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If you own certain assets worth more than 30 lakh, you are liable to pay wealth tax and file your return by July 31
The din generated by income tax returns tends to push the other taxes into the background. The wealth tax is the neglected child of the direct taxes family. However, remember that ignoring wealth tax can lead to serious problems for a taxpayer, with the penalty ranging from 100% to 500% of the unpaid tax. In extreme cases of willful default, a taxpayer may be punished with imprisonment ranging from six months to seven years.
Wealth tax raked in only 787 crore for the exchequer in 2011-12, which was a piffling 0.16% of the total direct tax kitty of 4,93,912 crore. The securities transaction tax brings in seven times as much revenue as the wealth tax.
This laxity on the part of the government has encouraged taxpayers to ignore their wealth tax liability. According to the Wealth Report 2012 of the Boston Consulting Group, India's rich are becoming richer. Nearly 28,000 Indian households crossed the threshold to become dollar millionaires (financial investments of over 5.5 crore) in 2011. Though financial assets do not invite wealth tax, real estate and gold, two favourite investment options of the super rich, are included. However, this is not reflected in the wealth tax collection, which has grown at a tardy pace, to say the least (see chart). However, this could change soon. A committee headed by former CBDT chairman, MC Joshi, has sought stricter punishment for tax evasion. The panel wants the minimum imprisonment for income tax and wealth tax evasion to be three years.
Most investors in real estate have no idea about the tax implication of buying a second property. A second house won't attract wealth tax only if it is rented out for at least 300 days in a year. It can be a double whammy for the owner if the house is lying vacant, for he will not only have to pay tax on the notional rental income, but the value of the house will be added to his net taxable wealth. This is why savvy investors prefer to put money in commercial real estate, which does not attract wealth tax.
An increased focus on wealth tax compliance can bring in significant revenue for the exchequer. The best part is that there cannot be any political opposition to such a move because the law already exists.
Tax experts also say that the current limit of 30 lakh is not in sync with reality. A small flat or plot of land in a metro will easily land even a middle-class family in the wealth tax net.
However, there's good news in store. The original Direct Taxes Code had proposed to raise the threshold of assets for wealth tax to 50 crore and reduce the tax to 0.25%. It had also sought to bring financial assets under the tax ambit. The revised DTC has not specified the limit, but has hinted that financial assets will not be included and that the threshold needs to be raised. Till that happens, make sure you pay your wealth tax and file the return to avoid a missive from the taxman.
Wealth tax primer
WHAT IS TAXABLE?
• More than one house, if it is unoccupied; ornaments; luxury cars, watches, yachts and aircraft; over 50,000 in cash.
HOW MUCH IS THE TAX?
• 1% of the value of the assets exceeding 30 lakh.
WHAT IS EXEMPT?
• Any one residential property.
• Commercial property.
• Financial assets
• Any outstanding loan taken to buy the asset.
FILING DEADLINE AND FORM
• Wealth tax return has to be filed by 31 July.
• You have to use the four-page Form BA for filing the return.
WHAT IS THE PENALTY?
• 1% interest for every month of delay.
• Penalty for evasion is 100-500% of the evaded amount.
• In extreme cases, even jail.
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