The proposed Direct Tax Code (DTC) has substantially enhanced the limit for wealth tax from Rs 30 lakh to Rs 50 crore. Apart from this threshold increase, the tax rate for this slab has been reduced from 1% to 0.25%. However, the asset base subject to wealth tax has been substantially widened.

The DTC proposes to include even financial assets in the list of taxable assets. Accordingly all shares in companies, fixed deposits etc will attract wealth tax. Shares were specifically excluded from wealth tax in 1993-94. A direct impact of this proposed change would be in case of promoter holdings in various companies, creating a huge wealth tax outgo for them. Also, if the valuation is proposed at cost or market valuation whichever is lower, it would really impact new investments where costs could be much higher than the older investments.

Interestingly, now there will be no exemption for a house and even a single house owned by an individual can be taxed if acquired on or after April 1,2000.

While the proposed DTC excludes companies from levy, all individuals, HUFs and private discretionary trusts owning relevant assets would be subject to wealth tax. Prima facie it appears that the companies are excluded because they are now subjected to Minimum Alternative Tax at a much higher rate of 2% of gross assets (0.25% for banks). And as for private discretionary trusts, the proposed change may adversely impact some of the existing private family trust arrangements.

To illustrate the above further, an individual holding shares worth Rs 100 crore may be liable to pay a wealth tax of Rs 12.50 lakh annually under the proposed DTC, but a company holding shares of similar value would not pay any wealth tax. Under the current legislation, neither the individual nor the company would have been subject to the wealth tax.

In contrast, if an individual held assets (other than shares) worth Rs 100 crore (which are currently subject to wealth tax), his wealth tax liability would be Rs 99.70 lakh. However, under the proposed DTC, this liability will still be Rs 12.50 lakh.

Under the DTC, as in the current provisions, assets held outside India would not be subject to wealth tax for foreign citizens and non resident individuals/HUF.

Accordingly, assets of an Indian national abroad will not be subject to wealth tax until such time as he is non resident in India. Only on his becoming an Indian resident will such assets be included in his net wealth valuation. Under the DTC, with the changed definition of residency (i.e. the category of ?Not ordinary resident? being proposed to be removed), an Indian national returning to India after a substantially long time can become liable to pay wealth tax on his global assets in either the year of his arrival or the year later as he is likely to be a resident of India much earlier. This is a dampener as under the existing provisions the same person would generally be liable to wealth tax on his global wealth in the third or fourth year of his arrival, as he would normally remain a ?Not ordinary resident of India? for the first two years.

While most of us may cheer the increase of the wealth tax limits, high net worth individuals are likely to be adversely impacted. The Finance Minister has given a rationale for the levy and has said that the holders of substantial economic resources have the capacity to pay higher taxes than those with similar income but less wealth. He also believes that a wealth tax base separate from an income tax base helps to partially capture the income tax avoided or evaded.

Anyway, it will take two years for the DTC to be enacted. Many changes may yet hit the anvil before that.

?The author is partner, BSR & Co. This article is coauthored with Nishit Kapadia, senior manager, BSR & Co