Why Jaitley decided to scrap wealth tax

Come April, wealth tax is going to be history. Under this tax, an assessee is required to pay 1 per cent of the value of his assets above a certain threshold.

Wealth tax has not had it easy since its introduction in 1957. In 1993, the tax reforms committee led by RJ Chelliah had suggested abolishing this tax. This call was repeated in 2002 by the Kelkar task force on Direct Taxes. Both committees had cited disproportionately high administration and compliance cost as the reason for their suggestion.

However, the tax continued as it served as a source of information about individuals’ wealth to the tax administration. But in 1993 the government accepted in part the recommendations of the Chelliah Committee by keeping financial assets out of the ambit of wealth tax.

The list of exclusions has only expanded since then.

In the amendment to the Finance Act, 2013, agricultural land in urban areas, land on which construction of building is not permissible and land held for industrial purpose were exempted from the definition of ‘assets’ for wealth tax.

The dilution in the rigour of the wealth tax, law experts say, has kept wealth tax collections low. In 1992-93, wealth tax collection was ₹468 crore, it dropped to ₹78 crore in 1996-97 after removing financial assets from the wealth tax net, and since has grown to about ₹950 crore in 2014-15. That’s a miniscule fraction of the ₹2.7 lakh crore collected by way of taxes on income on non-corporates in 2014-15.

Exclusions apart, some of the new age assets – art works and paintings – do not find a mention under assets liable to be taxed for wealth tax.

Why has the Centre not been able to enforce the tax?

“There is no separate department that looks up wealth tax filings, only income tax officials do it and they don’t they have the time or manpower to go behind individuals to collect that 1 per cent on wealth tax…they rather prefer to spend time scrutinising income tax returns where collections are more…”, says a senior person who has worked with the income tax department.

Also, practically it is not feasible for the authorities to go behind individuals and monitor them for wealth tax filings says, Tapati Ghose, Partner, Deloitte Haskins & Sells.

“There is evasion, there is non-compliance and if they have to stop it, they will have to go household-to-household to find out what each person is holding or what each person has inherited over the years and as this information is not there in any electronic database, it will mean a huge cost first to trace and then to prosecute the evaders….”

Ramesh Vaidyanathan, Managing partner, Advaya Legal, says, “The tax authorities face a challenge as the wealth tax is charged on the market value of the asset and arriving at the market value is difficult as there is so much of speculation on what is the right market value for an asset. In real estate for instance, the individual may have quoted the value in the ‘ready reckoner’ but the authorities may not agree with it and there is dispute and arbitration…”

The Finance Minister’s announcement that he intends to end wealth tax and instead introduce an additional surcharge of 2 per cent (over and above the existing 10 per cent surcharge) on individuals earning more than ₹1 crore is a smart move, say tax experts.  There are “42,800 tax payers who have admitted to a taxable income of more than ₹1 crore,” said P Chidambaram, in his Budget speech in February 2013.

The additional surcharge of 2 per cent on individuals earning above ₹1 crore annually means that their effective tax rate will go up from 33.99 per cent to 34.61 per cent.