Budget 2009 - Proposals relating to Wealth Tax - is something missing? A case for abolishing WT to save administrative time for more result orientation.

[C.A. DEV KUMAR KOTHARI]

Synopsis:

The section 147 of the Income-tax  Act is being amended to widen scope of reassessment. The Finance minister may check  and insert corresponding amendment in WT Act if it is desirable to remove mistake of omission, if any in drafting. 

A case has been made out to abolish WT in view of miniscule collection estimated at Rs.425 crore in total tax revenue collection expected at Rs.641079 crore. Theproposals to amend the WT Act  are also discussed they are only to increase the exemption limit to Rs. 30 lakh and to include Territories out side India in empowering provision for DTAA.

Procedural amendment- is some thing missing?

Usually when a procedure or limitation or provision of interest charge etc. is amended in the Income -tax Act, corresponding amendment is also made in the Wealth Tax Act, 1957. There are some proposal for amendment in certain procedures and limitations in the Income-tax Act. For example, vide ,clause 57 of the Bill S. 147 of the income-tax Act is amended to widen the scope of reassessment. However, there appears no corresponding proposal for  amendment in the WT Act. Is there an omission of drafting?

If so, necessary correction can be made by the Finance Minister.

A case for abolition of WT:

The following are extract from Receipt Budget of 2009-2010, as presented in Budget Documents by the Finance Minister:

                                                     (In crore of Rupees)

                                                            Budget  Revised  Budget

                                                        2008-2009 2008-09 2009-10

I. Tax Revenue

Corporation Tax                                    226361 222000 256725

Taxes on Income                                  138314 122600 112850

Wealth Tax                                                  325        400     425

Customs                                                118930 108000  98000

Union Excise Duties                              137874 108359 106477

Service Tax                                             64460   65000   65000

Taxes of Union Territories                         1451     1590     1602

Total - Tax Revenue                            687715 627949 641079

About WEALTH TAX it is stated as follows:

"With a view to stimulating investment in productive assets, the Finance Act, 1992 w.e.f. 1.4.1993 i.e. assessment year 1993-94,

abolished wealth tax on all assets except certain specified assets. Wealth-tax was abolished on assets such as shares, bank deposits,fixed deposits, bonds, debentures, etc. and is levied only in respect of unproductive assets such as residential houses, farm houses,urban land, jewellery, bullion, motor car, plane, boats, yacht, etc. Wealth-tax is charged at the rate of 1% of the amount by which the net wealth exceeds fifteen lakh rupees in 2008-09 and thirty lakh rupees in 2009-10.

In respect of Wealth Tax, the Budget Estimates for 2009-2010 is placed at Rs. 425 crore."

From the above we find that for the FY 2008-09 original estimate fro WT collection was Rs.325 Cr. And that has been revised to Rs.400 cr. And estimate for 2009-10 is placed at Rs.425 Cr.

In total tax receipts of Rs.641079 Cr. The sum of Rs.425 Cr. Is miniscule it is hardly  0.066%. Furthermore, how estimate is kept at Rs.425 Cr. Inspite of proposed hike of basic exemption to Rs.30 lakh is also not understandable.  The prices of gold and  silver has already appreciated  and there is not much more appreciation expected. Therefore,the net collection may really fall by at least 30 % so the net revenue for 2009-10 may be in range of about Rs. 250-300 Crores only.  This can definitely be sacrificed to reduce administrative burden.

Mindset need change:

The thinking that residential houses, farm houses,urban land, jewellery, bullion, motor car, plane, boats, yacht, etc. are unproductive asset also need to change. For balanced portfolio bullion and jewellery are also necessary. Houses are basic infrastructure and they should not be considered as unproductive. Without a proper residential house honorable Finance Minister will also not be able to work. Can honorable FM work without a motor car on any  day?

Motor car, planes , boats Yacht are also productive in many ways. These provide jobs to many people for their manufacturer, running, repair and maintenance etc.

Vacant lands are to be held for requirement in future. Therefore holding of such assets are necessary for future requirements of the economy. Therefore, holding of vacant lands should in fact be promoted, otherwise in future it will be difficult to get vacant land.

Wealth tax should have been abolished:

Once WT is in force each assessing officer has to review cases of his assessee to ascertain likely WT recoverable. Many assesses like salary earners, those offering tax under presumptive tax, assesses not having business income are not required to maintain books of account and draw a balance sheet. In such cases it is not easily ascertainable as to whether the assessee is a potential wealth tax payer who is not paying WT or whether WT paid is correct. As WT is applicable to individuals, HUF and companies, directly and indirectly on wealth of firms ( in hands of partners) lot of monitoring is required by revenue officers.

Abolition of WT will save considerable exercise and time involved in the same. That could provide more time to officers to concentrate more on other matters that can lead to better tax collection.   

In view of above discussion it is suggested that the WT should be abolished.

Finance (no.2) Bill 2009 relating to WT:

The Bill contains only two clauses in relation to proposed changes in relation to wealth tax. The effect of first proposal  is to increase the basic exemption limit from Rs.15 lakh to Rs. thirty lakh by amending the charging section viz. Section 3 of the Wealth Tax Act,1957. The clause 82 and notes thereon are reproduced below with high lights:

82. In section 3 of the Wealth-tax Act, 1957 (hereinafter referred to as the Wealth-tax Act), after subsection (2), the following proviso shall be inserted with effect from the 1st day of April, 2010, namely:—

'Provided that in the case of every assessment year commencing on and from the 1st day of April, 2010, the provisions of this section shall have effect as if for the words "fifteen lakh rupees",

the words "thirty lakh rupees" had been substituted.'

The Charging section shall after amendment read as follows:

"Charge of wealth-tax.

3. (1)  xxx not relevant

   (2) Subject to the other provisions contained in this Act, there shall be charged for every assessment year commencing on and from the 1st day of April, 1993, wealth-tax in respect of the net wealth on the corresponding valuation date of every individual, Hindu undivided family and company, at the rate of one per cent of the amount by which the net wealth exceeds fif­teen lakh rupees.]

'Provided that in the case of every assessment year commencing on and from the 1st day of April, 2010, the provisions of this section shall have effect as if for the words "fifteen lakh rupees", the words "thirty lakh rupees" had been substituted.'"

Notes on this  budget proposals

Clause 82 of the Bill seeks to amend section 3 of the Wealth tax

Act, relating to charge of wealth tax. Under the existing provisions contained in sub-section (2) of the said section, wealth-tax will be charged in respect of the net wealth on the corresponding valuation date of every individual, Hindu undivided family and company, at the rate of one per cent. of the amount by which the net wealth exceeds fifteen lakh rupees. It is proposed to insert a proviso after sub-section (2) to provide that for every assessment year commencing on and from the 1^st day of April, 2010, wealth-tax will be charged in respect of the net wealth on the corresponding valuation date of every individual, Hindu undivided family and company, at the rate of one per cent. of the amount by which the net wealth exceeds thirty lakh rupees. This amendment will take effect from 1st April, 2010 and will, accordingly, apply in relation to the assessment year 2010-2011 and subsequent years.

Discussion:

The short amendment has been made lengthy by insertion of a proviso. Instead of that the amount of Rs. thirty lakh could have been substituted w.e.f.01.04.2010.

The increase of basic exemption from Rs. 15 lakh to Rs.30 Lakh is miniscule in view of appreciation of many non yielding assets on which wealth tax is payable. In case of gold, silver and jewellary, no doubt  there have been  substantial appreciation in last five years. However, these assets are non yielding assets which are liable to wealth tax. According to status in society and socio-economic conditions, some investment in these assets is necessary. These assets are generally not sold except in rare financial difficulties. For a minimum standard a specific exemption of say Rs. twenty five lakh should be allowed for gold, silver jewellary and silver utensils and Rs. five lakh for one motor car to each individual and HUF.

The second amendment in the WT Act is amendment of section 44A. The relevant clause and notes with high lights provided are as follows:.

83. In section 44A of the Wealth-tax Act, in the Explanation, for the words "any country", the words "any country outside India or any territory outside India" shall be substituted with effect from the 1^st day of October, 2009.

Clause 83 of the Bill seeks to amend section 44A of the Wealth tax Act relating to agreement for avoidance or relief of double

taxation with respect to wealth-tax. Under the existing provision, power has been conferred upon the Central Government to enter into an agreement with the Government of any reciprocating country outside India for granting of relief in respect of wealth-tax payable under the said Act and the corresponding law in force in that reciprocating foreign country. It is proposed to amend the Explanation to the said section so as to confer power upon the Central Government to enter into agreement with the Government of any territory outside India, which may be notified by the Central Government, in addition to entering into agreement with foreign countries as provided in the said existing section 44A.

This amendment will take effect from the 1st October, 2009.

Existing and proposed sections (after amendment) compared:

Existing section

Section after amendment

Agreement for avoidance or relief of double taxation with respect to wealth-tax. 44A.    [The Central Government may enter into an agreement with the Government of any reciprocating country—           (a)     for the avoidance or relief of double taxation with respect to wealth-tax payable under this Act and under the corresponding law in force in the reciprocating country, or           (b)     for exchange of information for the prevention of evasion or avoidance of wealth-tax chargeable under this Act or under the corresponding law in force in that country or investigation of cases of such evasion or avoidance, or           (c)      for recovery of tax under this Act and under the corresponding law in force in that country, and may, by notification  in the Official Gazette, make such provision as may be necessary for implementing the agreement.] Explanation.—The expression "reciprocating country" for the purposes of this Act means any country which the Central Government may, by notification in the Official Gazette, declare to be a reciprocating country.]

Agreement for avoidance or relief of double taxation with respect to wealth-tax. 44A.    [The Central Government may enter into an agreement with the Government of any reciprocating country—           (a)     for the avoidance or relief of double taxation with respect to wealth-tax payable under this Act and under the corresponding law in force in the reciprocating country, or           (b)     for exchange of information for the prevention of evasion or avoidance of wealth-tax chargeable under this Act or under the corresponding law in force in that country or investigation of cases of such evasion or avoidance, or           (c)      for recovery of tax under this Act and under the corresponding law in force in that country, and may, by notification  in the Official Gazette, make such provision as may be necessary for implementing the agreement.] Explanation.—The expression "reciprocating country" for the purposes of this Act means "any country outside India or any territory outside India"  which the Central Government may, by notification in the Official Gazette, declare to be a reciprocating country.

 

The effect of amendment is that GOI will be entitled to enter into DTAA with foreign countries and also territory outside India.