Project Report

Taxation by Local and Other Authorities

TOPIC- Wealth tax from the historical perspective and as per

the statute

SUBMITTED TO: SUBMITTED BY:

Dr. Meenu Gupta JUBIN DAS

AMITY LAW SCHOOL, NOIDA A3268723006

AMITY LAW SCHOOL,

NOIDA
 Research Paper on Wealth Tax In India:

ABSTRACT

Present society is characterized by significant increase in the annual income which results in
rise in wealth of an individual in India. Wealth tax existed in many countries in one or other
form. This paper attempts to study various aspects of wealth tax as a part of Direct taxation
regime in India and further analyses in detail the background and introduction of wealth tax.

The critical analysis of the data’s intimated the existing gaps in wealth distribution in
India. Various issues and deficiencies in the system of wealth tax system is explored. The study
thereby throws light on wealth ownership structure in the urban and rural areas and further
it devotes a substantial extent to the various components of wealth tax in India.

This paper further analyses the reasons for abolishment of wealth tax in India and
whether is it feasible to introduce wealth tax in India. It is accepted fact that individual with
greater wealth is capable of paying more taxes. The focus of this paper is on the issues and
provisions related to taxation of wealth of an individual or a company or other taxpayers.

Keywords: Direct Tax, Wealth Tax

___________________________________________________________________________

BACKGROUND OF WEALTH TAX IN INDIA

After Indian independence in 1947, the Indian Income Tax Act, 1922 was the principal
legislation governing the levy of direct taxes. With the Nehru-led Government in power, the
trend in the initial years after independence was towards greater socialism. There was a
progressive taxation regime with higher taxes being levied on the rich. There were many
problems in the Indian direct tax system resulting in heavy tax evasion. 1 Therefore, the
Government of India set up the Kaldor Committee in 1955 to rationalise the tax system and
bring about affirmative reforms. Pursuant to the suggestions made by the Kaldor Committee,
the Government delineated a plan for a composite and integrated tax structure to ensure that

1
Dr.Venod K . Singhania, (1997),Direct Taxes, Law and Practice, New Delhi: Taxman publication
no income or wealth escaped assessment. Thus the the Wealth Tax Act (WTA) (धन कर

अधधधनयम) was introduced in 1957 as a permanent measure. It was abolished in 2015 due
to several procedural difficulties such as extensive litigation, increased compliance burdens,
heavy administration costs and generation of inadequate revenues. There is currently no real
support to reintroduce the wealth tax.2

When the wealth tax was introduced in India in 1957, the taxation system in India had
multiple taxes coupled with high rates. Such a structure was more coercive rather than
progressive and was leading to economic instability. In 1991, India decided to liberalise its
economic and fiscal policies to attract global capital. In 1993, the WTA was modified to cover
only unproductive and idle assets, previous to which it was levied on all assets of an assessee.
As per the observations made by successive committees set up by the Government in the
post-liberalisation era, the levy faced several administrative challenges such as extensive
litigation on valuation matters, insufficient tax yield, high costs of administration etc.
Considering all the aforesaid factors, the Government, with effect from April 2015, decided to
abolish the levy of wealth taxes in India. As a measure to partly offset the revenue loss on
account of the abolishment of wealth tax, the Government decided to increase the surcharge
levied taxes on the wealthiest individuals by an incremental rate of 2% in the same year. 3

The objective of a direct taxation regime is to ensure progressiveness in the levy of

taxes, i.e. tax the rich and incentivise the poor to achieve higher degrees of economic equality.
This predominantly makes the levy of such a tax justifiable. However, when such a progressive
taxation regime imposes heavy rates of taxes even at moderately high levels of income, it may
be perceived as unfair. One of the major problems in India up till the 1990s, was the
excessively high rates of taxes which led to large scale evasion.

Until 1991, the business environment was largely dominated by public sector
undertakings and the policy framework was not friendly towards private enterprises. Thus,
even though wealth tax had a negative impact on entrepreneurship, it was part of the policy
objectives of the government in power at the time, which justified the levy.

2
Girish Vanvari Krishnan TA , (2020) Wealth tax : India
3
Dr. Venod K . Singhania, (1997),Direct Taxes, Law and Practice, New Delhi: Taxman publication
 However, after 1991, the laws were amended to embrace globalisation, prompting a
drastic reduction in the scope of wealth tax so that it covered only unproductive and idle
assets, and thus did not prevent the promotion and incentivisation of start-ups.4

The tax was levied over the whole of India at a uniform rate, including in the Union
Territories of Jammu & Kashmir and Ladakh. Note that there are now no annual taxes
remaining on ownership of real estate and shares in India.

PERSONS LIABLE TO PAY WEALTH TAX:

Wealth-tax is chargeable only in case of three categories of person viz., Individual, HUF
and Company. However, A partnership firm is not liable to wealth tax, but the assets of the
partnership firm are charged to tax in the hands of the partners of the firm in the form of
“Interest in partnership firm”. In other words, a partnership firm is not liable to wealth tax,
but the value of the assets held by the firm is to be ascertained and this value will be
distributed amongst the partners of the firm and will be charged to tax in the hands of the
partners. However, where a minor is admitted to the benefits of partnership in a firm, the
value of the interest of such minor in the firm shall be included in the net wealth of the parent
of the minor.5

Similarly, an association of persons (not being a co-operative housing society) is not

liable to wealth tax, but the assets of the association of persons are charged to tax in the hands
of its members in the form of “Interest in Partnership firm”.

Wealth tax is levied on the net wealth owned by a person on the valuation date ,i.e.,
31st March of every year.

Wealth tax is levied at 1% on the net wealth in excess of Rs. 30,00,000.

ENTITIES WHICH ARE NOT LIABLE TO WEALTH- TAX

4
Girish Vanvari Krishnan TA , (2020) Wealth tax : India
5
Revised paper on direct code (2012), direct tax, Income tax department
Following entities are not liable to pay wealth-tax:

a) Any company registered under section 25 of the Companies Act;

b) Any co-operative society;
c) Any social club;
d) Any political party;
e) A Mutual Fund specified under section 10(23D) of the Income- tax Act; and
f) Reserve Bank of India.6

Manner of computation of net wealth

Wealth tax is levied on net wealth owned by the taxpayer on the valuation date. Net wealth
(i.e., taxable wealth) of every person is computed in following manner:

Residential status and Wealth-tax

A person may own assets in India as well as abroad. The taxability of an asset will be
determined on the basis of the residential status and the location of the asset. Residential
status will be ascertained in the same manner as is determined under Income-tax Law.
Following persons are liable to pay wealth-tax in respect of their world assets (i.e., on the
assets located in India as well as on the assets located outside India)

(a) A resident and ordinarily resident individual, who is an Indian citizen.

6
Revised paper on direct code (2012), direct tax, Income tax department
 (b) A resident and ordinarily resident HUF.

(c) A resident company

Following persons are liable to pay wealth-tax only in respect of assets located in India. In
other words, following persons are not liable to pay wealth tax in respect of assets owned by
them and which are located outside India:

a) An individual who is not a citizen of India (whether resident and ordinarily resident
or not).
b) A resident but not ordinarily resident individual and a resident but not ordinarily
resident Hindu Undivided Family.
c) A non-resident (may be individual or HUF or company).7

Definition of Assets [section 2(ea)]

 Guest House, Residential House or Commercial Building

Any building or land appurtenant thereto whether used for commercial or residential
purpose or for guest house.
A farm house situated within 25 kilometers from local limits of any municipality or
municipal corporation or cantonment board or by any other named they are called

Exceptions {the following are not considered as assets for the purpose of wealth tax}

o A residential house exclusively used for residential purposes and given by a

company to an employee or a officer or a director who is in whole –time
employment , having gross annual salary of less than Rs. 10,00,000.
o Any house for residential or commercial purpose which forms part of Stock –
in – trade
o Any house which the assessee ‘may occupy’ for the purpose of any business or
profession carried on by him
o Any residential property that has been let-out for a minimum period of 300
days in the previous year

7
Revised paper on direct code (2012), direct tax, Income tax department
 o Any property in the nature of commercial establishments or complexes.
 Motorcar
o In case of leasing company motor car is an asset,
o All motor cars including jeep, sport utility vehicle, multi utility vehicle other
than heavy utility vehicles (buses, trucks, tempos) whether Indian or Foreign
or purchased on hire purchase other than.
o Cars used by assessee in the business of running them on hire.
o Cars held by the assessee as stock-in trade.

 Jewellery, bullion, furniture, utensils etc. Made of precious metal

o Assets include Jewellery, bullion, furniture, utensils or any other article made
wholly or partly of gold, silver, platinum or any other precious metal or any
alloy containing one or more of such precious metals, whether or not
containing any precious or semi-precious stones, whether or not worked or
sewn into any wearing apparel, furniture , utensil or any article.
o It does not include: assets if it is held as stock-in–trade and shall not include
Gold Deposit Bonds issued under Gold Deposit Scheme 1999, notified by the
Central Government Yachts, boats and aircrafts.
o Other than used for by the assessee for commercial purposes.
o Ships are not included in the definition.
o Commercial purpose means used for business purpose or held as stock-in-
trade.

 Yachts, boats and aircrafts

o Yachts, boats and aircrafts (other than those used by the taxpayer for
commercial purpose.

 Urban Land
o Land situated in any area which is comprised within the jurisdiction of a
municipality and which has a population of not less than 10,000 according to
 the last preceding census of which relevant figures have been published before
the valuation date.
o Land situated in any area within such distance, not being more than 8
kilometers from the local limits of any municipality, as the Central Govt. may,
having regard to the extent of, and scope for, transition of that area and other
relevant consideration.

Following are not the assets for the purpose of wealth tax :
o Land on which construction of a building is not permitted under any law for the
time being in force in the area in which such land is situated
o The land occupied by any building which has been constructed with the
approval of the appropriate authority.
o Any unused land held by the assessee for industrial purposes for a period of
two years from the date of its acquisition by him.
o Any land held by the assessee as stock-in-trade for a period of ten years from
the date of its acquisition by him.
o specify in this behalf by notification in the Official Gazette.

 Cash on Hand

o In case of Individual and HUF, cash in hand in excess of Rs. 50, 000 will be
treated as asset, whether recorded in books of accounts or not.
o In case of Company, any cash not recorded in the books of account will only be
treated as an asset.

ASSETS EXEMPTED UNDER WEALTH TAX

 One house or part of a house or a plot of land (not exceeding 500 Sq. Mtrs.) in case of
Individual or HUF.
 The interest of a person in a coparcenary property of any HUF of which he is a member.
  Any property held by the taxpayer under trust or other legal obligation for any public
purpose of a charitable or religious nature in India.
 Jewellery in possession of a former ruler of a princely State, not being his personal
property which has been recognized by the Central Government as a heirloom before
1-4-1957 or by the CBDT after 1-4-1957.
 Certain assets belonging to a person of Indian origin or an Indian citizen who was
residing abroad and now returning with an intention or permanently residing in India
is exempted subject to following conditions:
o This exemption is available only to a person of Indian origin or a citizen of India.
A person will be said to be of Indian origin if he or any of his parents or
grandparents were born in un-divided India.
o Such person was residing in foreign country.
o Exemption is available at the time he returns to India,i.e, he is an Indian
repatriate.
o Exemption is available for a period of 7 years (starting from the year in which
he returns to India).

The above discussed exemption is available in respect of following assets:

1. Money brought into India at the time of his return to India.

2. Value of assets brought into India at the time of his return to India.
3. Money standing to the credit of such person in a Non-resident (External) Account in
any bank in India on the date of his return to India.
4. Assets acquired by him out of money refered to in (1) and (3) above within a period of
one year prior to the date of his return and any time thereafter. 8

Valuation of assets

Wealth tax is levied on the value of assets owned by the taxpayer on the valuation date, i.e.,
31st March of the relevant year. Value of any asset liable to wealth-tax (other than cash) is to

8
Revised paper on direct code (2012), direct tax, Income tax department
be determined in the manner prescribed in the Valuation Rules (i.e., rules given in Schedule
III of Wealth-tax Act).

Returns of Net Wealth

Every person whose net wealth on the valuation date exceeds Rs. 30,00,000 shall file his/her
return of net wealth. The due dates for filing the return of net wealth are the same as the due
dates prescribed for filing the return of income under section 139 of income-tax Act, inter alia,
if the taxpayer is liable to audit under Income-tax Act, the due date will be 30th September
and in other cases, the due date will be 31st July. A belated return or revised return can be
filed within a period of one year from the end of the assessment year or before completion of
assessment, whichever is earlier. 9

Penalties and Interest

Interest @ 1% per month or part of the month is levied for delay in filing the return of net
wealth. Where the taxpayer fails to pay the whole or any part of tax or interest or both, he
shall be deemed to be assessee-in-default in respect of the tax or interest or both. If the
amount is not paid within 30 days or within such lesser time specified in the notice of demand,
then the taxpayer is liable to pay interest @ 1% per month or part of a month comprised in
the period commencing from the expiry of the day specified in the demand notice for payment
and upto the date on which the amount is paid. Penalty in case of concealment of wealth can
be between 100% to 500% of tax sought to be avoided. Apart from levy of penalty for various
defaults, the law also provides for prosecution for defaults like willful attempt to evade tax,
not filling return of wealth, failure to produce accounts, records; and false statement in
verification, etc.10

Abolishment of Wealth Tax in India

The government had cited cost-benefits and simplification as the main reason for the abolition
of wealth tax in India. Here is a look at the reasons that saw wealth tax abolished –

9
Revised paper on direct code (2012), direct tax, Income tax department
10
Ibid.
Loopholes in the taxation system - The government wanted to eliminate the practice of
finding loopholes in the wealth tax rules. Many taxpayers would take undue advantage of
these loopholes in the Act. Besides, the complicated nature of the Indian taxation system
meant that it was prone to litigation. The government’s removal of wealth tax simplified the
taxation process.

Simple tax procedures - Wealth tax abolition helped reduce the complexity and multiplicity
of Indian tax laws. Replacing it with an income tax surcharge helped the government simplify
procedures for easier tracking and increased transparency in taxation.

No cost benefit - The cost of collecting the revenue was becoming too much for the
authorities. The wealth tax department was costing the government money rather than
earning it. Besides, as a revenue stream, wealth tax formed a smaller portion of the direct
taxes collected in India.

For instance, only Rs. 1,008 crore was collected as wealth tax for FY 2013-14 despite the rise
in the super-rich population.

Increased revenue - The government also highlighted that with wealth tax abolished and the
additional surcharge in place, it collected an additional revenue of over Rs 9000 crore in a
financial year.

Administrative burden - Wealth tax assessment was a cumbersome process. Taxpayers were
supposed to value their assets as per Wealth Tax Rules and calculate their net wealth. For
certain assets like jewellery, a valuation report from a registered valuer was required.

Wider coverage - A smaller percentage of taxpayers filed wealth tax returns compared to
income tax returns. The Indian Government used the bigger tax coverage of income tax to
bring more taxpayers into the net.

Improved reporting - The reporting of assets and liabilities continued even after the
abolition of wealth tax. The taxpayers paying the additional surcharge provide additional
reporting of information in their income tax returns regarding their assets and liabilities.

Prevents evasion - As taxpayers submit details about assets in their income tax returns,
along with their declared income, it is easier for authorities to correlate the two. It becomes
easier for the tax department to prevent tax evasion and leakage.

Low awareness - The awareness in the country around wealth tax was poor. Many taxpayers
would often receive notices for various wealth tax-related non-compliances.11

Feasability to introduce Wealth tax in India

Since 2018, India has been home to more new millionaires every year than any other country
in the world. According to Richlist 2021 Report, the top 10% of the country’s population
controls 57% of its income.

The absence of tax on health and inheritance makes it easier to maintain wealth compared to
annual income. Notably, there is a progressive tax structure in India that taxes the rich at a
higher rate. Besides, there are taxes on gifts, capital gains and surcharges too.

Along with the abolishment of wealth tax, an additional surcharge of 2 % was introduced. This
was applicable to people with taxable income of over Rs 1 crore. The government simplified
the income tax structure by inserting this additional tax surcharge that will be applied only to
high-paying tax citizens only.

For taxpayers that are individuals, the surcharge is applicable when the taxable income is
above Rs. 1 crore. For taxpayers that are companies, the surcharge is applicable when the net
taxable income is above Rs. 10 crores.

Taking all of this into consideration, India is unlikely to return to a wealth tax regime and
continue with simpler tax administration. 12

11
Girish Vanvari Krishnan TA , (2020) Wealth tax : India
12
Ibid.
 Conclusion

From the above analysis, It is clear that Reintroducing wealth tax in india could be a effective
measure to address the country’s wealth inequality and generate revenue for public
investment. However, the government must carefully consider the challenges and potential
consequences of implementing such a tax. By adopting a well-designed wealth tax system,
India can work towards achieving greater economic equality, promoting productive
investment, and ensuring a better quality of life for all its citizens.

A net wealth tax in combination with an income tax could thus achieve a better
distribution of taxes in accordance with individual capacity to pay. Moreover, the tax could
also serve as an instrument of socioeconomic reform by redistributing wealth, curbing undue
concentration of fortunes, and activating more productive use of assets. In these respects,
taxation of net wealth would serve the national objectives of developing countries, which
frequently wish to reduce extreme inequalities in wealth, income, and consumption.

A major part of what could be accomplished by a net wealth tax could be achieved by
taxes on income, property, inheritances, and gifts, if these taxes are well designed and
effectively administered. It might be easier to improve existing taxes than to introduce a new
and complex tax. Therefore, the socioeconomic requirement must be especially great and
administrative capacity strong to warrant the adoption of a net wealth tax.
 REFERENCES:

 Dr. Venod K . Singhania, (1997),Direct Taxes, Law and Practice, New Delhi:
Taxman publication
 Tanabe, Noboru. "The Taxation of Net Wealth", IMF Staff Papers 1967,
001 (1967), A005, accessed Apr 7, 2024,
https://doi.org/10.5089/9781451956191.024.A005
 Direct taxes law and practice by Vinod Singhania
 Corporate tax planning and management by Girish Ahuja and Dr. Ravi
Gupta
 Revised paper of direct tax code