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Last Updated : Jun 21, 2019 08:04 AM IST | Source: Moneycontrol.com

Budget 2019 | Wealth tax – The idea is to play fair, but is the time ripe?

Chances are wealth tax might make a comeback. Even so, the government would do well to put safeguards in place to ensure the common man is not put at a disadvantage

Moneycontrol Contributor @moneycontrolcom

Amarpal S Chadha

With the new government coming into rule, there are a lot of discussions around the Budget expectations for individual tax payers. With a strong focus on extending income support to the poor, the possibility of reintroduction of wealth tax is one of questions experts have been debating.

Wealth tax, which was introduced in India in 1957 with an objective to reduce inequalities in wealth and levying tax on non-productive assets, was abolished in 2016 due to the high cost of collection and low yield.

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The earlier wealth tax regulations required individuals and HUF to pay wealth tax at the rate of 1 percent on net wealth exceeding Rs 30 lakh as on the last day of the financial year. Individuals covered in this category were supposed to value the assets as per the prescribed valuation rules. 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 were covered under the wealth tax.

The government while abolishing the wealth tax also ensured that the tax loss was compensated by imposing an additional surcharge on high income earning taxpayers. Further, with an intention to ensure that abolition of wealth tax does not lead to escaping of any income from the tax, changes were made in the personal income tax returns to mandatorily report details of assets owned in India for taxpayers whose income is more than Rs 50 lakh during the tax year.

With the government’s strong focus on curbing black money, additional reporting requirements were introduced in tax returns to track the assets (Indian and foreign assets for residents) and enable data analytics on the disclosed information.

Globally, countries have been using different mechanism to tax the income/assets of individuals. While income tax is levied on regular income, wealth tax is applied on assets or net wealth of the individual. There are also transfer taxes in the form of gift tax (imposed when gift occurs) and inheritance tax (levied when the assets are passed onto the legal heirs).

The global trend shows that most of the wealthy countries are moving out of wealth tax. The report issued by OECD (Organisation for Economic Co-operation and Development) -- The Role and Design of Net Wealth Taxes in the OECD in April 2018 -- highlights the declining trend of wealth tax system in various countries. While 12 countries had net wealth taxes in 1990, there were only four OECD countries -- France, Norway, Spain and Switzerland -- that still levied taxes on individual’s net wealth in 2017. In 2018, France changed its wealth tax so that it applied only to real estate, not to financial assets.

Unlike wealth tax, inheritance tax still prevails in most of the OECD countries. The OECD report also suggests that the policymakers while making decisions should consider the rising trend of inequality and large concentrations of wealth. It also points out that if a country has a broad-based personal income tax and well-designed inheritance and gift tax, a combination of these approaches is typically preferable to a wealth tax.

Currently, there is no inheritance tax in India whereas many countries have the concept of levying inheritance tax on the value of assets transferred upon a person’s demise.

Scrapping of wealth tax in India was a move towards “minimum government, maximum governance”. With the additional reporting details already captured in personal tax returns and levy of additional surcharge on the super rich, together with re-introduction of taxation of long-term capital gains, it is debatable whether the government would reintroduce wealth tax.

Having said that and going with the government’s theme “Sabka Saath, Sabka Vikas”, there is lot of speculation around whether wealth tax/inheritance tax would be re-introduced in India. Even if going by the speculation that wealth tax/inheritance tax may be introduced, the government will consider the economic reality and put in place necessary measures like applicability of tax above certain monetary limit, exclusion of basic assets like one house property etc so that it will protect people from being adversely impacted on their daily lifestyles.

Amarpal S Chadha, Partner & India Mobility Leader, EY. Shanmuga Prasad, Tax Director, EY, also contributed to the article. Views expressed are personal.
First Published on Jun 21, 2019 08:04 am
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