15831_Modified Wealth Tax

7/30/2019 15831_Modified Wealth Tax

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Tax Planning and Management

UnitIV

Wealth tax- Part-1 (Basics)


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CONTENTS

What is wealth tax

Legal framework

Charging of wealth tax

What is net wealth

Who is assessee

Valuation date

Deemed assets

Debts owed by the

assessee.

Summary


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What is wealth Tax?

Wealth Tax is a tax on the value of wealth owned

by a person, levied under the Wealth Tax

Act,1957.

It is one of the direct taxes.

It is annual tax.It is charged for every assessment

year commencing from 1st April, 1957

The tax is levied @ 1 per cent on the amount ofwealth as on 31st March of every year, where

such amount exceeds Rs.30,00,000.


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Legal Framework

Wealth tax is charged under the provisions

of WEALTH TAX ACT,1957 read with

WEALTH TAX RULES, 1957

Contd.


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WEALTH TAX ACT, 1957

THIS Act came in to force with effect from1st April, 1957.

This Act extends to the whole of india.

This Act is divided into 8 chapters andcontains 119 (in numbers) sections and 3Schdules.

This Act has detailed provisions regardinglevy and collection of wealth tax.


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Charging Of Wealth Tax

Section 3 of wealth Tax Act, 1957 provides that every

Individual,

HUF or

Company,who is an assessee shall be charged wealth tax @1% onthe amount by which his net wealth, determined on the

basis of nationality and residential status, on the relevantvaluation date, exceedsRs. 15,00,000.

But following are not subject to wealth tax u/s 45:


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Who are not subject to wealth tax?

Section 45 of Wealth Tax Act provides that

no wealth tax shall be levied in respect of

the net wealth of the following persons:Section 25 company

Any co-operative society

Any social club

Any political party

A mutual fund specified u/s10 (23D) of the

Income tax Act.


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What is Net Wealth [sec. 2(m)]

Section 2(m) of Wealth Tax Act, 1957 defines whatis Net Wealth. In simple words, Net Wealthmeans:

Value of Assets owned by the assessee as on the

Valuation date

------

Add: Deemed assets u/s 4

Less: Exempt assets u/s 5

TotalLess: Debts incurred in relation to assets included

above.

Net Wealth

Contd.


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Contd.

Basis of computing net wealth [Sec. 6]

Net wealth is to be computed :

In case of Individual

In case of HUF and

Company

On the basis of his

Nationality and Residential

status in the previous yearending on the valuation

date. (for valuation date

31.03.07 previous year is

06-07)

On the basis of its

Residential status in the

previous year ending on

the valuation date.


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Who is an assessee[Sec.2(c) ]

Assessee means a person by whom wealth

tax or any other sum of money (I.e.

penalty, interest) is payable under this Act,and includes:


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WHAT IS AN ASSET?[sec. 2(ea)]

The term Assets has been defined undersection 2(ea) of wealth Tax Act, 1957.

This definition covers only 6 types ofassets ,basically these are unproductive innature.

It is to be noted that for the purpose of

charging wealth tax there must be anasset with in the meaning of sec.[2(ea)]


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1. Building

1. Any building or landappurtenant thereto

whether used for

Residential purpose or

Commercial purpose or

for the purpose ofmaintaining a guest

house or otherwise,

including a Farm House

situated within 25 kmsfrom the local limits of

the municipality BUT

subject to the following

exceptions


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Exceptions to the definition of house

The following shall not be included in the definitionof house:

1. Any house allotted by a company for

residential purpose to an employee or an officeror a director who is in full time employmenthaving a gross annual salary of less than Rs.5lakh.

2. Any house for residential or commercialpurpose, which forms part of stock in trade ofthe assessee.

Contd.


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Contd.

3. House used by the assessee for the

purpose of his business or profession.

4. Any residential property that has been letout for a minimum period of 300 days in

the previous year,

5. Any property in the nature ofcommercialestablishment or complexes


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2.Motor car(whether Indian or

foreign) But following willnot be considered as

asset

1. A car used for

running on hire

2. A car held as stock

in trade.
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3. Jewellery, Bullion, Furniture, utensils,or any other article made (wholly or

partly) of gold, silver or any precious

metals

But Jewellery held

as stock in trade is

not an asset.
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4. Yachts, boats and aircrafts

But yachts, boats and

aircrafts used for

commercial purpose are

not assets.

Meaning of commercial

purpose (e.g. using for

earning income or held asstock in trade.
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5. Urban Land

Urban land means land situated

in any area which is with in thejurisdiction of a municipalityand which has a population ofnot less than 10,000 according to

the preceding published census.Or

In any area with in suchdistance, not being more than 8km. From the local limits of anymunicipality or cantonment

board , notified by the centralgovernment.

But subject to the followingexceptions:
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The following urban land shall not be treated as

asset:

Land on which construction of building is notpermissible under any law.

The land occupied by any building which has

been constructed with the approval of appropriateauthority.

Any unused land held by the assessee forindustrial purpose for a period of two years from

the date of its acquisition. Any land held by the assessee as stock in trade

for a period of ten (10) years from the date of itsacquisition.


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6. Cash in Hand

In case of Individual and

HUF: cash in hand in

excess of Rs. 50,000,

whether recorded inbooks of account or not.

In case of Company: any

cash not recorded in thebooks of account
http://images.google.co.in/imgres?imgurl=http://travel.smart-guide.net/wp-content/uploads/2008/04/cash.jpg&imgrefurl=http://pindebit.blogspot.com/2008_10_01_archive.html&usg=__-q_TcYV27AVqy3BAgwVGycC0gKI=&h=369&w=551&sz=23&hl=en&start=9&tbnid=tfuRCdpBPVTC5M:&tbnh=89&tbnw=133&prev=/images%3Fq%3Dcash%2Bin%2Bhand%2Band%2Bcash%2Bat%2Bbank%26gbv%3D1%26hl%3Den%26sa%3DG%26ie%3DUTF-8


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What is valuation date

A very important date in

the wealth tax.

All the assets held by the

assessee on that day arecounted for the purpose

of wealth tax.

31 March preceding the

relevant assessment yearis the valuation date.
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Deemed Assets [sec. 4]

Deemed assets means those assets which do not belong

to assessee but they are included in computing the net

wealth of the assessee.

Deemed assets which

are included in

computing net wealth

of an individual

assessee only.

Types of deemed assets

Deemed assets which are

included in computing

net wealth of any

assessee (individual,

HUF, Company).

A B


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Conditions for inclusion of Deemed

Assets

The individual (transferor) must be the

owner of the asset transferred on the date

of transfer.These assets must be transferred without

adequate consideration.

These assets must be held by the transfereeon the valuation date.


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Type A Deemed Assets

Following deemed assets will be included

in the net wealth of individual assessee

only:


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1. Asset transferred to spouse[Sec.4(1)(a)(I)

If any asset has been

transferred by an individual to

his/her spouse, directly or

indirectly without adequate

consideration, then such assetshall be included in the net

wealth of the transferor.

EXCEPTION:

If such asset has been

transferred in connection withan agreement to live apart then

such asset shall not be included

in the net wealth of the

transferor.
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Contd.

The relationship of husband and wife must

exist on both the dates, I.e, date of transfer

and valuation date.

Love and affection is a good

consideration but not an adequate

consideration.


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2. Assets held by a minor child [sec.

4(1)(a)(ii)]

Assets held by a minor

child are included in the

net wealth of the parent.

However, the following

assets shall not be

included in the net wealth

of parent and would be

taxable in the hands of the

minor only.

Contd.
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Contd.

Assets held by a minor child suffering from anydisability of the nature specified u/s 80U ofIncome Tax Act,

Assets held by a minor married daughter.

Assets acquired by a minor child out of thefollowing income referred to in proviso toSection 64 (1A) of the Income Tax Act:

Income from manual work done by him, Income from activity involving application of his/her

skill, talent or specialised knowledge or experience.


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Contd.

It should be noted that the child must be

minor on the valuation date , otherwise,

clubbing provision shall not apply.

Question:

in which parents income the net wealth of

the minor child will be clubbed?


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contd.

If marriage subsist: In the net wealth of that parent whose net wealth (excluding the

assets of minor child) is greater.

If marriage does not subsist: In the net wealth of that parent who maintains the minor child in

the previous year,

and where any such assets are once included in the net

wealth of either parent, they will not be included inthe net wealth of other parent unless permitted by the

assessing officer.


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3. Assets transferred to a person or associationof persons [sec.4(1)(a)(iii)]

If any asset [within the meaning of Sec2(ea) ]has been transferred by an individual to a personor association of person, directly or indirectly,

without adequate consideration for the immediatebenefit of the :

Individual himself or herself

His/her spouse,

then such asset will be included in the netwealth of the transferor.

Again the relationship of husband and wife mustexist on the valuation date.


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4. Asset transferred under Revocable

Transfer[sec.4(1)(a)(iv)]

If any asset [within the meaning of Sec2(ea) ] has

been transferred by an individual to a person or

association of person, directly or indirectly,

otherwise than under an IrrevocableTransfer,

then such asset will be included in the net wealth

of the transferor.

Contd.


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Contd.

Meaning of revocable transfer

Following transactions are treated as revocable:

1. Transfer revocable within a period of six years or

during the transferees lifetime; or

2. If the transferor derives any benefit, directly orindirectly, from the assets transferred; or

3. If the transferor has a right to re-transfer, directly or

indirectly, whole or any part of the assets or income

from the assets transferred.4. If the transferor has a right to re-assume power,

directly or indirectly, over the whole or any part of

the assets or income from the assets so transferred.


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5. An Asset transferred to sons wife

[sec.4(1)(a)(v)]

If any asset [within the meaning of Sec2(ea)] has

been transferred by an individual to his/her son's

wife directly or indirectly, without adequate

consideration , then such asset shall be includedin the net wealth of transferor.

Imp.It is be noted that relationship between individual

(transferor) and daughter-in law must exist on both

the date- date of transfer and valuation date.


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6. Asset transferred to person or

association of person [sec.4(1)(a)(vi)]

If any asset [within the meaning of Sec2(ea) ] has been

transferred by an individual to a person or association of

person, directly or indirectly, without adequate

consideration for the immediate, or deferred benefit of the

sons wife then such asset will be included in the net

wealth of the transferor.

It is be noted that relationship between individual

(transferor) and daughter-in law must exist on both the

date- date of transfer and valuation date


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Some important facts or points

Asset transferred must be an asset with in

the meaning of Sec. 2 (ea) on the

valuation date and not on the date of

transfer.

Example:


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7. Converted Property [Sec.4(1A)]

Where an individual, who is a member of a HinduUndivided Family, converts his individual property in to

the property of the family through the act of impressing such separate property with the

character of property belonging to the family, or throwing it into the common stock of the family,or

By way of gift,

then such property is know as convertedproperty.

And the value of such converted property on thevaluation date shall be included in the net wealth of theindividual.


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8. Holder of an impartible estate

The holder of an impartible estate shall be

deemed to be the owner of all the

properties comprised in the estate.


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Type B Deemed Assets

The following assets will be included in

the net wealth of any of assessee (i.e.

individual, HUF, or Company)


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1. Interest in a firm or Association of

Persons [Sec. 4 (1) (b)]

In case of an assessee who is a partner in a firm

or a member of an association of persons, then

the value of his/her interest in the assets of the

firm or association, determined in a manner laiddown in Schedule III.

If a minor is admitted to the benefits of the

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.


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2. Gift made by means of book

entries [Sec.4 (5A)]

Where a gift of money from one person toanother person is made by means entries inthe books maintained by anyone or more of

the following:Donor

An individual or HUF or firm or an AOP orbody of individual with which the donor hasbusiness or other relationship,

Then the value of such gift shall beincluded in the net wealth of the donor.


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3.Building or part allotted under a House

Building Scheme[Sec.4

Where the assessee is a member of a co-operative

society, company or other association of persons

and a building or part thereof is allotted or leased

to him under a house building scheme of thesociety, company or other association, as the case

may be,

the assessee shall be deemed to be theowner of such building or part thereof.


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Some important facts or points

Asset transferred must be an asset with in the

meaning of Sec. 2 (ea) on the valuation date

and not on the date of transfer.

The asset transferred need not be in the sameform in which it was transferred by the

transferor.

Any accretions to the asset transferred do notcome with in the scope of Section 4. [CWT v.

Saraswathi Achi (1980)]


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Assets exempt from tax [Sec 5]

The burden of proving that assets are

exempt from tax is upon the assessee.


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General Rule

Any property held assessee under:

A trust

Purpose of religious or charitable purpose Is exempt from tax

This rule is subject to two special provisions


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Special rule 1Business Assets

When Business Assets are exemptWhere business is carried by trust wholly for

public religious purposes

Business consists of printing and publicationof books of a kind notified by Central Govt.

Business is carried on by institution wholly for

charitable purposes

Business is carried on by an institution, fund

or trust referred to in clause 23B or 23C of

Section 10 of Income Tax Act


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Special rule 2Business Assets

When Business Assets are taxable

Any other asset of business and charitable

purpose is not exempt


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Residential Building of Former

Ruler

Value of any building used for residence

by former ruler of a princely state is

exempt from tax.


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Former Rulers Jewellery

Jewellery in possession of former ruler of

princely state, not being his personal

property which has been recognized as

heirloom by Central Govt


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Assets belonging to Indian

Repatriates

Exemption is available if:

In case assessee is of Indian origin or citizen

of India.

Such person was ordinarily residing in foreign

country.

On leaving such country, such person has

returned India with intention of permanentlyresiding in India.


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If above conditions are satisfied then:

Money brought by him in India

Value of asset brought by him in India

Is exempt form tax for 7 AYs commencing from

period such person has returned to India


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One House or part of House [Sec 5(vi)]

The following shall be exempt in case of

individual or HUF:

A house or part of house

A plot of land not exceeding 500sq. metres in

area.


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Debt owed by the assessee

For calculating net wealth of an assessee debts owed bythe assessee shall be deductible subject to the followingcondition:

1. Debs should have been incurred in relation to taxable

assets.2. Such debt should be still outstanding on the valuation

date.

3. Debts located in India or outside India shall be

deductible on the basis of nationality and residentialstatus, as the case may be.

Liability under wealth tax Act is not a debt.


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Summary

For charging Wealth Tax the following points shouldbe kept in mind: Wealth tax is chargeable only in case of three categories of persons,

namely, individual, HUF, Company.

Wealth tax is charged @ 1% on the net wealth exceeding Rs. 30,00,000.

Net wealth of the assessee is to be computed as on the valuation date. For computing net wealth residential status and nationality of the

assessee will be considered.

Asset must be an asset within the meaning of Sec.2 (ea).

Such asset must belong to the assessee, however, deemed asset undersec. 4 will also be considered.

Such asset must be held by the assessee or the transferee under section 4on the valuation date.

For calculating net wealth exempt assets will not be considered.

For calculating net wealth debts owed by the assessee on the valuationdate will be considered.


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Thanks

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15831_Modified Wealth Tax