By replacing the Wealth Tax with a surcharge, the finance minister has not only cut down on unnecessary paper work for the tax-payer, but the government stands to gain substantially.
The abolition of Wealth Tax and increase in surcharge for the superrich has implications for all.
The first budget of the Narendra Modi government saw the abolition of the Wealth Tax, even as it raised the surcharge for the rich by two per cent. This change will benefit/affect all: the government, the middle-class as well the superrich.
The Wealth-Tax Act, 1957, extended to the whole of India till it got abolished in 2015. It was a direct tax, which was charged on the net wealth of the assessee. It was a tax on the benefits derived from ownership of property. The tax was to be paid annually on the same property on its market value, whether or not such property yielded any income.
Till now, an individual, a Hindu Undivided Family (HUF) or a company had to pay a wealth tax of one per cent on net wealth (i.e assets minus liabilities) over and above `3 million. After continuing for more than 50 years, the government finally decided to scrap this act.
Wealth tax was replaced by increasing the surcharge on the superrich. A surcharge of 10 per cent was announced in 2013 and in 2015 it has been revised to 12 per cent. The surcharge would be applicable on individuals, HUFs, firms, cooperative societies and local authorities having income exceeding `10 million.
1. The surcharge on all individuals with a taxable income of `10 million and above per annum increases by two per cent
2. Such individuals will have to pay 12 per cent surcharge instead of 10%
3. Firms with annual income of `100 million and above will also pay 12 per cent surcharge
4. Companies with incomes between `10 million and `100 million would be paying a surcharge of seven per cent
With the abolition of Wealth Tax tracking of wealth held by individuals will be done through income tax returns. Information regarding assets that are currently required to be furnished while filing wealth-tax returns will be required to be given while filing income tax. This will ensure that the abolition of wealth tax does not lead to escape of any income from the tax net.
Why was Wealth Tax abolished?
The Wealth Tax was abolished to simplify and widen the tax base. The Act had many issues; for instance, many were not even aware of such a tax and getting assets valued was also a difficult task. Also assets like, jewellery, unaccounted cash and cars are not easy to be tracked.
Collection was also a problem and the tax collected does not form a significant part of the total collection of direct taxes in India. According to Finance Minister Arun Jaitley, there was no point continuing with wealth tax as the cost of collection was very high and the yield low.
The change is expected to fetch a surcharge of Rs90 billion against the sacrifice of Rs10.08 billion. And so the smart move of swapping Wealth Tax with a higher tax on the superrich.