Don’t ignore wealth tax liability
Live Mint and the Wall Street Journal
Tax Partner & National Leader
There is renewed focus by revenue authorities on wealth tax compliance and there have been some friends bringing this topic up regularly and trying to understand the requirement/coverage under wealth tax and more importantly, the consequences of non-compliance.
A common question is: what will happen if I do not pay wealth tax and do not file my wealth tax return? The simple answer is: you certainly cannot get away with it. There are strict penalties for evading wealth tax. Here are the details: if the declaration of wealth is incorrect, the revenue authorities can impose a penalty of up to 500% of the amount of tax sought to be evaded. In extreme cases of wilful default, imprisonment of up to seven years could be imposed.
Since the consequences could be rigorous, it is best to understand the definition of wealth and the compliance requirements for an individual.
Every individual and Hindu Undivided Family (HUF) who has wealth exceeding Rs.30 lakh is required to pay wealth tax and file a return of wealth tax with the revenue authorities by 31 July, immediately following the end of the financial year. Currently, the wealth tax rate is 1% and the date of filing varies for people who are required to get their accounts audited.
Wealth tax is payable on net assets—that is asset less any liability such as loans relating to the assets. The value of an asset is to be considered on the valuation date, which is the last day of the fiscal year—31 March—and as per prescribed valuation rules. Wealth tax is applicable on assets such as building or land appurtenant thereto (exceptions made), motor cars, jewellery, bullion, yachts, boats and aircraft (other than those used for commercial purposes), urban land and cash in hand exceeding Rs.50,000, among other things.
An Indian national who qualifies as a “resident and ordinarily resident” is liable to pay tax on his global assets. In other cases, the Indian national is subject to wealth tax only on wealth in India.
All productive assets such as mutual funds, fixed deposits, exchange-traded gold funds and savings bank account balance are not included for computing one’s net wealth. Typically, wealth tax is levied on non-productive assets.
Distributing assets among family members also does not help one get away from the liability to wealth tax. Clubbing provisions similar to that in the Income-tax Act exist in the wealth tax Act, as per which assets transferred by an individual to her spouse, minor child, son’s wife, to any person under a revocable transfer or to a person for the benefit of herself, her spouse or son’s wife, without adequate consideration form part of his wealth and not that of the transferee.
Under the proposed Direct Taxes Code (DTC), the threshold limit for levy of wealth tax has been proposed to be raised from Rs.30 lakh to Rs.1 crore and additional assets are also proposed to be covered under the purview of wealth tax.
It is important to note that the government is taking measures to track data related to expenditure, investments and foreign assets, which will make it simpler for the authorities to correlate and track non-compliance.
What should you do?
Given the above, what should one do? As always, any tax compliance requires an individual to be organized. One could look at the following steps:
- Prepare a list of all assets and investments owned by the family.
- Classify the assets based on the legal ownership, assets purchased by own funds, gifts and inheritance.
- Compare the assets listing with the definition of assets under the wealth tax Act.
Once you have the above data ready, you will need to compute your wealth tax liability and also examine the various exemptions available under wealth tax provisions. For example, one residential house property owned is exempt from wealth tax and residential property let out for 300 days or more is also exempt from wealth tax. You may consider taking professional help to understand the liability under the wealth tax Act. This can also help you keep a track of your wealth tax liability for future purchases or investments.
So if you have not yet filed your wealth tax return, it is time for you to take a look at your assets.