The provisions dealing with wealth tax are enshrined in the Wealth Tax Act, which was passed in 1957. The current law, which is more than half a century old, is scheduled to be replaced by the proposed Direct Taxes Code. The government recently unveiled the revised version of the DTC (DTC 2013) for public discussion/comments. DTC 2013 has proposed certain significant changes to the existing provisions vis--vis levy of wealth tax.
Under the current provisions of the Wealth Tax Act, this tax is payable in respect of the net wealth on the corresponding valuation date (March 31) by every individual, Hindu Undivided Family (HUF) and company. As compared to this, DTC 2013 proposes to cover every individual, HUF and private discretionary trust within the ambit of the wealth tax. Thus, the corporate taxpayers are proposed to be kept out of the wealth tax net. Further, this is also a significant shift as compared to the earlier proposal under DTC 2010 wherein everyone (other than non-profit organisations) was proposed to be covered within the ambit of wealth tax. Thus, the relaxation under DTC 2013 should bring a sigh of relief to all other taxpayers.
Wealth tax under the current law is chargeable on the net wealth comprising of certain specified assets like house, motor cars, jewellery, yachts, aircraft, urban land, etc, with a few exceptions thereto. It also provides a list of assets that are not subject to wealth tax. In spirit, the levy of wealth tax currently is on certain unproductive assets. The levy of wealth tax under DTC 2010 was also proposed on certain specified assets, albeit with certain additions to the list.
However, DTC 2013 significantly widens the base for levy of wealth tax. It captures all assets for wealth tax (barring few exceptions) as against only unproductive assets captured in the current law. It also proposes to include all financial assets under the ambit of wealth tax as compared to only physical assets at present. Thus, the new law proposes to bring virtually all assets under wealth tax net including shares, mutual funds, debt instruments, etc. The stated rationale for such fundamental shift is to do away with the distinction between physical and financial assets, which discriminated against those taxpayers who are conservative and invest their money in physical assets. However, bringing financial assets within the purview of wealth tax would be against the general scheme of wealth tax provisions of levying tax only on unproductive assets, as the said assets are generally income earning assets on which income tax is levied. Further, this would mean that Indian founders or promoters owning shares of their companies would need to pay tax on their shares every year irrespective of the cash flows. This could be a deterrent to capital formation.
In addition to the above, the exclusion of definition of urban land under the existing provisions is also proposed to be done away with in DTC 2013. The valuation rules are to be prescribed for determining the value of net wealth.
The silver lining seems to be the rate at which wealth tax is proposed to be levied and the basic exemption limit for levy of wealth tax. Under the existing provisions, wealth tax is levied at the rate of 1% of the amount by which the net wealth exceeds R3 million. As against this, under DTC 2013, the charge of the wealth tax is proposed at the rate of 0.25%. Further, in the case of individuals and HUFs, the threshold is prescribed at R500 million. Accordingly, the individuals and HUFs would be subject to wealth tax at the rate of 0.25% on their wealth exceeding R500 million on the valuation date. This is commendable as even DTC 2010 proposed threshold of R10 million and tax rate of 1% of net wealth exceeding that limit.
While there are few significant changes to the wealth tax law proposed under DTC 2013 as compared to the current provisions of the Wealth Tax Act, 1957, given the political scenario in the country and the ongoing general elections, the fate of its implementation remains uncertain. It would be interesting to see what finally happens to the DTC in the backdrop of the political uncertainty, the policies and priorities of the next government.
Maulik Mehta, director, International Tax & Regulatory, KPMG in India, contributed to this article
The author is co-head of tax, KPMG in India. Views are personal