductive forms of wealth or other things whose acquisition should be rightfully discouraged in the interest of the community.

Who introduced the wealth tax in India?

A wealth tax may be imposed on a person, a Hindu undivided family, or corporations under the terms of the Wealth Tax Statute, 1957, a statute of the Indian Parliament. The tax was assessed against a person’s net worth as of the valuation date. In India, it was introduced in May 1957.

What replaced wealth tax in India?

The wealth tax was replaced with a surcharge by the finance minister. The surcharge for the extremely wealthy population ranges from 2% to 12%.

What is an example of wealth tax in India?

The following possessions are subject to wealth tax:  Wealth tax was due on items like gold and real estate.  Aircraft, boats, and yachts were all subject to the wealth tax.  One residential property is not subject to wealth tax, but more than one of your own dwellings would be.

Is there any wealth tax in India?

Due to the fact that the expense of recovering taxes was more than the benefit received, the wealth tax was eliminated in the 2015 budget (which was effective for FY 2015–16). The wealth tax was replaced with a surcharge by the finance minister. The surcharge for the extremely wealthy population ranges from 2% to 12%.

What is the type of wealth tax?

In India, there are two different kinds of wealth taxes: direct and indirect. While indirect taxes are placed on the consumption of goods and services, direct wealth taxes are imposed on an individual’s income. India’s wealth tax is levied and collected according to the Wealth Tax Act.

Read our article: Corporate Tax in India: Everything you need to know

References

  1. https://incometaxindia.gov.in/pages/acts/wealth-tax-act.aspx

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