Published Editorial

Evading wealth tax is a criminal offence

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Business Standard

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Amarpal S. Chadha
Tax Partner
EY

Contributed by:

Rama Karmakar
Senior Tax Professional
EY

The deadline for filing the income tax return just got over and most taxpayers would have filed their income tax returns. However, only a few taxpayers are aware that they also have to file wealth tax returns. Every individual and Hindu Undivided Family (HUF) who has wealth exceeding Rs 30 lakh is required to file a return of wealth tax with the revenue authorities and pay wealth tax. Currently, the wealth tax rate is 1 per cent.

Wealth includes certain prescribed assets such as building or land (with certain exceptions), motor cars, jewelry, bullion, yachts, boats and aircraft (other than ones used for commercial purposes), urban land, cash in hand exceeding Rs 50,000, etc. Any debt owed in respect of such assets can be reduced from the value of the assets. For the purpose of calculating wealth tax, the value of the assets would be as on the last day of the respective previous year (that is, March 31). There are prescribed guidelines that need to be followed to value assets to arrive at your wealth tax liability.

Let us take an example. Rahul Singhal has a residential house property worth Rs 1 crore (on which there is an outstanding loan of Rs 70 lakh), motor car worth Rs 13 lakh, gold jewellery Rs 40 lakh and cash in hand of Rs 2 lakh. For the purpose of wealth tax, we will first need to calculate Singhal's total wealth.

Singhal's net wealth works out to Rs 25 lakh (aggregate of Rs 55 lakh for gold jewellery, motor car and cash in hand minus Rs 30 lakh).

A self-occupied residential house or a plot of land that does not exceed 500 square meters is exempt from wealth tax.

Also, a residential house or a commercial building which forms part of stock-in-trade or any house which the taxpayer may occupy for the purpose of any business or profession carried out by him or a property in the nature of commercial establishment or complexes are all excluded from the purview of wealth tax.

For taxpayers who have more than one house property (in addition to one residential property), the additional house properties are excluded from wealth tax if they are let out for a minimum of 300 days during the previous year.

All productive assets such as mutual funds, fixed deposits, exchange traded gold funds and savings bank accounts are not included in wealth tax. Wealth tax, typically, is levied on non-productive assets.

It should be noted that dispersing assets among family members is not a solution that will exempt one from wealth tax status. Clubbing provisions, similar to the Indian Income Tax Act, exist in the Wealth Tax Act as well. Any assets transferred by an individual to his spouse, minor child, son's wife, or to any person under a revocable transfer or to a person for the benefit of himself, his spouse or son's wife, without adequate consideration form a part of his/her wealth and not that of the transferee.

All resident individuals are liable to pay wealth tax on their global wealth, whereas not ordinarily residents/non-resident individuals and foreign citizens are liable to pay wealth tax only on the assets situated in India.

So what happens if you do not pay wealth tax and do not file your wealth tax return? You certainly cannot get away with it. There are strict penalties imposed for evading wealth tax.

If the declaration of wealth made is incorrect, revenue authorities can impose a penalty of up to 500 per cent of the amount of tax evaded.

In cases of willful default, imprisonment of up to seven years could also be imposed. In order to defend a penalty proceeding, a bona fide and reasonable cause for not furnishing the assets or furnishing inaccurate particulars of assets would need to be established.

Revenue authorities are also increasingly focusing on whether all tax payers have complied with their wealth tax returns. Tax authorities are asking assesses to furnish a copy of the wealth tax return while auditing their income tax returns. The revenue authorities for wealth and income tax are the same. And hence, an income tax officer can easily call for a list of assets owned by the tax paper.

Under the proposed Direct Tax Code (DTC), the threshold limit to levy wealth tax could be raised from Rs 30 lakh to Rs 1 crore. In addition, there are some more assets that have been included under the purview of wealth tax.

If you have not yet filed your wealth tax return, it is time for you to look at your assets and determine if you have a wealth tax liability.