Wealth Tax

Assignment

On

Wealth TAX

Wealth tax Introduction :-

Wealth tax is not a very important or high revenue tax in view of various exemptions. Wealth tax is a socialistic tax. It is not on income but payable only because a person is wealthy.

Wealth tax is payable on net wealth on ‘valuation date’. As per Section 2(q), valuation date is 31st March every year. It is payable by every individual, HUF and company. Tax rate is 1% on amount by which ‘net wealth’ exceeds Rs 30 lakhs from AY 2010-11. (Till 31-3-2009, the limit was Rs 15 lakhs). No surcharge or education cess is payable.

No wealth-tax is chargeable in respect of net wealth of any company registered under section 25 of the Companies Act, 1956; any co-operative society; any social club; any political party; and a Mutual fund specified under section 10(23D) of the Income-tax Act [section 45]

Net wealth = Value of assets [as defined in section 2(ea] plus deemed assets (as defined in section 4) less exempted assets (as defined in section 5), less debt owed [as defined in section 2(m)].

Debt should have been incurred in relation to the assets which are included in net wealth of assessee. Only debt owed on date of valuation is deductible.

In case of residents of India, assets outside India (less corresponding debts) are also liable to wealth tax. In case of non-residents and foreign national, only assets located in India including deemed assets less corresponding debts are liable to wealth tax.

Net wealth in excess of Rs. 30,00,000 is chargeable to wealth-tax @ 1 per cent (on surcharge and education cess).

Assessment year - Assessment year means a period of 12 months commencing from the first day of April every year falling immediately after the valuation date

A wealth tax is generally conceived of as a levy based on the aggregate value of all household holdings actually accumulated as purchasing power stock (rather than flow), including owner-occupied housing; cash, bank deposits, money funds, and savings in insurance and pension plans; investment in real estate and unincorporated businesses; and corporate stock, financial securities, and personal trusts.[1]

Existing net wealth/worth taxes

 France: A progressive rate from 0 to 1.8% of net assets. In 2006 out of €287 billion "general government" receipts, €3.68 billion was collected as wealth tax. See Solidarity tax on wealth.

 Switzerland: A progressive wealth tax with a maximum of around 1.5% may be levied on net assets.[2] The exact amount varies between cantons.

 Netherlands: Interest income is taxed like a wealth tax, i.e. a fixed 30% out of an assumed yield of 4% is a rate of 1.2%. See Income tax in the Netherlands.

 Norway: Up to 0.7% (municipal) and 0.4% (national) a total of 1,1% levied on net assets exceeding NOK. 700,000.

 India: Wealth tax is 1% on wealth exceeding Rs 30,00,000. However, non-residents returning to India are given exemption for seven years.

Details

Some governments require declaration of the tax payer's balance sheet (assets and liabilities), and from that ask for a tax on net worth (assets minus liabilities), as a percentage of the net worth, or a percentage of the net worth exceeding a certain level. The tax is in place for both "natural" and in some cases legal "persons".

In France, the net worth tax on "natural persons" is called the "solidarity tax on wealth". In other places, the tax may be called, or be known as, a "Capital Tax", an "Equity Tax", a "Net Worth Tax", a "Net Wealth Tax", or just a "Wealth Tax".

Some European countries have abandoned this kind of tax in the recent years: Austria, Denmark, Germany (1997), Sweden (2007), and Spain (2008). On January 2006, wealth tax was abolished in Finland, Iceland and Luxembourg. In other countries, like Belgium or Great Britain, no tax of this type has ever existed, although the Window Tax of 1696 was based on a similar concept.

Arguments in favor

There are four lines of argument in favor of a tax based on household wealth. The claims are that such a wealth tax improves the fairness of most tax systems, effectively raises government

revenue, can further economic growth, and could have desirable secondary, social effects by reducing economic inequality.

Fairness: It is generally held that taxes should be commensurate with ability to pay, and the tax laws of nearly all nations reflect this to a greater or lesser extent. A household’s wealth, its net worth, along with its income, are usually considered the best measures of socioeconomic status and so ability to pay.[1][3] Net worth is also a good measure of the extent to which a household has profited from the economic infrastructure provided by governments, that is all taxpayers. For instance, it can be claimed that a wealthy investor or business owner has profited more than average citizen from the public education (of the work force), roadways (for carrying on commerce), financial security for the elderly (consumers), a judiciary to enforce commercial agreements, financial regulation, government subsidies to and rescues of corporations, and so on.[4][5]

It is argued that a wealth tax would improve the fairness of a tax system particularly to the extent that it replaces taxes that are less commensurate with ability to pay and profits from government-provided financial infrastructure. Sales and value added taxes are generally regressive as to income or wealth, since the wealthy spend a smaller fraction of their income and wealth than the middle class and poor.[6] Real estate property taxes are generally regressive on overall wealth since the tax is a fixed percentage of the full value of the home.[6] For young, middle-class families especially, this full value is often many times their net worth, while for the very wealthy it is generally a small fraction of their net worth.[4]

Income taxes are often a progressive tax on "taxable income," but they generally do not tax unrealized capital gains from investments. Unrealized capital gains are likely the largest source of investment gains, but they are generally not defined as income for purposes of taxation. Therefore, for instance, an individual with a million dollars in an equity mutual fund may have the value of that holding increase $100,000 in a year, but can pay little or no taxes on that gain (in some cases even if he redeems shares from the fund). If Warren Buffett's unrealized capital gains were considered taxable income, his income tax rate would have been 0.13% rather than the 18% rate he reported for 2006.[4][7]

Taxing unrealized capital gains directly is impractical since it would result in massive yearly swings in tax revenue for governments and even large payouts from the government in years that equity markets are down. However, a 1-2% tax on household wealth above an exempt amount of several hundred thousand dollars, (coupled with elimination of taxes on dividends, realized capital gains and estates) would amount to a roughly 25% tax on typical investment income/gains of 4-6% (including unrealized capital gains). This tax rate would be similar to typical tax rates on income from work or interest on savings accounts. The Netherlands imposes a 1.2% tax on net worth, which is justified as a 30% tax on an assumed ("deemed") investment return (income) of 4%.[8] This justification could be used to answer criticisms that wealth taxes represent "double taxation" or "confiscation of property." In the United States the same construction could be used to defend a federal wealth tax as a form of income tax, which is authorized by the Constitution.

In 1999, Donald Trump proposed a once off 14.25% wealth tax on the net worth of individuals and trusts worth $10 million or more. Trump claimed that this would generate $5.7 trillion in new taxes, which could be used to eliminate the national debt.[9]

The reduction of wealth condensation in the investing class and bringing tax rates for investment returns closer to tax rates for work could reduce excessive investment and risky investment, which create investment bubbles, which in turn often contribute to the formations of some recessions.[4][10] The reduction in regressive taxes, like property and sales taxes, would reduce the tax burden on newly unemployed workers, who owe these taxes despite having no income. This would help maintain their spending power and could prevent a recession from spiraling deeper. [4]

[11] It has also been argued that a wealth tax could encourage the investment in assets that are more productive.[1][3]

It is argued that more financial resources in the hands of the poor and middle class would improve the educational opportunities for their children. This would promote social mobility, mean more citizens reach their full potential of productivity, and so improve the economy. More economic equality has been correlated with higher levels of innovation.[12] Increased government revenue from a wealth tax could be used to promote public investment in services like education, basic science research, and transportation infrastructure, which in turn improve economic efficiency. Increased government revenue from a wealth tax coupled with restrained government spending would reduce government borrowing and so free more credit for the private sector to promote business. A strong, steadily growing economy could in turn increase tax revenues further, allowing for more deficit reduction, and so on in a virtuous cycle.[4]

Arguments against

A 2006 article in The Washington Post titled "Old Money, New Money Flee France and Its Wealth Tax" pointed out some of the harm caused by France's wealth tax. The article gave examples of how the tax caused capital flight, brain drain, loss of jobs, and, ultimately, a net loss in tax revenue. Among other things, the article stated, "Eric Pichet, author of a French tax guide, estimates the wealth tax earns the government about $2.6 billion a year but has cost the country more than $125 billion in capital flight since 1998."[13]

There are several major flaws in a wealth tax system. First, valuation of illiquid assets including real estate, privately held businesses, antiques, art etc can be purely arbitrary. Secondly, wealth valuation fluctuates in time due primarily to the money supply fluctuations. This creates a moral hazard whereby governments can use inflation as a direct means of raising revenue. Finally, elderly citizens whose income is much smaller than their non-revenue generating assets may find it near impossible to pay their taxes without continued asset liquidation.

Due to valuation and accounting difficulties, wealth taxes systems have high management costs, for both the taxpayer and the administrating authorities, compared to other taxes. Per one study in the Netherlands the aggregated cost of the tax’s yield was roughly five times that of income tax.[14]

Wealth Tax

The Wealth Tax Act is an important direct tax legislation, which came into existence on 1 st April 1957. Wealth tax is levied on the benefits derived from property ownership. The tax is to be paid year after year on the same property on its market value, whether or not such property yield any income.

An assessee or a person, who is liable to pay wealth tax under the Wealth Tax Act, includes legal envoy, perpetrator or administrator of a deceased person and a person deemed to be an agent of a non-resident. Under the Act, tax is charged on the following persons in respect of the wealth held by them during the assessment year:

A company. A Hindu Undivided Family (HUF), which is a type of assessee recognised under the Act,

consisting of all persons lineally descended from a common ancestor and deriving income from joint family corpus. Hindu, Jain, Buddhist, and Sikh families have been so recognised.

An association of persons or a body of individuals.

Non-corporative taxpayers whose accounts are to be statutorily audited.

Those who fall in the 1-by-6 category (External website that opens in a new window).

The Wealth-Tax Act, 1957

1. Short title, extent and commencement. —

(1) This Act may be called the Wealth-Tax Act, 1957.

(2) It extends to the whole of India .

(3) It shall be deemed to have come into force on the 1st day of April, 1957.

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.  The important provisions concerning the Act are mentioned below –

Wealth Tax Returns

Wealth Tax in IndiaWealth 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.  The important provisions concerning the Act are mentioned below – 1. 

1.   Wealth Tax

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.

2.   Incidence of Wealth Tax

Incidence of tax in the case of an individual depends upon his residential status and nationality. Residential status is decided as per the provisions of the Income-tax Act (Chapter I Supra).

The scope of liability to wealth tax is as follows :

a. In the case of an individual who is a citizen of India and resident in India, a resident—HUF and company resident in India;Wealth tax is chargeable on net wealth comprising of 

i. All assets in India and outside India;

ii. All debts in India and outside India are deductible in computing the net wealth.

b. In the case of an individual who is a citizen of India but non-resident in India or not ordinarily resident in India, HUF, non-resident or not ordinarily resident in India and a company non-resident in India;

i. All assets in India except loan and debts interest whereon is exempt from income-tax under section 10 of the Income-tax Act are chargeable to tax.

ii. All debts in India are deductible in computing the net wealth.

iii. All assets and debts outside India are out of the scope of Wealth Tax Act.

c. In the case of an individual who is not a citizen of India whether resident, non-resident or not ordinarily resident in India:Same as in (b):

Explanation

The credit balance in a Non-resident (External) Account is exempt from wealth tax provided the depositor is a person resident outside India as defined in the Foreign Exchange Regulation Act, 1973.

Valuation Date

Wealth Tax is levied on the net wealth of a person as on a particular date. This date is known as valuation date. According to section 2(Q) the valuation date is the last day of the previous year relevant to the assessment year. Hence, valuation date is March 31, immediately proceeding the assessment year.

3. Assets

The assets liable to wealth tax as per the definition given in section 2(ea) of the Wealth Tax Act are as under :

(1) Any building or land appurtenant thereto which shall include :

i. commercial buildings;ii. residential buildings;

iii. any guest house;

iv. a farm house situated within 25 kilometres from the local limits of any municipality (whether known as Municipality, Municipal Corporation or by any other name) or a Cantonment Board.

However, the following buildings will not be included to assets:

i. a house meant for residential purposes 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. 5,00,000/-.

ii. any house for residential or commercial purposes which forms part of stock-in-trade;

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

The following buildings shall also not be an asset w.e.f. A.Y. 1999-2000:

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

b. any   property   in   the   nature   of  commercialestablishments or complexes.

(2)  Motor Cars (excluding those used by the assessee in the business of running them on hire or as stock-in-trade).

(3)   Jewellery, bullion, furniture, utensils or any other, article made wholly or partly of gold, silver, platinum or any other previous metal or any alloy containing one or more of such precious metals (excluding those held as stock-in-trade by the assessee). Jewellery includes:

i. ornaments made of gold, silver, platinum or any other precious metal of any alloy containing one or more of such precious metals, whether or not” containing any precious or semi-precious stones, and whether or not set in any furniture, utensils or other article or worked or sewn into~any wearing apparel;

ii. precious or semi-precious stones, whether or not set in any furniture, utensils or other articles or worked or sewn into any wearing apparel.

For the removal of doubts it has been clarified by explanation 2 to section 2(ea) that the term jewellery does not include the Gold Deposit Bonds issued under the Gold Deposit Scheme, 1999 notified by the Central Government.

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

(5)   Urban land; “Urban Land” means land situated :

i. in any area which is comprised within the jurisdiction of a local authority and which has a population of not less than ten thousand according to the last proceeding census of which the relevant figures have been published before the valuation date; or

ii. any area within such distance, not being more than eight kilometres from the local limits of a local authority as the Central Government may, having regard to the extent, and scope for urbanisation of that may, and other relevant considerations, specify in this behalf by notification in the Official Gazette.

However, the following urban land shall not be included in assets;

i. 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;

ii. land occupied by any building which has been constructed with the approval of the appropriate authority;

iii. any unused land held by the assessee for industrial purposes for a period of two years from the date of its acquisition by him.

iv. land held by an assessee as stock-in-trade for a period of five years from the date of its acquisition by him. (Ten years w.e.f. A.Y. 1999-2000).

Note: Agricultural land situated in urban area is not liable to wealth-tax.

(6)   Cash in hand;

a. In case of an individual and HUF cash in hand in excess of Rs. 50,000/- shall be included in assets.

b. In cash of any other person cash in hand not recorded in the books of account shall be included in assets.

4. Deemed Assets

In computing the net wealth of an assessee, the following assets are included as belonging to the assessee by virtue of section 4(l)(a) of the Wealth Tax Act, 1957.

a. Assets transferred by one spouse or another.b. Assets held by minor children.

Whether the assets are held by a physically or mentally handicapped minor child (specified in section SOU of the Income Tax Act) such assets will not be clubbed with the net wealth of the parent. In such a case the net wealth of the handicapped minor child shall be determined separately and assessee in his hands.

c. Assets transferred to a person or an Association of Persons for immediate  or deferred benefit of the transferrer,   his   or   her   spouse   without   adequate consideration.

d. Assets transferred under revocable transfer.

e. Assets transferred to son’s wife.Assets transferred to a person or Association of Persons for the benefit of son’s wife.

5. Exempt Assets

The following assets are totally exempt from Wealth Tax (Section 5).

a. Property held under a trust or other legal obligation for any public purpose of a charitable or religious nature  in India subject to the  satisfaction of the stipulated conditions;

b. Coparcenary interest in a HUF property;

c. One residential building belonging to a former Ruler;

d. Former   Ruler’s  jewellery   (excluding   his   personal jewellery) which has been recognized as a heirloom by the Central Government before 1.4.1957 or by the CBDT after that date;

e. Assets belonging to the Indian repatriates for 7 years on fulfillment of the conditions prescribed;

f. One house or part of a house (with effect from 1.4.1999 one house or part of a house or a plot of land) belonging to an individual or HUF is exempt from Wealth Tax.

6. Debts Owned

Wealth tax is levied on the ‘net wealth’ which means that from the aggregate of all assets (including deemed assets but excluding exempt assets) the value of debts owed on the valuation date shall be deducted subject to the satisfaction of the following two conditions viz.

a. Only debts which are ‘owed’ on the valuation date are deductible.b. Debts should have been incurred in relation to those assets which are included in the net

wealth of the assessee.

Broadly, a debt could be defined as an obligation to pay a liquidated or certain sum of money. A sum which may or may not become due or the payment of which depends upon contingencies which may or may not happen is not a debt. (See Sardar C.S. Angre v. CWT (1968) 69 ITR 336 (MP).

7. Wealth Tax Liability—Whether a Debt Owed?

Wealth tax liability is not deductible in computing the net wealth liable to tax. This position has been made clear by the amendment of section 2(m) with effect from the assessment year 1993-94. Liability under the Wealth-tax Act has been considered as a ‘debt owed’ by the assessee incurred in relation to the assets taxable under the Wealth-tax Act. Such a liability has been considered to be the personal liability of the assessee and is not a debt incurred but a debt created by statute. Hence is deduction is not permissible (See CBDT’s circular No. 663 dated 28 th

September, 1993).

8. Valuation of Assets

For the purpose of Wealth-tax the value of any asset (other than cash) shall be its value as on the valuation date determined in the manner laid down in Section 7(2) and in Schedule III to the Wealth Tax Act.

9. Return of Wealth Tax

Every person is required to file a return of net wealth in Form ‘A’ if his net wealth or net wealth of any other person in respect of which he is assessable under the Act on the valuation date is such an amount as to render ‘ him liable to wealth tax. The dates of filing the return are the same as under the Income-tax Act for filing returns. Where wealth tax is payable on the basis of return to be furnished, the assessee is required to pay the tax before filing of the return and such return is to be accompanied by the proof of payment.

10. An Illustration

For the assessment year 2001-2002, ‘R’ an Indian National and resident and ordinary resident in India furnishes the following particulars regarding his assets and liabilities.

1 Residential House outside India 50,00,0002 Jewellery in India 50,00,0003 Loans taken:

i) For residential house outside India 10,00,000ii) For   acquiring jewellery

5,00,000

Computation of taxable wealth :

1 Jewellery in India 50,00,000Less: Debt owed concerning jewellery 5,00,000

—————Net value of jewellery 45,00,000

2 Property outside India 50,00,000Less : Debt owed 10,00,000

—————Net value of property 40,00,000

=========Total net wealth 85,00,000

In cases of non-resident or resident but not ordinarily resident or a foreign national who is a non-resident, no wealth tax would be leviable on property outside India. In their cases, wealth-tax would be leviable on a sum of Rs. 45,00,000 lakhs only.

Practical question on Wealth Tax

By- Sandhya Garg

Roll no-37

Q-1. ABC Ltd is engaged in the construction of residential flats. For the valuation date 31.3.2011, it furnishes the following data and requests you to compute the taxable wealth -(a) Land in urban area (Construction is not permitted as per Municipal Laws in force) `- 55, 00,000(b) Motor-cars (used on hire by the company) ` 10, 00,000(c) Jewellery (Investment) ` 25, 00,000. Loan taken for purchasing the same ` 20, 00,000(d) Cash Balance (as per books) ` 2, 75,000(e) Bank Balances ` 5, 50,000(f) Guest House (situated in a place which is 30 Kms away from the local limits of the municipality) 10, 00,000(g) Residential flats occupied by the Managing Director ` 15, 00,000. The Managing Director is on whole time appointment and is drawing remuneration of ` 2, 00,000 per month.(h) Residential house were let out on hire for 200 days ` 10, 00,000The computation should be supported with proper reasoning for inclusion or exclusion.Solution:

Valuation Date: 31.03.2011 Computation of Taxable WealthNature of asset Rs. Reason

Land in Urban Area

Motor Cars

Jewellery

Cash Balance

Bank Balance

Guest House

Residential Flat occupied by MD

Residential House Let-out 10,00,000 Asset

Total Assets

Less: Debt incurred in relation to an asset: Loan for JewelleryTaxable Net Wealth

NIL

NIL

25,00,000

NIL

NIL

10,00,000

15,00,000

10,00,000

Land in which construction is not permitted as per municipal law is not an asset u/s 2(ea).

Motor cars used in business of hire is not an asset u/s 2(ea)Not held as stock in trade

Cash as per books - Not an asset U/s 2(ea)

Not an asset u/s 2(ea)

Asset u/s 2(ea)

Asset u/s 2(ea) since Annual Gross Salary is greater than `5,00,000.Asset U/s 2(ea) as it is not let-out for a period – 300 days.

60,00,000

(20,00,000)

40,00,000

Less : Basic Exemption

Taxable Net Wealth

30,00,000

10,00,000

Tax Payable @1%

10,000

Q.2- Compute the net wealth of Nivedita, a resident individual as on 31.3.2011 from the following particulars furnished —(a) She has a house property at Delhi, valued at ` 20,00,000 which is occupied by a firm in which she is a partner for its business purposes. Another house at Mumbai, valued at ` 8,00,000 is being used for his own business.(b) Vehicles for personal use - (i) Motor Car ` 10,00,000 (ii) Motor Van — ` 3,00,000 (iii) Jeep — ` 5,00,000.(c) Cash on hand - ` 3,10,000(d) Jewellery - ` 10,00,000(e) Nivedita has gifted to a Trust a residential property situated at Kolkata purchased 5 years back for `20,00,000 for the benefit of the smaller HUF consisting of herself and her spouse and let-out for 8 months. Schedule-Ill, Rule 3 value as on 31.3.2010 is ` 14 Lakhs.(f) She had transferred an urban house plot in February 1999 in favour of her niece which was not revocable during her life time. This niece died on 14.3.2009. Nivedita could get the title to the plot retransferred to her name only on 15.4.2009 despite sincere and honest efforts. The market value of the house as on 31.3.2011 is `10,00,000.(g) Nivedita is the holder of an impartible estate in which urban agricultural lands of the value of ` 4,30,000 as on 31.3.2010 are comprised.Solution :

Assessee: Ms. Nivedita Valuation Date: 31.3.2011 Assessment Year: 2011-12

Computation of Net Wealth

Nature of Asset Amount Taxable

Reasons

House Property at Delhi used for business by a firm in which he is a partner

House Property at Mumbai used for his own business

NIL

NIL

Property used for business purpose is not an asset u/s 2(ea) (Refer Note)

Property used for business purpose is not an asset u/s 2(ea)

Vehicles for Personal Use

1. Motor-car

2. Motor-van

3. Jeep

Cash on Hand

Jewellery

Property at Kolkata transferred to a Trust 20,00,000

Less: Exemption u/s 5(vi) 20,00,000

Urban House Plot transferred to Niece

Urban Agricultural Land

NET WEALTH

Less : Basic Exemption

Taxable Net Wealth

Taxable Payable @ 1%

10,00,000

3,00,000

5,00,000

2,60,000

10,00,000

NIL

10,00,000

4,30,000

Vehicles used for personal purposes are assets u/2(ea)

For an Individual, cash in excess of ` 50,000 shall be chargeable to Wealth Tax u/s 2(ea) (`3,10,000 -`50,000)

Jewellery other than those held as stock-in-trade are asset u/s 2(ea)Taxable u/s 4(1A). Value = Higher of Value as on Valuation Date `14 Lakhs or Cost of Acquisition ` 20 Lakhs

Taxable u/s 4(5) as the title to the property stands vested in Nivedita’s hands immediately on niece’s demise

Holder of an impartible estate is deemed to be the owner of all properties comprised therein u/s 4(6)

44,90,000

30,00,000

14,90,000

14,900

Q.3- Samir furnishes the following particulars for the compilation of his Wealth Tax return for Assessment Year 2011-12.(a) Gifts of jewellery made to wife from time to time aggregating `80,000.Market value on valuation date `3,00,000(b) Flat purchased under installment payment scheme in 1979 for `9,50,000. Used for purposes of his residence and market value as on 31.3.2010. (Installment remaining unpaid ` 80,000) `10,00,000

(c) Urban land transferred to minor handicapped child valued on 31.3.2010 `5,00,000.

Explain how you will deal with these items. Make suitable assumptions if required.

Solution:

Particulars Taxable Reasons

Gift of Jewellery made to wife

Flat used for residence

Urban Plot in the hands of the minor

3,00,000

NIL

NIL

Deemed asset u/s 4. Fair Market Value of the Jewellery is taxable.

Taxable as an asset u/s 2(ea) but the assessee can claim exemption u/s 5(vi). So full value of the asset is exempt from tax.

Asset held by the minor who is handicapped u/s 80U, clubbing provisions does not apply.

Q.4. SIPRA Constructions Ltd. is engaged in the construction of residential flats. For the valuation date 31.3.2011, furnishes the following data and requests you to compute the taxable wealth:(a) Land in urban area (construction is not permitted as per Municipal laws in force) ` 50 lakhs(b) Motor-cars (in the use of company) `10lakhs(c) Jewellery (Investment) `10 lakhs(d) Cash balance (As per books) ` 3 lakhs(e) Bank Balance (As per books) ` 6 lakhs(f) Guest House (Situated in rural area) ` 8 lakhs(g) Residential flat occupied by Managing Director (Annual remuneration of whom is `8 Lakhs excluding perquisites) ` 10 lakhs(h) Residential house let-out for 100 days in the financial year ` 5 lakhs(i) Loan obtained for :• Purchase of Motor Car ` 3 lakhs• Purchase of Jewellery ` 2 lakhs

Solution :Assessee: SIPRA Constructions Ltd. Valuation Date: 31.3.2011 Assessment Year: 2011-12

Nature of Asset Amount taxable (Lakhs)

Reasons

Land in Urban Area NIL Land in which construction is not permitted as per municipal laws is not an asset u/s 2(ea)

Motor-cars

Jewellery

Cash Balance

Bank Balance

Guest House

Residential Flat Occupied by MD

Let-out Residential House Property

TOTAL ASSETS

Less: Debt incurred in relation to Assets

1. Purchase of Motor-car

2. Purchase of Jewellery

NET WEALTH

Less : Basic Exemption

Taxable Net Wealth

Taxa Payable @ 1%

10

10

NIL

NIL

8

10

5

Motor-car other than those used in the business of hire or held as stock-in-trade is an asset u/s 2(ea)

Not held as stock-in-trade - asset u/s 2(ea)

Cash as per books - not an asset u/s 2(ea)

Not an asset u/s 2(ea)

Asset u/s 2(ea)

Asset u/s 2(ea)-since Gross Annual Salary of Managing Director is greater than ` 5 LakhsAsset u/s 2(ea) - since not let-out for a period exceeding 300 days

43

(3)

(2)

38

30

8

8,000

Q.5- Sunrise Promoters & Developers Ltd. a widely held company owns the following assets as on 31.3.2011 : -(a) Land at Rajarhat (West Bengal) purchased in 2002 on which a residential complex consisting of 24 flats, to be sold on ownership basis, is under construction for last 18 months(b) Two office flats at Noida purchased for resale in the year 2003(c) Shares of Group Companies, break-up value of which is ` 19,00,000

(d) Cash at construction site ` 8,00,000(e) Residential flat in occupation of company’s whole-time director drawing a salary of `4,50,000 per annum.Which of the above assets will be liable for wealth? Give reasons in brief.

Solution: Assessee: Sunrise Promoters & Developers Ltd. Valuation Date: 31.3.2011

Assessment Year: 2011-12

Nature of Asset Amount Taxable

Reasons

Land at Rajarhat purchased in 2005

Residential Flats at Noida purchased in 2004 for resale

Shares of Group Companies

Cash at construction site

Residential House Property for Whole-Time Director

NIL

NIL

NIL

NIL

NIL

Urban Land held as stock-in-trade for a period less than 10 Years -not an asset u/s 2(ea)

House Property held as stock-in-trade - not an asset u/s 2(ea)

Not an asset u/s 2(ea)

Any amount recorded in the books of account is not an asset u/s 2(ea)

Since Gross Annual Salary of Whole Time Director is less than ` 5 Lakhs - not an asset u/s 2(ea)

Q.6- Hassan, a person of Indian origin was working in Australia since 1986. He returned to India for permanent settlement in June 2004 when he remitted the moneys into India. He furnished the following particulars of his wealth as on 31.3.2011. You are required to arrive at his wealth in respect of Assessment Year 2011-12 :(a) Market Value of Residential house in Jharkhand (let-out for residence) ` 10,00,000 with Net Maintainable Rent p.a. of ` 1,20,000.(b) Share in building owned by a firm in which Hassan is a Partner - used for business ` 5,00,000(c) Motor-car purchased in April 2009, out of moneys remitted to India from Australia ` 4,00,000(d) Value of interest in Firm excluding item (b) above ` 5,00,000(e) Shares in companies (quoted) ` 2,00,000(f) Assets purchased out of amount remitted from Australia :• Jewellery purchased in March 2002 ` 5,50,000• Vacant land purchased in October 2000 ` 10,00,000(g) Amount standing to the credit of NRE Account ` 15,00,000(h) Cash on hand (out of sale proceeds of agricultural income) ` 65,000

Solution :

Assessee: Hassan Valuation Date: 31.3.2011 Computation of Net Wealth

Nature of Asset AmountTaxable

Reasons

Residential House in Jharkhand

Share in the building owned by the firm

Motor-car 4,00,000

Less: Exempt u/s 5(v)-acquired out of money brouqht into India (4,00,000)

Value of Interest in a Firm

Shares in Companies

Value of Jewellery

Vacant Land

Money in NRE A/c

Cash in Hand in excess of ` 50,000

NET WEALTH

Tax Liability

NIL

NIL

NIL

5,00,000

NIL

5,50,000

10,00,000

NIL

15,000

Not an Asset u/s 2(ea) - Let-out for whole year -Hence, not taxableNot an asset u/s 2(ea), used for its own business - not chargeable to taxAsset u/s 2(ea). But, exemption available u/s 5(v), since acquisition out of money brought into India.

Assumed as deemed asset u/s 4(1)(b)

Not an asset u/s 2(ea)

Asset u/s 2(ea) - Not entitled for exemption

Asset u/s 2(ea) - Purchased in October 2000Not an asset u/s 2(ea)

Asset u/s 2(ea), being an Individual

20,65,000

Nil

Since less than the Basic Exemption limit.

Q.7- Romit Roy, a Not Ordinarily Resident in India seeks your advice with regard to the furnishing of his Wealth Tax Return. The value of assets held on 31.3.2011 is indicated below. You are requested to compute the Taxable Wealth.• Motor cars of foreign make held as Fixed Assets `26 lakhs• Gold bonds under Gold Deposit Scheme, 2000 `25 lakhs• Residential House Property at Kolkata let out w.e.f.10.2.2010 `30 lakhs• Jewellery held `20 lakhs• Lands purchased for industrial purpose: (a) on 1.1.2004 ` 7 lakhs (b)on 24.2.2010 `10 lakhs• Loans against the purchase of land : (a) on 1.1.2005 ` 4 lakhs (b) on 24.2.2010 `5 lakhs• Fixed Assets located in Abu Dhabi ` 80 lakhs• Cash at Bank `4 lakhs• Cash in Hand ` 80,000

• Mrs. Roy acquired out of gifts received from her husband:(a) Shares and securities `3,00,000(b) Residential House property at Bangalore `20,00,000

Solution : Assessee: Romit Roy Valuation Date: 31.3.2011 Assessment Year:2011-12

Computation of Net Wealth

Nature of Asset Rs Reasons

Motor-cars

Gold Bonds, 1999

Residential House Property

Jewellery

Land purchased on 1.1.02 for Industrial Purpose

Land purchased 24.2.2009

Cash-on-Hand

Cash-at-Bank

Fixed Asset located in Abu Dhabi

Deemed Assets acquired and held by Mrs.Roy

(a) Shares and Securities

(b) (b) Res.House Property at Bangalore 20,00,000

Less: Exemption u/s 5(vi) (20,00,000)

Total Assets

Less: Debts incurred on Taxable Assets

26,00,000

Nil

Nil

20,00,000

7,00,000

Nil

30,000

Nil

Nil

Nil

Nil

Motor-car other than those used in the business of hire or held as stock-in-trade is an asset u/s 2(ea)Not an asset under WT Act.Any residential house property let-out for 300 days or more is not an assetJewellery other than those held as stock-in-trade is an AssetLand held beyond two years from the date of acquisition for industrial purposes is an asset

Land held for first two years from the date of acquisition for industrial purposes is not an assetCash held beyond ` 50,000 is an assetNot an asset under WT Act.Not chargeable to tax for Not Ordinary Resident

Not an asset u/s 2(ea)

Asset u/s 2(ea).

One house or part of the house exempt u/s 5(vi)

Wealth Tax Liability and Debts incurred in relation to exempted assets are not deductible

53,30,000

On Land acquired on 1.1.2004 (4,00,000)

Net Wealth

Less: Basic Exemption

Taxable Net Wealth

Tax Payable @ 1%

49,30,000

30,00,000

19,30,000

19,300

Q.8- Abhishek, a person of Indian origin was working in Austria since 1991. He returned to India for permanent settlement in May 2010 when he remitted money into India. For the valuation date 31.3.2011, the followingmparticulars were furnished. You are required to compute the taxable wealth. The reason for inclusion or exclusionshould be stated –• Building owned and let-out for 270 days for residence. Net maintainable rent (`1,00,000) and the Market Value (Excess of Unbuilt Area over Specified Area is 20% of the Aggregate Area) ` 30 lakhs• Jewellery : (a) Purchased in April 2010 out of money remitted to India from Austria `12,00,000(b) Purchased in May 2010 out of sale proceeds of motor-car brought from abroad and sold for ` 40 lakhs.• Value of interest in urban land held by a firm in which he is a partner `10 lakhs• Bonds held in companies `10 lakhs• Motor car used for own business ` 25 lakhs• Vacant house plot of 480 sq. mts. (purchased in December 2003) market value of ` 20,00,000• Cash in hand ` 45,000• Urban land purchased in the year 2007 out of withdrawals of NRE Account ` 15,00,000

Solution: Assessee : Abhishek Valuation Date : 31.3.2011 Assessment Year : 2011-12

Computation of Net Wealth

Nature of the Asset Rs. Rs. Reasons

Value of the House

Jewellery: Purchased in April 2010

Less: Exempt u/s 5(v) Jewellery

Jewellery: Purchased in May 2010

Less: Exempt u/s 5(v)

12,00,000

(12,00,000)

18,50,000

Nil

Asset u/s 2(ea). Working Note 1

Asset u/s 2(ea).

Purchased out of money brought into India

Asset u/s 2(ea).

Purchased out of sale proceeds of

40,00,000

(40,00,000)

Interest in Urban Land held by firm

Bonds held in companies

Motor car

Vacant House Plot (480 sq. mts.)

Less: Exempt u/s 5(vi)

Cash in hand

Urban Land Purchased

Less: Exempt u/s 5(v)

NET WEALTH

Less : Basic Exemption

Net Taxable Wealth

Tax Payable @ 1%

Nil

10,00,000

Nil

25,00,000

Nil

Nil

Nil

assets brought into India

Deemed Asset u/s 4(1)(b)

Not an asset u/s 2(ea)

Asset u/s 2(ea). Not held as stock-in-tradeAsset u/s 2 (ea)

House/part of house/plot less than 500 sq.mts.

Since not exceeding `50,000

Purchased out of money brought into India

-----

20,00,000

(20,00,000)

15,00,000

(15,00,000)

53,50,000

30,00,000

23,50,000

23,500

(1) Working Notes: Valuation of Building :Net Maintainable Rent(NMR) = `1,00,000Capitalized Value of NMR=NMR×12.5 (Owner of the land) = ` 1,00,000 × 12.5 = `12,50,000Add : Premium for excess of unbuilt area (20%) over specified area = 40% of CNMR = ` 5,00,000VALUE OF THE HOUSE `18,50,000

Q.9- Mr. Kushal Sengupta owns a house at Jharkhand, which is let-out at `1,35,000 per annum. The annual value of the property as per municipal records also is `1,00,000. Municipal taxes are partly borne by the owner (`5,000) and partly by the tenant (`6,000). Repair expenses are borne by tenant (`10,000) the difference between the un-built area and specified area does not exceed 5%. The property was acquired on 10.5.1998 for ` 15,00,000. Determine for purposes of Wealth Tax Act, the value of the property as on 31.3.2011 on the following situations —(a) The house is built on a freehold land.

(b) It is built on a leasehold land, the unexpired period of lease of the land is more than 50 years.(c) If the area of the plot on which the house is built is 800 sq. meters. FSI, permissible is 1.4 and FSI utilised is 1088 Sq. metres. (136 Sq. metres × 8 Storeys)(d) The tenant had made interest free deposit of ` 1,00,000 with the landlord.Solution :

Assessee : Mr. Kushal Sengupta Valuation Date : 31.3.2011 Assessment Year : 2011-12Computation of Value of House Property

For Situations (a) & (b):Computation of Gross Maintainable Rent (Amount in `)

Particulars No RentalDeposit

Rental Deposit excess of 3

Mths

Actual Annual Rent

Add: Municipal Taxes borne by the tenant

l/9th of Actual Rent Receivable since repair expenses are borne by the tenant (`1,35,000/ 9)

Rental Deposits - 15% Interest on ` 1,00,000

GROSS MAINTAINABLE RENT

Less: Municipal Taxes Paid

Less: 15% of Gross Maintainable Rent

Net Maintainable Rent

Case (a) Capitalization of Net Maintainable Rent

-Freehold Land NMR x 12.5

Case (b) Capitalization of Net Maintainable Rent

-Leasehold Land - Unexpired Lease 50 Years = NMR×10

Property Acquired after 31.3.1974 i.e. 10.5.1997

Therefore, Value of the Property (whether on Lease-hold Land or on Freehold Land)

1,35,000

6,000

15,000

1,35,000

6,000

15,000

Nil

1,56,000

11,000

15,000

1,71,000

11,000

23,400 25,650

1,90,400 2,07,650

23,80,000 25,56,625

19,04,000

15,00,000

20,07,650

15,00,000

15,00,000 15,00,000

For Situation (c) : In case of excess unbuilt area :Unbuilt Area = (Actual Area of the Land less Built up Area) = (800 sq. mt less 136 sq. mt). = 664 sq. mt.

Excess Unbuilt Area = (Unbuilt Area less Specified Area) = 664 sq. mt. less 70% of 800 sq. mt. = 664 Less 560 = 104 sq. mt% of Excess Unbuilt Area = Excess Unbuilt Area × 100/Aggregate Area = 104 × 100/800 = 13%Therefore, Value of the Property = Substituted Net Maintainable Rent i.e. `15,00,000 + 30% of SNMR = ` 19,50,000

Q. 10- From the following dated furnished by Mr.Soumitra, determine the value of house property built on leasehold land as at the valuation date 31.3.2011:

Particulars Rs.

Annual Value as per Municipal valuation 1,40,000

Rent received from tenant (Property vacant for 3 months during the year) 1,08,000

Municipal tax paid by tenant 10,000

Repairs on property borne by tenant 8,000

Refundable deposit collected from tenant as security deposit which does not carry any interest

50,000

The difference between unbuilt area and specified area over aggregate area is 10.5%.

Solution :

Assessee: Mr. Soumitra Valuation Date: 31.3.2011 Assessment Year: 2011-12Computation of Value of House Property

Step I: Computation of Gross Maintainable Rent(GMR)

Particulars Rs. Rs.

Actual Annual Rent- ` 1,08,000 x 12 Months/9 MonthsAdd: Municipal tax paid by the Tenant10,000l/9th of Actual Rent Receivable as repair expenses are borne by the tenant - ` 1,44,000/9Interest on Refundable Security Deposit- ` 50,000 x 15% x 9/12

16,000

6,000

1,44,000

32,000GROSS MAINTAINABLE RENT (GMR) 1,76,000

Step II: Computation of Net Maintainable Rent (NMR)

Particulars Rs. RsGross Maintainable Rent (GMR)Less: Municipal Taxes levied by the local authority15% of Gross Maintainable Rent - `1,76,000 x 15%

10,00026,400

1,76,000

(36,400)

NET MAINTAINABLE RENT (NMR) 1,39,600Step III: Capitalisation of the Net Maintainable Rent (CNMR) (Assumed that unexpired lease period is more than 50 Years)NMR × Multiple Factor for an Unexpired Lease Period - ` 1,39,600 × 10 = ` 13,96,000

Step IV: Addition of Premium to SNMR in case of excess inbuilt area:

Particulars Rs.

Add: Capitalisation of the Net Maintainable AssetPremium for excess of 10.5% unbuilt area over specified area-30%of CNMR

13,96,000

4,18,800Value of House Property as per Wealth Tax Act 18,14,800

Q.11- Property Company Ltd. has let-out a premise with effect from 1.10.2010 on monthly rent of `1.5 lakh. The lease is valid for 10 years and the tenant has made a deposit equivalent to 3 months rent. The tenant has undertaken to pay the municipal taxes of the premises amounting to Rs. 2 lakh. What will be the value of the property under Schedule III of the Wealth Tax Act for assessment to wealth tax?Solution :

Assessee: Property Company Ltd. Valuation Date: 31.3.2011 Assessment Year : 2011-12Computation of Value of Let-out Property

Actual Annual Rent Receivable - ` 1,50,000 × 12 MonthsAdd: Municipal Taxes borne by the Tenant

GROSS MAINTAINABLE RENTLess: Municipal Taxes levied by the Municipal AuthorityLess: 15% of Gross Maintainable Rent (` 20,00,000 × 15%)NET MAINTAINABLE RENT

18,00,0002,00,000

20,00,000(2,00,000)(3,00,000)15,00,000

Value of the Property = Capitalized Value of NMRNMR × 8 (unexpired period of lease is less than 50 years) = ` 15,00,000×8 = ` 1,20,00,000

Q.12-ABC Ltd. owns following assets. State whether these assets are chargeable to wealth tax for assessment year 2005-06a) Stock in tradeb) Residential flats given to employees by the company with annual salary of Rs 3,00,000 eachc) Shares in Indian Companies.d) Cars used by directors for company’s business purpose.e) Land acquired in 1992 on which construction of building is not permitted.Solutiona) Stock in trade is not an asset under section 2 (ea)b) Since the residential flats have been given to the employees with annual salary of less than Rs. 5,00,000, so these are not to be treated as assets under section 2 (ea) (i)]c) Shares in Indian companies are not treated as assets under section 2(ea)

d) Since cars are not being used by the assessee for the business of running them on hire or being held as stock-in-trade, hence cars are to be treated as assets under Section [2(ea) (ii)].e) Since the construction of the building is not permitted on the land hence it is not to be treated as asset under section [2 (ea) (v)]

Q.13- Discuss whether the following are assets:a) A residential house property given on rent by X for a period of 320 days.b) A commercial house property used by Mr. Y for his business purposes.c) Mr. A was having cash of Rs. 1, 20,000 on 31st March 2006, out of which he deposited Rs. 40,000 in bank on the same day.d) Aircrafts owned by Sahara Airlinese) Amount held by Mr. Z in fixed deposits in bankSolutiona) Since the residential house or property has been given for rent on more than 300 days in previous year, hence it is not be treated as an asset under section [2 (ea) (i)].b) Since commercial house or property is being used by assessee for his own business purposes hence it is not be treated as an asset.c) Since on the last moment of valuation date i.e. 31st March’2006, Mr. A is having cash of Rs 80,000 and out of which Rs. 50,000 is not an asset under section [ 2 (ea) (vi)], thus remaining Rs 30,000 is taken as an asset.d) Under section 2 (ea) (iv) aircrafts used by assessee for commercial purposes is not an asset.e) Amount held by Mr. Z in fixed deposit is not an asset under section 2 (ea).

Q.14- Explain the taxability of the following in the net wealth computation of Mr. Aa) Gifts of jewellery made to wife Rs 60,000, Market value on valuation date is Rs 2, 00,000.b) He gifted cash Rs. 2, 00,000 to his son’s wife without consideration, which she deposited in bank.c) Urban land transferred by him to his minor handicapped childd) A minor son of Mr. A receives income by acting in films. Out of this income, he purchased a Car and a residential house; value of these on valuation date is Rs 50 Lacs.e) He transferred a house valued at Rs 20 Lacs to his married daughter but he has reserved the right to live in that house for whole life.Solution:-a) Since the gift has been made without adequate consideration, hence the value of jewellery on valuation date will be included in wealth of Mr. X.b) Although the gift has been made without any adequate consideration but as on valuation date it is in form of fixed deposits, which is not an asset under section 2 (ea), hence it is not an asset.c) Assets held by minor handicapped child are not taxable in the hands of parents, hence the value of urban land is not to be included in wealth of Mr. X, but it is chargeable in hands of the child.d) The assets acquired by the minor child out of his income arising on account of any manual

work done by him or activity involving application of his specialized knowledge or skill is not included in the wealth tax of parents, hence the assets valued at Rs 50 Lacs will be included in the wealth of the child.e) Mr. A transferred his house to his married daughter. Hence he does not remain the owner of the house on the valuation date, but he has reserved the right to live in that house for whole life, hence it is a revocable transfer u/s 4 (1) (a) (iv) thus value of the house will be included in wealth of Mr. AQ.15- How would you treat the following items under the wealth tax act?i) Mr. Gupta is a managing trustee of an educational society. The society is a public charitable trust. The value of trust property is Rs 50 Lacs, which is held by Mr. Gupta in his name as Managing director.ii) Mr. G, an Indian repatriate came to India on 1st Oct’2005, The balance in his non resident external account is Rs 10 Lacs on that day, out of which he purchased a car for Rs 4 Lacsiii) Mr. X is a former ruler; his jewellery was recognized by Central Govt. as his heirloom in 1956.iv) Interest of Mr. Z in the HUF to which he is a memberv) Mr. Shyam owns only one house valued at Rs. 12 Lacs, the house has been build on a land area of 450 sq. meter.Solution i) Any property held by assessee under trust for any public purposes of charitable nature in India is exempt u/s 5 (I, hence value of trust property is neither includable in the wealth of Mr. Gupta nor the society is liable to pay wealth tax on it.ii) Balance on Non-resident external account is exempt u/s 5 (v), further Car acquired by him out of that balance is also exempt.iii) Jewellery in procession of a former ruler that has been recognized as an heirloom by central govt. is exempt u/s 5 (iv).iv) As Mr. Z is a member of HUF so his interest in family property is totally exempt from tax u/s 5 (ii)v) Since the land area does not exceed 500 sq. meters. , Thus the value of house is exempt from wealth tax as value of one house is exempt u/s 5 (vi)

NAME – Md. MASOWAR ALAM

ROLL NO – 04

SUBJECT – TAX

MCQ & TRUE & FALSE QUESTIONS

Q. (1) In which case wealth-tax is chargeable?

A) Company registered under section 25 of the Companies Act, 1956

B) Co-operative society

C) Social club

D) Political party

E) An association of persons or a body of individuals

(1 – e)

Q. (2) In which year Wealth Tax came into existence?

A) 1st Apr 1957

B) 1st March 1957

C) 1st Apr 1956

D) 1st March 1956

( 2 – a )

Q. (3) On which amount Wealth Tax is chargeable?

A) More than 3000000

B) Less than 3000000

C) Equal to 3000000

( 3 – a )

Q. (4) How much percentage is charged for Wealth Tax?

A) 1%

B) 1.5%

C) 0.5%

D) 2%

( 4 – a )

Q. (5) For how many years Wealth Tax is exempted for NRI after

being returned?

A) 7 years

B) 5 years

C) 6 years

D) 8 years

( 5 – a )

Q. (6) What are the reasons for being charged the Wealth Tax?

A) Improves the fairness of most tax systems

B) Effectively raises government revenue

C) Economic growth

D) Reducing economic inequality

E) All of them

( 6- e )

Q. (7) Who gets the special benefit under this law?

A) Pensioners

B) Retired persons

C) Senior citizens

D) Political party

E) All of them

( 7 – d )

Q. (8) Who is liable to be charged Wealth Tax?

A) A company

B) HUF

C) An association of persons or a body of individuals

D) Non-corporative taxpayers whose accounts are to be statutorily audited

E) All

( 8 – e )

Q. (9) Under which Act The credit balance in a Non-resident

(External) Account is exempt from wealth tax?

A) Foreign Exchange Regulation Act, 1973

B) Companies Act, 1956

C) Income-tax Act ,

D) Wealth Tax Act , 1957

( 9 – a )

Q. (10) Which section defines the Valuation Date?

A) Section 2 (Q)

B) Section 2(m)

C) Section 2(ea)

D) Section 4

( 10 – a )

Q. (11) Which date is the Valuation Date of the Assets?

A) 31st March

B) 1st April

C) 30th September

D) 1st January

( 11 – a )

Q. (12) Which building or land appurtenant is considered liable

Assets to Wealth Tax?

A) Commercial buildings

B) Residential buildings

C) Any guest house

D) Farm house situated within 25 kilometres from the local limits of any municipality

E) All

( 12 – e )

Q. (13) How much Cash is considered as An Asset in case of

Individual & HUF?

A) More than 50000

B) Less than 50000

C) Equal to 50000

D) Not any

( 13 – a )

Q. (14) Which Assets are considered as a Deemed Asset?

A) Assets transferred by one spouse or another

B) Assets held by minor children

C) Assets transferred under revocable transfer

D) Assets transferred to son’s wife

E) All

( 14 – e )

Q. (15) Which section defines the exemption of Wealth Tax?

A) Section 2

B) Section 4

C) Section 5

D) No one

( 15 – c )

Q. (16) Which section defines the Valuation of Assets?

A) Section 7(2)

B) Section 5

C) Section 2(ea)

D) No one

( 16 – c )

Q. (17) Which Assets are taxes exempted under Wealth Tax?

A) Property held under a trust or other legal obligation for any public purpose of a

Charitable

B) Coparceners interest in a HUF property

C) One residential building belonging to a former Ruler

D) Assets belonging to the Indian repatriates for 7 years on fulfilment of the

Conditions

E) All

( 17 – e )

Q. (18) Which Land is considered as an Asset related to urban area?

A) Land on which construction of a building is not permissible under any law

B) Land occupied by any building which has been constructed with the approval of

the appropriate authority

C) Unused land held by the assessee for industrial purposes for a period of two years

D) All

( 18 – d )

Q. (19) Which section defines the debt owe?

A) Section 2 (m)

B) Section 2 (q)

C) Section 2 (a)

D) Section 5

( 19 – a )

Q. (20) In which country Wealth Tax exists?

A) Austria

B) Denmark

C) Germany

D) Sweden

E) No one

( 20 – e )

TRUE OR FALSE QUESTIONS

Q. (1) On January 2006, wealth tax was abolished in Finland

A) True B) False

( 1 – True )

Q. (2) Window Tax of 1696 was based on a Wealth Tax concept

A) True B) False

( 2 – True )

Q. (3) In France, the net worth tax on "natural persons" is called the "Equity tax on

Wealth".

A) True B) False (solidarity tax on wealth)

( 3 – False )

Q. (4) Wealth tax would improve the fairness of a tax system

A) True B) False

( 4 – True )

Q. (5) Valuation of illiquid assets including real estate, privately held businesses,

antiques, Art Etc. are major flaws in a wealth tax system

A) True B) False

( 5 – True )

Q. (6) The Wealth Tax Act is an important indirect tax legislation

A) True B) False (direct tax )

( 6 – False )

Q. (7) An association of persons or a body of individuals are not liable to pay Wealth

Tax

A) True B) False

( 7 – True )

Q. (8) Assessment year means a period of 12 months commencing from the first day of

March

A) True B) False (31st March)

( 8 – True )

Q. (9) Wealth Tax is often a progressive tax on "taxable income

A) True B) False

( 9 – False )

Q. (10) Residential status is decided as per the provisions of the Income-tax Act

A) True B) False

( 10 – True )

Q. (11) Any house for residential or commercial purposes which forms part of stock-in-

trade are liable to pay Wealth Tax

A) True B) False

( 11 – False )

Q. (12) Agricultural land situated in urban area is not liable to wealth-tax

A) True B) False

( 12 – True )

Q. (13) Assets transferred under revocable transfer are considered as Deemed Assets

A) True B) False

( 13 – True )

Q. (14) One house or part of a belonging to an individual or HUF is exempt from

Wealth Tax

A) True B) False

( 14 – True )

Q. (15) Only debts which are ‘owed’ on the valuation date are deductible

A) True B) False

( 15 – True )

Q. (16) In cases of non-resident or resident but not ordinarily resident or a foreign

national who is a non-resident, no wealth tax would be leviable on property

outside India

A) True B) False

( 16 – True )

Q. (17) In cash of any person cash in hand not recorded in the books of account shall be

included in assets except HUF or Individual

A) True B) False

( 17 – True )

Q. (18) Wealth tax is payable on net wealth on ‘valuation date’. As per Section 2(q)

A) True B) False

( 18 – True )

Q. (19) Every person is required to file a return of net wealth in Form ‘A’

A) True B) False

( 19 – True )

Q. (20) Loan and debts interest are exempt from Wealth Tax

A) True B) False

( 20 – True )

NAME – NABANITA DUTTA

ROLL NO – 26

THEORY QUESTIONS

Q1) What is wealth Tax?

Ans: Wealth tax is not a very important or high revenue tax in view of various exemptions. Wealth tax is a socialistic tax. It is not on income but payable only because a person is wealthy.

Wealth tax is payable on net wealth on ‘valuation date’. As per Section 2(q), valuation date is 31st March every year. It is payable by every individual, HUF and company. Tax rate is 1% on amount by which ‘net wealth’ exceeds Rs 30 lakhs from AY 2010-11. (Till 31-3-2009, the limit was Rs 15 lakhs). No surcharge or education cess is payable.

No wealth-tax is chargeable in respect of net wealth of any company registered under section 25 of the Companies Act, 1956; any co-operative society; any social club; any political party; and a Mutual fund specified under section 10(23D) of the Income-tax Act [section 45]

Net wealth = Value of assets [as defined in section 2(ea] plus deemed assets (as defined in section 4) less exempted assets (as defined in section 5), less debt owed [as defined in section 2(m)].

Debt should have been incurred in relation to the assets which are included in net wealth of assessee. Only debt owed on date of valuation is deductible.

In case of residents of India, assets outside India (less corresponding debts) are also liable to wealth tax. In case of non-residents and foreign national, only assets located in India including deemed assets less corresponding debts are liable to wealth tax.

Net wealth in excess of Rs. 30,00,000 is chargeable to wealth-tax @ 1 per cent (on surcharge and education cess).

Q2) What is Assessment Year?

Ans: - Assessment year means a period of 12 months commencing from the first day of April every year falling immediately after the valuation date.

Q3) What are the advantages of Wealth Tax?

Ans: There are four advantages of Wealth Tax. They are as follows:

i) Improves the fairness of most tax system.

ii) Effectively raises government revenue.

iii) Economic growth.

iv) Social effects by reducing economic inequality.

Fairness: It is generally held that taxes should be commensurate with ability to pay, and the tax laws of nearly all nations reflect this to a greater or lesser extent. A household’s wealth, its net worth, along with its income, are usually considered the best measures of socioeconomic status and so ability to pay. Net worth is also a good measure of the extent to which a household has profited from the economic infrastructure provided by governments, that is all taxpayers. For instance, it can be claimed that a wealthy investor or business owner has profited more than average citizen from the public education (of the work force), roadways (for carrying on commerce), financial security for the elderly (consumers), a judiciary to enforce commercial agreements, financial regulation, government subsidies to and rescues of corporations, and so on.

It is argued that a wealth tax would improve the fairness of a tax system particularly to the extent that it replaces taxes that are less commensurate with ability to pay and profits from government-provided financial infrastructure. Sales and value added taxes are generally regressive as to income or wealth, since the wealthy spend a smaller fraction of their income and wealth than the middle class and poor. Real estate property taxes are generally regressive on overall wealth since the tax is a fixed percentage of the full value of the home. For young, middle-class families especially, this full value is often many times their net worth, while for the very wealthy it is generally a small fraction of their net worth.

Income taxes are often a progressive tax on "taxable income," but they generally do not tax unrealized capital gains from investments. Unrealized capital gains are likely the largest source of investment gains, but they are generally not defined as income for purposes of taxation. Therefore, for instance, an individual with a million dollars in an equity mutual fund may have the value of that holding increase $100,000 in a year, but can pay little or no taxes on that gain (in some cases even if he redeems shares from the fund). If Warren Buffett's unrealized capital gains were considered taxable income, his income tax rate would have been 0.13% rather than the 18% rate he reported for 2006.

Taxing unrealized capital gains directly is impractical since it would result in massive yearly swings in tax revenue for governments and even large payouts from the government in years that equity markets are down. However, a 1-2% tax on household wealth above an exempt amount of several hundred thousand dollars, (coupled with elimination of taxes on dividends, realized capital gains and estates) would amount to a roughly 25% tax on typical investment income/gains of 4-6% (including unrealized capital gains). This tax rate would be similar to typical tax rates on income from work or interest on savings accounts. The Netherlands imposes a 1.2% tax on net worth, which is justified as a 30% tax on an assumed ("deemed") investment return (income) of 4%. This justification could be used to answer criticisms that wealth taxes represent "double taxation" or "confiscation of property." In the United States the same

construction could be used to defend a federal wealth tax as a form of income tax, which is authorized by the Constitution.

In 1999, Donald Trump proposed a once off 14.25% wealth tax on the net worth of individuals and trusts worth $10 million or more. Trump claimed that this would generate $5.7 trillion in new taxes, which could be used to eliminate the national debt.

The reduction of wealth condensation in the investing class and bringing tax rates for investment returns closer to tax rates for work could reduce excessive investment and risky investment, which create investment bubbles, which in turn often contribute to the formations of some recessions. The reduction in regressive taxes, like property and sales taxes, would reduce the tax burden on newly unemployed workers, who owe these taxes despite having no income. This would help maintain their spending power and could prevent a recession from spiraling deeper. It has also been argued that a wealth tax could encourage the investment in assets that are more productive.

It is argued that more financial resources in the hands of the poor and middle class would improve the educational opportunities for their children. This would promote social mobility, mean more citizens reach their full potential of productivity, and so improve the economy. More economic equality has been correlated with higher levels of innovation. Increased government revenue from a wealth tax could be used to promote public investment in services like education, basic science research, and transportation infrastructure, which in turn improve economic efficiency. Increased government revenue from a wealth tax coupled with restrained government spending would reduce government borrowing and so free more credit for the private sector to promote business. A strong, steadily growing economy could in turn increase tax revenues further, allowing for more deficit reduction, and so on in a virtuous cycle.

Q4) What are the disadvantages of Wealth Tax?

Ans: A 2006 article in The Washington Post titled "Old Money, New Money Flee France and

Its Wealth Tax" pointed out some of the harm caused by France's wealth tax. The article gave

examples of how the tax caused capital flight, brain drain, loss of jobs, and, ultimately, a net loss

in tax revenue. Among other things, the article stated, "Eric Pichet, author of a French tax guide,

estimates the wealth tax earns the government about $2.6 billion a year but has cost the country

more than $125 billion in capital flight since 1998."

There are several major flaws in a wealth tax system. First, valuation of illiquid assets including

real estate, privately held businesses, antiques, art etc can be purely arbitrary. Secondly, wealth

valuation fluctuates in time due primarily to the money supply fluctuations. This creates a moral

hazard whereby governments can use inflation as a direct means of raising revenue. Finally,

elderly citizens whose income is much smaller than their non-revenue generating assets may find

it near impossible to pay their taxes without continued asset liquidation.

Due to valuation and accounting difficulties, wealth taxes systems have high management costs,

for both the taxpayer and the administrating authorities, compared to other taxes. Per one study

in the Netherlands the aggregated cost of the tax’s yield was roughly five times that of income

tax.

Q5) When Wealth Tax Act, 1957 was commenced?

Ans: (1) This Act may be called the Wealth-Tax Act, 1957.

(2) It extends to the whole of India .

(3) It shall be deemed to have come into force on the 1st day of April, 1957.

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. 

Q6) Write a short note on Wealth Tax?

Ans: 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.

Q7) What are the important provisions concerning the Wealth Tax act?

Ans: Wealth Tax Returns

Wealth Tax in IndiaWealth 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.  The important provisions concerning the Act are mentioned below – 1. 

1.   Wealth Tax

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 1 st 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.

2.   Incidence of Wealth Tax

Incidence of tax in the case of an individual depends upon his residential status and nationality. Residential status is decided as per the provisions of the Income-tax Act (Chapter I Supra).

The scope of liability to wealth tax is as follows:

d. In the case of an individual who is a citizen of India and resident in India, a resident—HUF and company resident in India;Wealth tax is chargeable on net wealth comprising of 

i. All assets in India and outside India;

ii. All debts in India and outside India are deductible in computing the net wealth.

e. In the case of an individual who is a citizen of India but non-resident in India or not ordinarily resident in India, HUF, non-resident or not ordinarily resident in India and a company non-resident in India;

i. All assets in India except loan and debts interest whereon is exempt from income-tax under section 10 of the Income-tax Act are chargeable to tax.

ii. All debts in India are deductible in computing the net wealth.

iii. All assets and debts outside India are out of the scope of Wealth Tax Act.

f. In the case of an individual who is not a citizen of India whether resident, non-resident or not ordinarily resident in India:Same as in (b):

Explanation

The credit balance in a Non-resident (External) Account is exempt from wealth tax provided the depositor is a person resident outside India as defined in the Foreign Exchange Regulation Act, 1973.

Valuation Date

Wealth Tax is levied on the net wealth of a person as on a particular date. This date is known as valuation date. According to section 2(Q) the valuation date is the last day of the previous year relevant to the assessment year. Hence, valuation date is March 31, immediately proceeding the assessment year.

3. Assets

The assets liable to wealth tax as per the definition given in section 2(ea) of the Wealth Tax Act are as under :

(1) Any building or land appurtenant thereto which shall include :

v. commercial buildings;vi. residential buildings;

vii. any guest house;

viii. a farm house situated within 25 kilometres from the local limits of any municipality (whether known as Municipality, Municipal Corporation or by any other name) or a Cantonment Board.

However, the following buildings will not be included to assets:

iv. a house meant for residential purposes 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. 5,00,000/-.

v. any house for residential or commercial purposes which forms part of stock-in-trade;

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

The following buildings shall also not be an asset w.e.f. A.Y. 1999-2000:

c. any residential property that has been let out for a minimum period of 300 days in the previous year.

d. any   property   in   the   nature   of  commercialestablishments or complexes.

(2)  Motor Cars (excluding those used by the assessee in the business of running them on hire or as stock-in-trade).

(3)   Jewellery, bullion, furniture, utensils or any other, article made wholly or partly of gold, silver, platinum or any other previous metal or any alloy containing one or more of such precious metals (excluding those held as stock-in-trade by the assessee). Jewellery includes:

iii. ornaments made of gold, silver, platinum or any other precious metal of any alloy containing one or more of such precious metals, whether or not” containing any precious or semi-precious stones, and whether or not set in any furniture, utensils or other article or worked or sewn into~any wearing apparel;

iv. precious or semi-precious stones, whether or not set in any furniture, utensils or other articles or worked or sewn into any wearing apparel.

For the removal of doubts it has been clarified by explanation 2 to section 2(ea) that the term jewellery does not include the Gold Deposit Bonds issued under the Gold Deposit Scheme, 1999 notified by the Central Government.

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

(5)   Urban land; “Urban Land” means land situated :

iii.

behalf by notification in the Official Gazette.

However, the following urban land shall not be included in assets;

v. 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;

vi. land occupied by any building which has been constructed with the approval of the appropriate authority;

vii. any unused land held by the assessee for industrial purposes for a period of two years from the date of its acquisition by him.

viii. land held by an assessee as stock-in-trade for a period of five years from the date of its acquisition by him. (Ten years w.e.f. A.Y. 1999-2000).

Note: Agricultural land situated in urban area is not liable to wealth-tax.

(6)   Cash in hand;

c. In case of an individual and HUF cash in hand in excess of Rs. 50,000/- shall be included in assets.

d. In cash of any other person cash in hand not recorded in the books of account shall be included in assets.

4. Deemed Assets

In computing the net wealth of an assessee, the following assets are included as belonging to the assessee by virtue of section 4(l)(a) of the Wealth Tax Act, 1957.

f. Assets transferred by one spouse or another.g. Assets held by minor children.

Whether the assets are held by a physically or mentally handicapped minor child (specified in section SOU of the Income Tax Act) such assets will not be clubbed with the net wealth of the parent. In such a case the net wealth of the handicapped minor child shall be determined separately and assessee in his hands.

h. Assets transferred to a person or an Association of Persons for immediate  or deferred benefit of the transferrer,   his   or   her   spouse   without   adequate consideration.

i. Assets transferred under revocable transfer.

j. Assets transferred to son’s wife.Assets transferred to a person or Association of Persons for the benefit of son’s wife.

5. Exempt Assets

The following assets are totally exempt from Wealth Tax (Section 5).

g. Property held under a trust or other legal obligation for any public purpose of a charitable or religious nature  in India subject to the  satisfaction of the stipulated conditions;

h. Coparcenary interest in a HUF property;

i. One residential building belonging to a former Ruler;

j. Former   Ruler’s  jewellery   (excluding   his   personal jewellery) which has been recognized as a heirloom by the Central Government before 1.4.1957 or by the CBDT after that date;

k. Assets belonging to the Indian repatriates for 7 years on fulfillment of the conditions prescribed;

l. One house or part of a house (with effect from 1.4.1999 one house or part of a house or a plot of land) belonging to an individual or HUF is exempt from Wealth Tax.

6. Debts Owned

Wealth tax is levied on the ‘net wealth’ which means that from the aggregate of all assets (including deemed assets but excluding exempt assets) the value of debts owed on the valuation date shall be deducted subject to the satisfaction of the following two conditions viz.

c. Only debts which are ‘owed’ on the valuation date are deductible.d. Debts should have been incurred in relation to those assets which are included in the net

wealth of the assessee.

Broadly, a debt could be defined as an obligation to pay a liquidated or certain sum of money. A sum which may or may not become due or the payment of which depends upon contingencies which may or may not happen is not a debt. (See Sardar C.S. Angre v. CWT (1968) 69 ITR 336 (MP).

7. Wealth Tax Liability—Whether a Debt Owed?

Wealth tax liability is not deductible in computing the net wealth liable to tax. This position has been made clear by the amendment of section 2(m) with effect from the assessment year 1993-94. Liability under the Wealth-tax Act has been considered as a ‘debt owed’ by the assessee incurred in relation to the assets taxable under the Wealth-tax Act. Such a liability has been considered to be the personal liability of the assessee and is not a debt incurred but a debt created by statute. Hence is deduction is not permissible (See CBDT’s circular No. 663 dated 28 th

September, 1993).

8. Valuation of Assets

For the purpose of Wealth-tax the value of any asset (other than cash) shall be its value as on the valuation date determined in the manner laid down in Section 7(2) and in Schedule III to the Wealth Tax Act.

9. Return of Wealth Tax

Every person is requaired to file a return of net wealth in Form ‘A’ if his net wealth or net wealth of any other person in respect of which he is assessable under the Act on the valuation date is such an amount as to render ‘ him liable to wealth tax. The dates of filing the return are the same as under the Income-tax Act for filing returns. Where wealth tax is payable on the basis of return to be furnished, the assessee is required to pay the tax before filing of the return and such return is to be accompanied by the proof of payment.

10. An Illustration

For the assessment year 2001-2002, ‘R’ an Indian National and resident and ordinary resident in India furnishes the following particulars regarding his assets and liabilities.

1 Residential House outside India 50,00,0002 Jewellery in India 50,00,0003 Loans taken:

i) For residential house outside India 10,00,000ii) For   acquiring jewellery

5,00,000

Computation of taxable wealth :

1 Jewellery in India 50,00,000Less: Debt owed concerning jewellery 5,00,000

—————Net value of jewellery 45,00,000

2 Property outside India 50,00,000Less : Debt owed 10,00,000

—————Net value of property 40,00,000

=========Total net wealth 85,00,000

In cases of non-resident or resident but not ordinarily resident or a foreign national who is a non-resident, no wealth tax would be leviable on property outside India. In their cases, wealth-tax would be leviable on a sum of Rs. 45,00,000 lakhs only.

NAME: TEJAS KULKARNI

ROLL NO- 48

TOPIC-WEALTH TAX

CLASS-PGDM-BANKING & FINANCE

MATCH THE FOLLOWING

Column A Column B

1) Assessment year a) Solidarity tax on wealth

2) France b) 12 months

3) Return on Wealth tax c) 31st March

4) Valutation Date d) Form A

Ans- 1-b, 2-a, 3-d,4-c

Tax Abolishement years

Column A Column B

1) Germany a) 2007

2) Sweden b) 1997

3) Spain c) 2006

4) Finland d) 2008

Ans- 1-b, 2a, 3-d, 4-c

Column A Column B

1) Income Tax a) Indirect Tax

2) Wealth Tax b) Indirect Tax

3) Customs Duty c) Direct Tax

4) Service Tax d) Direct Tax

Ans- 1-c, 2-d, 3-a, 3-b

Column A Column B

1) Depreciable asset a) Book Value

2) Non-Depreciable asset b) WDV

3) Closing stock c) Value as per I.T act

Ans- 1-b, 2-a, 3-c

Column A Column B

1) Residential status a) HUF

2) Location of assets as on valuation date

b) Individual

3) Political party c) Non chargeability of wealth tax

4) Trade unions d) Individual

5) Trustees e) Individual

Ans- 1-b, 2-c, 3-b, 4-d, 5-e