Wealth Tax
The Wealth Tax Act, 1957 governed the taxation process associated with the net wealth that an individual, a Hindu Undivided Family, or a company possesses on the valuation date.
The valuation date was an important component in the calculation of the Wealth Tax. The net wealth that an assessee possessed on the valuation date determined the amount of tax. The valuation date was the day of 31 March immediately preceding the Assessment Year.
Overview
Wealth tax is imposed on the richer section of the society. The intention of doing so is to bring parity among the taxpayers. However, the wealth tax was abolished in the budget of 2015 (effective FY 2015-16) as the cost incurred for recovering taxes was more than the benefit derived.
Abolishing the wealth tax also simplified the tax structure. As an alternative to the wealth tax, the finance minister hiked the surcharge from 2% to 12% for the super-rich section.
Wealth tax is applicable to individuals, HUFs, and companies. The deciding factor for the applicability of wealth tax is the residential status. The thumb rule is that the resident Indians are subject to wealth tax on their global assets. However, NRI’s fall under the ambit of wealth tax for the assets held in India.
Reasons for Abolition of Wealth Tax
Tax simplification
The Indian taxation system is quite complicated and is prone to litigation. Experts say that the government removed wealth tax to simplify the taxation process and thereby enhance transparency and easy tracking.
Massive cost for collection but low yield
The government collected only Rs. 1,008 crore as wealth tax for FY 2013-14 even though there had been a significant rise in super-rich individuals. The expenses of wealth tax collection had been surprisingly higher than the tax amount.
Reduction of taxpayers’ burden
For wealth tax, a taxpayer had to opt for asset valuation as per guidelines of wealth tax for tax computation. This contributed to an additional burden for taxpayers.
Increased revenue
The government abolished wealth tax and replaced it with an additional surcharge. This has enabled it to collect around Rs. 9,000 crore in a financial year.
Tax compliance
Reports suggest that taxpayers filing IT returns are much more than those who filed wealth tax returns. The government aims to bring more individuals under its taxation.
Ensuring reduced tax leakage
Details of assets that a taxpayer submits in the IT return will help tax officials to easily correlate the declared net wealth with regard to the declared income.
Low awareness
Many taxpayers in the country were fully aware of wealth tax. Naturally, many taxpayers received notices from the government for failing to pay wealth tax on time. Reports suggest there were only 1.15 lakh wealth tax assessees in FY2011-12.
