CHAPTER - XIV - WEALTH-TAXCHARGE OF WEALTH-TAX14.1 Wealth tax is an annual tax like income tax. It is another type of direct tax by which tax is imposed on individuals coming within its purview. Pensioners, retired persons or senior citizens have not been accorded any special benefits under this Act.14.2 Wealth tax is charged for every assessment year in respect of net wealth of corresponding valuation date, inter alia, on every individual Hindu Undivided Family (HUF) and company at the rate of one per cent (1%) of the amount by which net wealth exceeds Rs. 15 lakhs. "Valuation Date" is 31st March immediately preceding the assessment year [S.2(a)], Assessment year, as under the Income-tax Act, means a period of 12 months commencing from 1st day of April every year falling immediately after the valuation date [S.2(d)]. Net wealth means taxable wealth. It means the amount by which the aggregate value of all assets (excluding exempted assets) belonging to the assessee on the valuation date including assets required to be included in the net wealth, is in excess of the aggregate value of all debts owed by the assessee on the valuation date which have been incurred in relation to the taxable assets.14.3 Wealth tax is an anti- abuse measure in the integrated tax system. It ensures reporting of significant assets held by a tax payer. It is proposed that Wealth Tax will be levied broadly on the same lines as provided in the Wealth Tax Act, 1957. The DTC follows a similar approach of taxation of wealth as followed in the Wealth Tax Act, 1957. Accordingly, it is proposed in the DTC that specified "unproductive assets" will be subject to the wealth tax. However, it will be payable by all taxpayers except non-profit organizations. The threshold limit and rate of tax have been suitably calibrated in the context of overall tax rates to provide an exemption limit of Rs. 1 crore and tax @1% on any amount in excess of this limit.14.4 On the issue of the reduction of the exemption limit, the Ministry in their written replies stated that the exemption limit of Rs. 1 crore has been provided so as to take care of persons in the lower income and net worth groups.14.5 During evidence the Committee further sought to know about the reasons for reduction of the exemption limit from proposed 50 crore to 1 crore for wealth tax. In their reply to the said query, the Ministry in their written information stated as under :"When the threshold limit of Rs. 50 crore for applicability of wealth tax was proposed, the tax was proposed to be levied on all assets including financial assets and the tax rate proposed was @ 0.25%. Wealth tax is proposed as an anti-abuse measure in an integrated tax system. It ensures the reporting of significant assets held by a tax payer. The tax will be levied only on specified assets. It does not include financial assets like shares and securities. Moreover one house, a plot of land up to 500 sq. mts., commercial property and rented properties are exempted from tax. As a result of this, a large number of assets are left out of wealth tax. It was in this context that the threshold limit was reduced from Rs. 50 crore to Rs. 1 crore. Under the existing law, wealth tax is levied @ 1 % above threshold of Rs. 30 lakhs. Therefore, relief by way of increase in threshold from Rs. 30 lakhs to 1 crore has already been provided."14.6 With a view to making the tax regime progressive and to increase the wealth tax revenue, the Committee suggest that wealth tax should be levied at the rates as recommended in PART-I of the Report.Proposed clauses in the DTC Bill, 2010Clause 112 - Tax on net wealth14.7 Clause 112 reads as under :112. (1) Subject to the provisions of this Code, every person, other than a non-profit organisation, shall be liable to pay wealth-tax on the net wealth on the valuation date of a financial year.(2) The wealth-tax shall be charged in respect of the net wealth referred to in subsection(1), on the valuation date of a financial year at the rate specified in Paragraph E of the Second Schedule in the manner provided therein.(3) The liability to wealth-tax shall be discharged by payment of pre-paid taxes in accordance with the provisions of this Code.(4) The wealth-tax charged under this section shall be collected after allowing credit or pre-paid taxes, if any, in accordance with the provisions of this Code.Existing provision in the Wealth-Tax Act14.8 Every individual, Hindu Undivided Family and company were liable to wealth-tax as per section 3(1) of the Wealth-tax Act.14.9 Indian Chamber of Commerce, Calcutta, Institute of Chartered Accountants of India, Bombay Chartered Accountants' Society and Federation of Indian Chamber of Commerce and Industry through their written memorandum submitted to the Committee suggested as follows :(i) At present schedule III of Wealth Tax Act provides the method to determine the value of assets. Under DTC, such valuation rules will be notified by CBDT. It is suggested that similar schedule III (as existing) may be made part of DTC itself.(ii) Under the Wealth-tax Act, property held by a person under trust or other legal obligation for any public purpose of charitable or religious nature was not included in the net wealth. In the DTC, only NPOs are not subject to wealth-tax. However, NPOs do not include religious trusts and therefore, religious trusts become liable for wealth-tax. It is suggested that wealth tax should not be levied on religious trusts.(iii) As per clause 314(169), following organizations do not qualify to be a NPO-(a) organisation established for the benefit of any particular caste or religious community;(b) organization which provides any benefit for the members of any particular caste or religious community;(c) organization established for the benefit of any of its member;(d) Organization not actually carrying on the charitable activities during the financial year.The organizations of the type listed above should be specifically exempted from the provisions of wealth tax.(iv) Under the existing Wealth Tax Act, wealth tax is levied only on individuals/HUFs and companies. Firms/LLPs are outside its purview. It is suggested that the same position should continue under the DTC regime.14.10 In response to the above said suggestions, the reply of the Ministry on each suggestion is given as under :(i) Taxation law should be such that it is not required to be amended often. The rules for valuation may be needed to be changed often. Therefore they shall be notified by the CBDT.(ii) & (iii) A public religious trust would be covered in the definition of Non Profit Organisations (NPOs) and therefore exempt from wealth-tax as clause 112 (1) provides that every person other than a NPO shall be liable to pay wealth tax. .Schedule 7, para 39 also exempts income of a public religious trust. Other religious trusts set up for benefit of a particular religion and not held for public purpose, do not merit such exemption.Similarly, the trusts set up for a particular caste or only for its members or not actually carrying on any charitable activity are like any other entity and, accordingly, do not deserve any special dispensation as these are not existing for public purpose rather with a private motive.(iv) Holders of substantial economic resources in form of accumulated wealth should not desist from paying a small sum as wealth-tax. Firms and LLPs cannot be categorized differently from companies in this respect.14.11 The Committee note that the clause provides for levy of wealth tax on all assessees except non-profit organisation and definition of NPO expressly exclude trusts/institutions established for a particular caste or religious community thereby making them liable to Wealth Tax which are otherwise exempt under the present Wealth Tax Act, 1951 for the last five decades. The Committee, therefore, recommend that wealth tax should not be levied on particularly religious trusts which are doing significant charitable work, as bringing such trusts under wealth tax would affect public welfare activities undertaken by them.Clause 112 (4)14.12 Clause 112 (4) reads as under :112(4) The wealth-tax charged under this section shall be collected after allowing credit for pre-paid taxes, if any, in accordance with the provisions of this Code.Existing provision in the Wealth-Tax Act14.13 There is no such existing provision in the Wealth Tax Act.14.14 On this clause, Bombay Chartered Accountants' Society in their written memorandum suggested as under :"DTC proposes to levy wealth tax on deposit in a bank located outside India, interest in a foreign trust and any equity or preference shares held by a resident in a controlled foreign company, which were hitherto not liable to WT. Therefore, equity demands that wealth tax paid on such assets in foreign country should also be available as foreign tax credit".14.15 On this suggestion, the Ministry in their written replies stated as under :"Bank deposits located outside India, in case of an individual or a Hindu undivided family, or any interest in a foreign trust or any other body located outside India (whether incorporated or not) other than a foreign company, have been included in the list of items subjected to wealth-tax as a reporting requirement and in order to prevent tax evasion.Foreign tax credit in respect of wealth tax paid outside India is available under some of the DTAAs signed by India. The incidence of wealth tax is nominal".14.16 The Committee are in agreement with the Ministry that the incidence of levy of wealth tax in respect of the deposit in a bank outside India is nominal and Foreign Tax Credit thereto is available under some of the DTAAs signed by India.Clause 113 - Computation of net wealth14.17 The clause relates to computation of net wealth. Wealth-tax is to be charged on the net wealth on the valuation date. The value of assets and liabilities is to be taken on the valuation date i.e. market value is to be charged to wealth tax.14.18 On this clause, Institute of Chartered Accountants of India (ICAI) in their written suggestions stated as follows :"Basic purpose of wealth-tax being to extract information rather than raising revenue, it is suggested that the tax may be charged on the net wealth valued at cost price rather than market price. However, if the same is not possible the assessee should be required to disclose the cost of the specified asset along with the market value".14.19 On this suggestion, the reply of the Ministry is given as under :"The case for levy of wealth tax is based on several factors and purpose is not just collection of information. Wealth-tax was introduced as a measure against accumulation of wealth in certain hands. This was levied to ensure that resources are not concentrated in a few hands rather shared with the masses. Besides, cost price of the assets is not a correct indicator of actual worth of the person.As regards disclosure of cost-price along with market value, the suggestion would be examined at the time of prescribing format of tax returns".14.20 The Committee endorse the view of the Ministry that for computation of net wealth, cost price of the assets is not a correct indicator of actual worth of the person. The Committee would expect that as agreed with the suggestion regarding disclosing cost price of the specified assets alongwith the market value by the assessee, appropriate modification to this effect be made and suitably incorporated in the format of tax returns. Clause 113 (1)14.21 Clause 113 (1) reads as under :113. (1) The net wealth of a person referred to in sub-sections (1) and (2) of section 112 shall be the amount computed in accordance with the formula - A-B WhereA = the aggregate of the value on the valuation date, of all the specified assets, wherever located, belonging to the person referred to in this section, computed in accordance with the provisions of sub-section (5);B = the aggregate of the value on the valuation date, of all the debts, owed by the person, which have been incurred in relation to the specified assets.14.22 Suggestion as received from Institute of Chartered Accountants of India (ICAI) on this clause is as under :"Presently the Board's circular 663 dt.28.09.93 clarifies that wealth-tax payable shall not be taken as a debt incurred in relation to assets. Thus wealth-tax payable cannot be included under Item B in the formula.For clarity purpose, the item 'B' should be reworded to exclude specifically "wealth tax" from "debts owed by the person, which have been incurred in relation to the specified assets".14.23 In their reply to the above said suggestion, the Ministry in their written statement stated that the said suggestion will be considered.14.24 The Committee would expect the Ministry to suitably modify item 'B' as suggested in the formula for computing net wealth to exclude specifically 'wealth tax' from 'debts owned by the person which have been incurred in relation to the specified assets' for the purpose of clarity.Clause 113 (2), 113 (3)(c) and 314(284)14.25 Clause 113 (2) reads as under :113 (2) The specified assets referred to in sub-section (1) shall be the following, namely :-(a) any building or land appurtenant thereto (hereinafter referred to as "house"), used for any purpose;(b) any farm house situated within twenty-five kilometers from local limits of any municipality or municipal corporation (by whatever name called) or a Cantonment Board;(c) any urban land;(d) motor car, yacht, boat, helicopter and aircraft other than those used by the assessee in the business of running them on hire or as stock-in-trade;(e) 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, other than those used by the assessee as stock-in -trade;(f) archaeological collections, drawings, paintings, sculptures or any other work of art;(g) watch having value in excess of fifty thousand rupees;(h) cash in hand, in excess of two lakh rupees, of individuals and Hindu undivided families;(i) deposit in a bank located outside India, in case of individuals and Hindu undivided families, and in the case of other persons any such deposit not recorded in the books of account;(j) any interest in a foreign trust or any other body located outside India (whether incorporated or not) other than a foreign company; and(k) any equity or preference shares held by a resident in a controlled foreign company, as referred to in the Twentieth Schedule.Clause 113 (3)(c)14.26 Clause 113 (3) (c) reads as under :The specified assets referred to in sub-section (2) shall not include the following, namely:-(c) the value of the assets located outside India, if the person is a non resident;Clause 314 (284)14.27 Clause 314 (284) describing the meaning of 'urban area' is also related to the clause 113.Clause 314 (284) reads as under :314. In this Code, unless the context otherwise requires -(284) "urban area" means-(a) an area within the jurisdiction of a municipality (whether known as a municipality, municipal corporation, notified area committee, town area committee, town committee or by any other name) or a cantonment board and which has a population of more than ten thousand according to the last preceding census of which the relevant figures have been published before the first day of the financial year; or(b) an area within such distance from the local limits of any municipality or cantonment board referred to in sub-clause (a), as the Central Government may having regard to the extent of, and scope for, urbanisation of that area and other relevant considerations, specify in this behalf by notification.14.28 Existing provision in the Wealth-Tax Act2(ea) "assets", means - (i) any building or land appurtenant thereto (hereinafter referred to as "house"), whether used for residential or commercial purposes or for the purpose of maintaining a guest house or otherwise including a farm house situated within twenty-five kilometres from local limits of any municipality (whether known as Municipality, Municipalilty Corporation or by any other name) or a Cantonment Board, but does not include -(1) a house meant exclusively for residential purposes and which is allotted by a company to an employee or an officer or a director who is in whole-time employment, having a gross annual salary of less than five lakh rupees;(2) any house for residential or commercial purposes which forms part of stock-in- trade;(3) any house which the assessee may occupy for the purposes of any business or profession carried on by him;(4) any residential property that has been let-out for a minimum period of three hundred days in the previous year;(5) any property in the nature of commercial establishments or complexes; (ii) motor cars (other than those used by the assessee in the business of running them on hire or as stock-in-trade); (iii) 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 :Provided that where any of the said assets is used by the assessee as stock-in-trade, such assets shall be deemed as excluded from the assets specified in this subclause; (iv) yachts, boats and aircrafts (other than those used by the assessee for commercial purposes); (v) urban land; (vi) cash in hand, in excess of fifty thousand rupees, of individuals and Hindu undivided families and in the case of other persons any amount not recorded in the books of account.Explanation 1 : For the purposes of this clause, - (a) "jewellery" includes - (i) ornaments made 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 semiprecious stones, and whether or not worked or sewn into any wearing apparel; (ii) precious or semiprecious stones, whether or not set in any furniture, utensils or other article or worked or sewn into any wearing apparel; (b) "urban land" means land situate -(i) in any area which is comprised within the jurisdiction of a municipality (whether known as a municipality, municipal corporation, notified area committee, town area committee, town committee, or by any other name) or a cantonment board and which has a population of not less than ten thousand according to the last preceding census of which the relevant figures have been published before the valuation date; or(ii) in any area within such distance, not being more than eight kilometers from the local limits of any municipality or cantonment board referred to in subclause (i), as the Central Government may, having regard to the extent of, and scope for, urbanisation of that area and other relevant considerations, specify in this behalf by notification in the Official Gazette, but does not include land on which construction of a building is not permissible under any law for the time being in force in the area in which such land is situated or the land occupied by any building which has been constructed with the approval of the appropriate authority or any unused land held by the assessee for industrial purposes for a period of two years from the date of its acquisition by him or any land held by the assessee as stock-in-trade for a period of five years from the date of its acquisition by him.14.29 On this clause, ICAI suggested as follows :Assets like urban land, archaeological collections, drawings, paintings, sculptures or any other work of art, watches of value exceeding 50000 are proposed to be charged to wealth-tax even if they are held as stock-in trade.However, for jewellery, bullion, furniture, utensils, motor car, yacht, boat, helicopter and aircraft such exclusion has been provided for. The exclusion for stock-in-trade items should be provided for all assets charged to wealth-tax.14.30 The Ministry in their written replies to the above said suggestions stated that the suggestions will be considered.14.31 The Committee note that in the proposed DTC Bill, certain items are to be charged to wealth tax even if they are held as stock-in-trade whereas exclusion has been provided for other items. In view of this and as agreed to by the Ministry, the Committee desire that all assets charged to wealth tax should be provided exclusion for stock-in-trade items and necessary modifications be made in the relevant clause accordingly.14.32 On this clause, FICCI, Bombay Chartered Accountants Society and Indian Chamber of Commerce, Calcutta in their written memorandum suggested as follows :Urban land [clause 113(2)(c)] should be defined in clause 314 to avoid any litigation. Also exemptions provided in the present Act should also be provided for.14.33 Indian Chamber of Commerce, Calcutta has also suggested that specific provision may be made in DTC that no wealth tax will be levied on urban land which is used for industrial purposes.14.34 The Ministry in their written replies to the above said suggestions stated that these suggestions will be considered.14.35 As suggested and agreed to by the Ministry, the Committee would expect exemptions provided in the present Act should continue in the new DTC Bill and recommend to make suitable modifications accordingly.14.36 In their written memorandum submitted to the Committee, ASSOCHAM on this clause suggested as follows :"As per section 6 of the WT Act, foreign citizens qualifying to be resident and ordinarily resident would not be charged for WT for assets located outside India. DTC does not carry such exemption causing hardship to foreign citizens coming to India and becoming a resident of India. Therefore, in the case of Foreign citizen becoming resident in India, the net assets located outside India should not be charged to wealth tax".14.37 One more suggestion as received from an expert on this clause is as under :"Sec 113(3) deals with specified assets which shall not be included and clause (c) states "the value of the assets located outside India, if the person is a non-resident." Thus foreign assets are excluded only in case of non residents. The category of 'non-citizen' is not mentioned in the exception clause. In this sense there is an unintended tax on foreign assets of foreign citizens. This is likely to affect numerous foreign citizens who are employed by both Indian companies as also foreign companies who have made substantial investments in India. It is also likely to affect foreign direct investments by persons of Indian origin who are NRIs as well. This unintended effect of the proposed piece of legislation needs to be corrected. In this connection the following amendment is suggested:-Section 113(3)(c) to read as follows :(c) the value of assets located outside India, if the person is a non resident or is not a citizen of India".14.38 The Ministry in their replies to the said suggestions stated that it will be considered.14.39 The Committee find that as per existing Wealth Tax Act, foreign citizens qualifying to be resident and ordinarily resident would not be charged for wealth tax for assets located outside India. The Committee feel that as suggested and agreed to by the Ministry, in the case of foreign citizens becoming resident in India, the net assets located outside India should not be charged to wealth tax as this trend would hit foreign citizens in employment with both Indian and foreign companies which have invested in India. The Committee, therefore, desire that necessary amendments be made to sub-clause (3)(c) of Clause 113.14.40 ASSOCHAM and Bombay Chamber of Commerce and Industry in their written memorandum suggested as follows :"Shares held by a resident in CFC are chargeable to WT. There is no rationale for the same when shares held in Indian company are not subject to WT. These provisions should be deleted. Also it should be clarified that wealth tax would not be levied multiple times in case of multi-tier CFCs.14.41 The Ministry in their written replies to the said suggestion stated as follows:"This provision has been included as a reporting system and as a measure to check tax evasion. Hence it is a measure to elicit information regarding interest in a CFC. Further, the income of CFC being passive in nature, the share in CFC can be categorized as an unproductive investment, and therefore, chargeable to WT. However, for a company to be categorized as CFC, there are strict provisions. As far as issue of multi-level CFCs is concerned, the method of valuation of interest in such CFCs shall be prescribed through rules.14.42 The Committee observes that general scheme underlying the levy of wealth tax is that it is levied on unproductive investment. The equity or preference shares in a CFC cannot be regarded as unproductive as these assets are earning income on which income tax is levied. So, the Committee recommend that shares held in a CFC should be excluded from the scope of wealth tax.Clause 114 - Net wealth to include certain assets14.43 The clause provides for situations where certain specified assets shall be deemed to be belonging to a person and included in his net wealth.14.44 Clause 114 reads as under :114. (1) The specified assets referred to in sub-section (2) of section 113 shall be deemed to be belonging to the person, being an individual, and included in computing his net wealth if such assets, as on the valuation date, are held (whether in the form they were transferred or otherwise)-(a) by the spouse of such individual to whom such asset has been transferred by him, directly or indirectly, otherwise than for adequate consideration or in connection with an agreement to live apart;(b) by a minor child, not being a person with disability or person with severe disability, of such individual;(c) by a person to whom such asset has been transferred by the individual, directly or indirectly, otherwise than for adequate consideration for the immediate or deferred benefit of the individual or his spouse;(d) by a trust to whom such asset has been transferred by the individual, if the transfer is revocable during the life time of the beneficiary of the trust;(e) by a person, not being a trust, to whom such asset has been transferred by the individual, if the transfer is revocable during the life time of the person; and(f) by a Hindu undivided family by way of any converted property.(2) The provisions of sub-section (1) shall not apply in respect of such specified asset as has been acquired by the minor child out of his income referred to in clause (b) of subsection (1) of section 9 and which are held by him on the valuation date.(3) In this section,-(a) the asset referred to in clause (b) of sub-section (1) shall be included in the net wealth of-(i) the parent who is the guardian of the minor child; or(ii) the parent whose net wealth (excluding the assets referred to in that clause) is higher, if both the parents are guardians of the child;(b) a transfer shall be deemed to be revocable if-(i) it contains any provision for the re-transfer, directly or indirectly, of the whole or any part of the income or asset to the transferor; or(ii) it, in any way, gives the transferor a right to re-assume power, directly or indirectly, over the whole or any part of the income or asset;(c) the person shall, notwithstanding anything in this Code or in any other law for the time being in force, be deemed to be the owner of a building or part thereof, if he is a member of a co-operative society, company or other association of persons and the building or part thereof is allotted or leased to him under a house building scheme of the society, company or association, as the case may be;(d) the holder of an impartible estate shall be deemed to be the individual owner of all the properties comprised in the estate; and(e) the value of any assets transferred under an irrevocable transfer shall be liable to be included in computing the net wealth of the transferor in the year in which the power to revoke vests in him.14.45 Existing provision in the Wealth-Tax Act4(1), 3rd proviso.Provided also that where the assets held by a minor child are to be included in computing the net wealth of an individual, such assets shall be included, - (a) where the marriage of his parents subsists, in the net wealth of that parent whose net wealth (excluding the assets of the minor child so includible under this subsection) is greater; or(b) where the marriage of his parents does not subsist, in the net wealth of that parent who maintains the minor child in the previous year as defined in section 3 of the Income-tax Act, and where any such assets are once included in the net wealth of either parent, any such assets shall not be included in the net wealth of the other parent in any succeeding year unless the Assessing Officer is satisfied, after giving that parent an opportunity of being heard, that it is necessary so to do.14.46 Bombay Chartered Accountants' Society on this clause suggested as follows :"In a situation covered under clause (ii), where both parents are guardian of the child, the clause should provide that where any wealth is once included in the total wealth of either parent, then in the succeeding year also the same should be included in the wealth of the same parent. This provision would be in line with the existing provision contained in the third proviso to sec 4(1) of the Wealth Tax Act, 1957".14.47 While accepting the above said suggestion the Ministry in their written replies stated as follows :This will be considered in line with the provisions of clause 9(6) of the DTC, 2010 relating to inclusion of income of a minor in the hands of his parents.14.48 The Committee desire that as agreed to by the Ministry the suggestion regarding any wealth once included in the total wealth of either parent in case where both are guardians, the same should be included in the wealth of the same parent in the succeeding years. Suitable amendments may be incorporated in the Bill so as to be in line with existing provisions contained in the Wealth Tax Act, 1957.