- By CA S.Krishnaswamy

INTRODUCTION TO WEALTH TAX

Faculty Development Programme on “BUSINESS TAXATION and IFRS”

UNION BUDGET - RECEIPTS

Are you liable to pay wealth tax ?

Persons covered under Wealth Tax An individual and Hindu Undivided Family (HUF) and a company

Persons not covered under Wealth tax Co-operative Society, Companies register u/s 25 of companies Act Social club Political parties , RBI, Mutual Fund registered under section 10(23D) of Income Tax

Act. Exemption Limit

Person whose net wealth on the valuation date (i.e. 31st March) up to Rs 30,00,000 (wef Ay 2010-11) is liable for Wealth Tax

Applicability of Wealth Tax

Wealth Tax is levied @1% on net wealth in excess of Rs 30,00,000.

No cess or surcharge is levied on Wealth Tax. Valuation date is March 31 immediately preceding

the Assessment year. Net wealth means excess of assets over debts Assets includes deemed assets Assets do not includes exempted assets

RATE OF WEALTH TAX & VALUATION DATE

WEALTH TAX AND RESIDENTIAL STATUS

A resident and ordinarily resident individual who is an Indian citizen, a resident and ordinarily resident HUF and every resident company is liable to Wealth Tax in respect of world assets (i.e. assets located in India as well as outside India).

However, an individual who is not a citizen of India (may be resident and ordinarily resident or not), a resident but not ordinarily resident individual/HUF and every non-resident (may be individual or HUF or company) is liable to Wealth Tax only in respect of assets located in India

Residential status of every person will be ascertained in the same manner as is determined under Income Tax Act.

ASSETS COVERED UNDER WEALTH TAX(MOVABLE PROPERTY)

Motor cars (other than those used by the assessee in the business of running them on hire or used by the assessee as stock-in-trade).

Yachts, boats and aircrafts (other than those used by the assessee for commercial purposes).

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 precious metals (other than used by the assessee as stock-in-trade)

ASSETS COVERED UNDER WEALTH TAX(IMMOVABLE PROPERTY)

Any building or land appurtenant thereto (including a farm house) situated within 25 kms of a Municipality or Cantonment Board, excluding Any residential property which has been let-out for a

minimum period of 300 days in the previous year. Any house occupied by the assessee for the purposes

of any business or profession carried on by him. Commercial establishments or complexes. 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 Rs 10,00,000.

Any house for residential or commercial purposes

ASSETS COVERED UNDER WEALTH TAX(IMMOVABLE PROPERTY CONT…)

Urban land, other than the followingLand on which construction is not

permissible under any law for the time being in force; or

Any land on which construction is done with the approval of the appropriate authority; or

Any unused land held by the assessee for industrial purposes; it will be excluded 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; it will be excluded for a period of ten years from the date of acquisition by him

ASSETS COVERED UNDER WEALTH TAXCASH IN HAND

In case of an individual and HUF : Cash in hand in excess of Rs 50,000

In the case of a company : any amount not recorded in the books of

account.

DEEMED OWNERSHIP IN RESPECT OF ASSETSTRANSFERRED WITHOUT CONSIDERATION

A person will be treated as deemed owner in respect of assets transferred by him/her (without adequate consideration) to his/her HUF or to his/ her spouse or to his/ her son's wife or to a person for his/her benefit or for the benefit

of his/ her spouse or for the benefit of his/ her son's wife.

TAXABILITY OF ASSETS BELONGING TO MINOR CHILD

Assets belonging to a minor child will be clubbed along with the net wealth of his/ her parent.

No clubbing will be done in respect of assets belonging to a minor child suffering from any disability specified under section 80U of the Income Tax Act.

Further, clubbing provisions will not apply in respect of any asset acquired by the minor out of income arising to the child by application of his/her skill, talent or specialized knowledge and experience, etc.

TAXABILITY OF ASSETS BELONGING TO PARTNERSHIP FIRM

A partnership firm is not liable to Wealth Tax. However, value of taxable asset of the firm

is to be computed in the prescribed manner and the share of each partner in the assets of the firm will be included along with the net wealth of each partner.

ASSETS EXEMPT FROM WEALTH TAX

A person can claim exemption in respect of few assets. Exemption in respect of one house or part of a

house or a plot of land (not exceeding 500 Sq. Mtrs.) available to individuals and HUFs.

DEBT IN RESPECT OF TAXABLE ASSETS

From the total value of taxable assets the value of debt owed in respect of taxable assets is to be deducted to arrive at the value of net taxable assets.

RETURN OF WEALTH

Every individual, HUF and company whose net wealth on valuation date (i.e. 31" March) exceeds 30,00,000 shall file the return of Wealth Tax.

The due dates for filing the return of Wealth Tax are same as due dates for filing the Return of Income specified under section 139 of Income Tax Act (i.e. if assessee is liable to audit, due date will be 30"‘ September and in other case the due date will be 31 "July).

BELATED OR REVISED RETURN

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.

Interest @ 1% per month or part of the month is levied for delay in filing the return of Wealth Tax.

MAJOR PENALTIES

Penalty up to 100% of the amount of tax in arrears can be levied in case of non-payment of Wealth Tax.

Penalty in case of concealment of wealth can be up to 500% of tax sought to be avoided.

WEALTH TAX ACT DEFINITIONS & EXPLANATIONS

THE WEALTH TAX ACT , 1957

DEFINITIONS

The amount by which the aggregate value computed in accordance with the provisions of this Act of. all the assets, wherever located, belonging to the assessee on the valuation date, including the assets required to be included in his net wealth as on that date under this Act, is in excess of the aggregate value of all the debts owed by the assessee.

Every person in respect of whom any proceeding under Wealth tax act has been taken for the determination of wealth-tax payable by him or by any other person or the amount of refund due to him or such other person

Every person who is deemed to be an assessee under this Act

Every person who is deemed to be an assessee in default under the Act

Net Wealth Assessee

“ASSETS” UNDER THE WEALTH TAX ACT, 1957

1. Any building or land appurtenant thereto, whether used for residential or commercial purposes or for the purpose of maintaining a guest house or otherwise including a farm house situated within 25km from local limits of any municipality or a Cantonment Board, but does not include –

a. A house meant exclusively for residential purposes and which is allotted by a company to an officer or a director who is in whole-time employment, having a gross annual salary of less than Rs. 5 Lakh.

b. Any house for residential or commercial purposes which forms part of stock-in-trade

c. Any house which the assessee may occupy for the purposes of any business or profession carried on by him

d. Ay residential property that has been let-out for a minimum period of 300 days in the previous year

e. Any property in the nature of commercial establishments or complexes.

2. Motor cars (other than those used by the assessee in the business of running them on hire or as stock-in-trade

3. Jewellery, bullion and 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 sub-clause

4. Yachts, boats and aircrafts (other than those used by the assessee for commercial purposes)

5. Urban land

6. Cash in hand, in excess of Rs. 50,000 of individuals and HUF and in the case of other persons any amount not recorded in the books of account.

CHARGE OF WEALTH - TAX Charged for wealth tax in respect of the net wealth on the corresponding valuation

date of : every individual, HUF and company, at the rate of 1% of the amount by which the net wealth tax exceeds Rs. 30 Lakhs.

NET WEALTH COMPUTATION – TO INCLUDE Individual – the value of assets which on the valuation date are held –

a. By the Spouse (held otherwise than for adequate consideration or in connection with an agreement to live apart

b. By a Minor child

c. By a person or association of persons (otherwise than for adequate consideration for the immediate or deferred benefit of the individual , his or her spouse)

d. By a person or association of persons (transfer otherwise than under an irrevocable transfer)

e. By the son’s wife (otherwise than for adequate consideration)

Note : Where the transfer of such assets or any part thereof is wither chargeable to gift-tax under the Gift tax Act, 1958, the value of such assets or part thereof , as the case may be, shall not be included in computing the net wealth of the individual

The value of any assets transferred under an irrevocable transfer shall be liable to be included in computing the net wealth of the transferor as and when the power to revoke arises to him.

The holder of an impartible estate shall be deemed to be the individual owner of all the properties comprised in the estate.

Of an assessee who is a partner in a firm or a member of an association of persons , there shall be included, as belonging determined in the manner laid down in Schedule III

Provided that where a minor is admitted to the benefits of partnership in a firm, the value of the interest of such minor of the firm, determined in the manner specified above shall be included in the net wealth of the parent of the minor, so far as may be, in accordance with the provisions of the third proviso to clause (a)

NET WEALTH COMPUTATION (CONTD.)

EXEMPTIONS IN RESPECT OF CERTAIN ASSETS

Any property held by assessee under trust or other legal obligation for any public purpose of a charitable or religious nature in India

The interest of the assessee in the coparcenary property of HUF of which he is a member. In the case if an assessee, being a person of Indian origin who was ordinarily residing in a

foreign country and who, on leaving such country has returned to India with the intention of permanently residing therein, moneys and the value of assets brought by him into India and the value of assets aquired by him out of such moneys (within 1 year immediately preceeding the date of his return and at any time thereafter)

Provided that this exemption shall apply only for a period of seven successive assessment years commencing with the assessment year next following the date on which such person returned to India. One house or part of a house or a plot of land belonging to an individual or a HUF;

Provided that wealth – tax shall not be payable by an assessee in respect of an asset being a plot of land comprising an area of 500 sq. mts or less.

EXCLUSION OF ASSETS AND DEBTS OUTSIDE INDIA

In computing the net wealth of an Individual [ who is not a citizen of India or of an Individual] or a HUF not resident in India or resident but not ordinarily resident in India, or of a company not resident in India during the year ending on the valuation date –

The value of the assets and debts located outside India and The value of the assets in India represented by any loans or debts owing to

the assessee in any case where the interest, if any, payable on such loans or debts is not to be included in the total income of the assessee under Section 10 of the Income – tax act

DETERMINING VALUE OF ASSETS

The value of any asset, other than cash, for the purposes of this Act shall be its value as on the valuation date determined in the manner laid down in Schedule III.

The value of house belonging to the assessee and exclusively used by him for residential purposes throughout the period of 12 months immediately preceding the valuation date, may, at the option of the assessee, be taken to be the value determined in the manner laid down in Schedule III as on the valuation date next following the date on which he became the owner of the hjouse or the valuation date relevant to the assessment year commencing on the 1st day of April, 1971, whichever valuation date is later

SCHEDULE IIIRULES FOR DETERMINING THE VALUE OF ASSETS

IMMOVABLE PROPERTY

Step I : Gross maintainable rent:

In case the property is let out

Compare

Annual rent received / receivable

Plus municipal taxes borne by the tenant

Plus 1/9th of the actual rent if repair expenses are borne by the tenant

Plus 15% p.a on the amount of deposit outstanding from month to month as reduced by the interest actually paid by the owner

Plus Premium received on leasing of property divided by the number of years of period of lease

Plus any other benefit or perquisite derived from the property

Annual value as assessed by local authority

HIGHER OF THE TWO

In case the property is not let out

If assessed by the local authority - the annual rent so assessed

If no such assessment or situated outside the jurisdiction of local authority – the amount which the owner can reasonably expect to receive as annual rent had such property been let

IMMOVABLE PROPERTY (CONTD.) Step II : Net maintainable rent

Gross mainable rent

Minus taxes levied by local authority in respect of such property

Minus 15% of the gross maintainable rent

o Step III: Capitalisation of the net maintainable rent:

If construction on freehold land:

Net maintainable rent X 12.5

If construction on leasehold land:

Net maintainable rent X 10 (if unexpired period of lease is 50 years or more)

X 8 (if unexpired period of lease is less than 50 years)

Step IV: Substitute cost of construction plus Improvement

(if such cost is higher than the value arrived in Step III.

Substitution not to apply in respect of one self-occupied property selected at the option of the assessee where the cost of construction plus cost of

improvement does not exceed Rs. 50 lakhs, if situated at Bombay, Calcutta, Delhi and Madras and Rs. 25 lakhs, if situated at any other place

Step V : Premium

Add to the value at Step IV, premium on the following basis :

Step VI : Unearned Increase

Deduct unearned increase in the value payable to the government or any authority assuming that the property is transferred on the valuation date subject to maximum of 50 percent of the value of property as arrived at in Step IV.

Step VII : Special provision in respect of self-occupied property

Assessee is given an option to determine the value as per Steps I to VI on the valuation date next following the date on which he became the owner of the house or on the valuation date relevant to assessment year 1971-72, whichever is later. This option can be exercised in respect of any number of properties.

IMMOVABLE PROPERTY (CONTD.)

The excess of ‘unbuilt area’ over ‘specified area’ Premium

Not more than 5 % of the ‘aggregate area’ Nil

More than 5% but not more than 10% of the ‘aggregate area’ 20%

More than 10% but not more than 15% of the ‘aggregate area’ 30%

More than 15% but not more than 20% of the ‘aggregate area’ 40%