WEALTH TAX – SOME NEW THOUGHTS – wealth tax as a fees or service charge link basic exemption to inflation and provide no other exemptions.

[CA DEV KUMAR KOTHARI]

News report about levy of Estate Duty (ED) and Banking Cash Transaction Tax (BCTT)

As per recent news reports the Government is thinking to reintroduce above taxes in forthcoming budget to improve tax collection.

Past experience shows that these two levies had not been much successful and resulted into litigation and are not liked by people in general. Tax collection will be low and resentments amongst public will be high.  Hence not good for popular political parties also. Once these levies are reintroduced, even minuscule opposition will find handy tools for protest and raising voices.

 Wealth tax can be better choice:

Wealth tax can be a handy tool to collect tax from wealthy people for benefit of poor and to reduce disparity of income and wealth both.

Wealth –tax is also for services rendered to rich people:

Security is concern of all. Wealthy people are more concerned.  Rich people enjoy more for services like safety and security in society by deployment of police forces, traffic police and also military. This is because rich people have more wealth in different forms which require more protection. Rich people also engages more people for their day to day work in homes and offices. People so engaged also need protection by way of safety and security personnel’s.

Therefore, wealth tax looked as a service charge will not be pinching.

Payment of wealth tax reduces wealth and earning capacity of remaining wealth the wealth tax payer but it is in regular course and can be considered as recurring expenditure for holding wealth.

Therefore, wealth tax appears to be a better option.

 Past and present:

Earlier most of assets were subject to wealth tax and some exceptions were provided. However, from 01.04.1993 a  new  policy was made based on theory of productive assets and non productive assets and very few assets were  taxable under the wealth tax Act. On such changes ,basic exemption limit was also raised to Rs. fifteen lakh and the same was again  raised to Rs. thirty lakh  w.e.f. 01.04. 2010  and the same  continued  till discontinuation of wealth tax from 2016.

Thus ,we find that after 1993 basic exemption was raised in 2010 that is after seventeen years. During this period even as per cost inflation index for computation of capital gains the CII increased from 223 for 1992-93 to 632 for 2009-10. Thus there was 2.83 time increase in CII and real inflation was 2.83/ 75 x 100 = 3.77 times. Therefore, even if inflation is taken into account the limit should have been raised from  ₹ 15 lakh to ₹ 57 lakh.

Therefore, the increase in exemption limit was not in tune with inflation.

Substantial increase in market valuation:

Higher inflation and many other reasons have caused many fold increase in valuation of properties which were  liable to wealth when in force.  Even if there is no change in real wealth  (in terms of same properties being held) yet the valuation has increased many times. The increase in valuation is for the following main reasons:

1. Inflation
2. Speculative element due to  speculative trading in commodities like  gold and  silver.
3. Speculative element in prices of properties by holding of large properties by traders and investors for reselling and keeping such properties vacant.
4. Higher purchasing capacity of people due to increase in income of some of strata of public, increase in borrowing capacity,
5. Devaluation of rupee against many foreign currencies.

New form of wealth tax:

Wealth tax can be reintroduced in new and simple form with higher basic exemption and lower and progressive rate of wealth tax. Considering all factors new levy of Wealth tax can be on following lines on all persons- individuals, companies, firms, societies, HUF AOP etc.

1. Basis exemption up to ₹ 500 lakh of net wealth  so no WT  up to net worth of ₹ 500 lakh (Five crore) per assesse.
2. Rate of WT as follows:

        Above 500 lakh up  to 1000 lakh  @ 1% that is on wealth of ₹ 10 crore WT will be ₹ 5 lakh.

          On wealth in excess of ₹ 1000 lakh up to ₹ 2000 lakh   @ 2%

          On net wealth above ₹ 2000 lakh  @ 3%

No exemption of any class of assets:

In view of higher basic exemption and lower rate of WT it is desirable that there should not be any other exemption based on any class of assets.  Net worth can be computed based on balance sheets of assesse.

In case any immovable property is more than five years old, revaluation can be made at interval of each five years for fixing its value.

Certain assets can be revalued and in case revaluation has been done on recognized method, it should be adopted.

Net worth should be computed in simple manner by taking into account book value of all assets minus book value of all liabilities.

Simple rules for valuation can be provided which can be implemented easily and without additional burden.

All liabilities be allowed.

Revision of limits and rates:

At interval of every five years basic exemption and rates of wealth tax can be revised.