WEALTH TAX – SOME NEW THOUGHTS – link basic exemption to inflation and provide limited specified exemptions with certain limits to impose tax on assets above limits.

[C.A. DEV KUMAR KOTHARI]

Relevant links:

Section 2 (ea) and 3 of Wealth tax Act 1957.

Table of cost inflation index.

Wealth tax- a handy tool to collect tax from wealthy people for benefit of poor and to reduce disparity:

Wealth tax can be considered a handy tool to collect tax from wealthy people with a view to raise funds for benefit of poor people and also to regularly reduce disparity of wealth income.  This is because payment of wealth tax reduces wealth and earning capacity of remaining wealth the wealth tax payer.

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 are not 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 is still continuing (Please see section 3 of the Wealth Tax Act, 1957). In draft Direct Tax Code this limit was proposed to be raised substantially, however, as we know DTC has not been implemented and in the wealth tax Act the limit has not been raised. taxmanagementindia.com

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 Rs.15 lakh to Rs.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 liable to wealth tax during last 5-6 years. 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:

Inflation

Speculative element due to speculative trading in commodities like gold and silver.

Speculative element in prices of properties by holding of large properties by traders and investors for reselling and keeping such properties vacant.

Higher purchasing capacity of people due to increase in income of some of strata of public, increase in borrowing capacity,

Devaluation of rupee against many foreign currencies.

No justification of keeping exemption limit at Rs.30 lakh:

As discussed in earlier paragraph increase from 15 lakh to 30 lakh was also very low and it did not kept pace with inflation.

In view of above factors which have caused valuation of same properties very high there is no justification in keeping basic exemption at Rs. thirty lakh. The same need to be adjusted at least for the reason of inflation.

Even after 31.03.2010 the CII has been increased to 711 and 785 for 2010-11 and 2011-12 respectively.  Real inflation in two years have been 16.48 % and 13.87%. For 2012-13 real inflation is likely to be 13% and likely CII is   858.

Even if we apply for likely CII at 858 the limit should be raised to 30 / 632 X 858 = 40.72 say Rs.41 lakh

If we take inflation into account than the increase in CII is 226/ 75 X 100 = 301 points since 2009-10 therefore the revised limit should be 30 / 632 X 933 = 44.59 say Rs.45 lakh

Revision based on CII

If we simply consider exemption of Rs.15 lakh as on 31.03.1993, cost inflation index and increase in it since 1993(when CII was 223) for capital gains purposes we find that the basis exemption should be as follows for last five years:

Valuation date	Calculation with reference to CII of 1992-93  i.e. 223 (valuation date 31.03.1993)	Exemption limit taking into account only 75% of inflation rounded off to nearest lakh of rupees
31.03.2010	15/223 X 632 = 42.51	43 lakh
31.03.2011	15/ 223 X 711 =47.82	48 lakh
31.03.2012	15/223 X 785 = 52.80	51 lakh
31.03.2013	15/223 X 858 = 57.71	58 lakh

Limit based on real inflation should be fixed instead of CII for capital gains purpsoes. If we consider the same the exemption for valuation date 31.03.2013 should be around Rs.   15/ 223 X 1070 **= 71.97 = say Rs. 72 lakh instead of Rs.30 lakh at present and Rs.58 lakh if CII for capital gains is considered.

** (858- 223  =  635/75 x 100 =  847 actual CII 223 + 847 = 1070 (estimated).

Therefore, it can be suggested that basic exemption limit should be raised according to inflation in every years finance bill. This can be applied even in respect to many other monetary limits in taxation like basic exemption of income, deductions under some sections for certain investments or payments as provided in Chapter VIA e.g.  S. 80C. limits for cash payments, cash loan receipts and repayment, tax audit etc.

Inclusion of certain assets above specified limits:

There is no justification in treating all persons on same footing when it comes to different assets held by different persons having varying valuation.

A person is having a residential house of worth of Rs. say ten lakh and another having residential house of say Rs. ten crores. Both are availing exemption as each of them have one residential house. There is no justification for allowing full exemption to person having residential house of Rs. ten crore. In his case some tax can be levied this will be according to his capacity to pay and this will be an attempt to cause some distribution of wealth from wealthy to poor and will reduce disparity.

Similarly there can be case of other assets like financial assets. 

Why a person who hold financial assets of say Rs. 1000 crore is treated similar to another who has hardly such assets of few lakh of rupees.

 For example, in case of shares and units of mutual funds, it is not proper to allow full exemption. The exemption should be subject to certain limits. This is more important because even income-tax concessions are also allowed in respect for earning from such assets and capital gains on transfer of such assets.

To consider case of disparity let us consider an example of a CEO of a big corporate who may have shares of his employer company (obtained under Employees Stock Options or otherwise) worth crores and urabs of rupees whereas a junior officer or clerk and peon may have hardly any shares of his employer company and stock option may not be available to juniors. In such cases wealth creation by seniors should be subject to wealth tax so that a portion of such wealth is collected by way of tax for providing public purposes including reducing disparity of wealth.

Certain specified limited and reasonable exemptions should be allowed for different type of assets.  The prescription should be made keeping in mind socio- economic objectives for promoting welfare and distribution of assets for use by others and also distribution of wealth. An illustrative list is given below:

Type of specified assets	Exemption limit Rs. in lakh
Residential houses  for own and  family use (not more than two houses)	30
Residential and commercial properties let  out to others	500
Financial assets cash and assets  equivalent to cash – like deposits in banks, government securities, bonds and debentures, preference shares, PPF, EPF, Pension funds, Gratuity accumulations, Superannuation funds , debt oriented mutual funds, loans and advances, surrender value of Life Insurance Policies  etc.	50
Equity shares and equity oriented mutual fund units, applications for such shares and units	50
Gold, silver,  other precious metals, precious stones, jewelry etc.	50
Vehicles like motor cars , jeeps, motor cycle, yacht, boat, aircraft   for personal use	15 lakh
Agricultural land	25 lakh
Non agricultural land	25 lakh

 

Table of cost inflation index for capital gains and cost inflation index for real inflation is given below:

COST INFLATION INDEX

FINANCIAL YEAR	COST INFLATION INDEX	Increase and 75% of percentage of real inflation  allowed	Real inflation % of CII Increase allowed / 3 X 4
1981-1982	100
1982-1983	109	9  = 9%	12%
1983-1984	116	7= 6.422	8.563%
1984-1985	125	9=7.7586	10.344%
1985-1986	133	8=6.4	8.5333%
1986-1987	140	7=5.263	7.0173%
1987-1988	150	10=7.1428%	9.5237%
1988-1989	161	11=7.333%	9.7777%
1989-1990	172	11=6.8323%	9.1097%
1990-1991	182	10=5.8139%	7.7519%
1991-1992	199	17=9.340%	12.4542%
1992-1993	223	24=12.060%	16.080%
1993-1994	244	21=9.4170%	12.556%
1994-1995	259	15=6.1475%	8.1967%
1995-1996	281	22=8.494%	11.325%
1996-1997	305	24=8.5409%	11.388%
1997-1998	331	26=7.8549%	10.473%
1998-1999	351	20=6.0423%	8.0564%
1999-2000	389	38=10.826%	14.435%
2000-2001	406	17=4.370%	5.827%
2001-2002	426	20=4.926%	6.568%
2002-2003	447	21=4.929%	6.573%
2003-2004	463	16=3.579%	4.773%
2004-2005	480	17=3.6717%	4.896%
2005-2006	497	17=3.5416%	4.7222%
2006-2007	519	22=4.4265%	5.902%
2007-2008	551	32=6.1657%	8.221%
2008-2009	582	31=5.6213%	7.501%
2009-2010	632	50=8.591%	11.455%
2010-2011	711	79=12.36	16.485%
2011-2012	785	74= 10.40%	13.87%
2012-2013	858 Expected	73= 9.30%	12.40%

Discussions to this article

[DEV KUMAR KOTHARI]

Readers may also refer to anothre article written by Shri T.N.Panday , Ex- Chairman ,CBDT ref: 

[2012] 24 taxmann.com 185 (Article) and titled Why Wealth-Tax Law is Being Continued as Lameduck Legislation? webhosted on http://www.taxmann.com/directtaxlaws/fileopencontainer.aspx?Page=ART&id=99912069&path=TaxmannFlashes\\Articles\\taxmann_com%28ART%2921-8-12-DTL-24%28185%29.htm&search= in which detailed discussions have been made by the learned author.

That also suggest that there is need to provide for wealth tax in an effective manner.