Wealth Tax in India - Act, 1957
The 1957 "Wealth Tax Act" was an act of the Indian Parliament, which imposes wealth tax on individuals, Hindu non-separated families (HUF), or companies.
Apart from this, it also imposes a property tax on the net wealth of a person on the valuation date. Clearly, the bill applies to all of India. Hence, since April 1, 2016, the scope of application of the law has ended.
Also, the valuation date is an important part of calculating wealth tax. The net wealth of the individual on the valuation date determines the tax amount. The assessment date is March 31st immediately following the assessment year.
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Pros and Cons of Wealth Tax in India
- Eliminate inequality: Undoubtedly, a wealth tax will help reduce wealth inequality. Without a doubt, most of the world’s wealth is in the hands of a few people. Therefore, a wealth tax is a way for the government to redistribute wealth. It also balances the scale to support the middle and lower classes. We can use the income generated through the wealth tax to improve healthcare, housing, education, public infrastructure, etc.
- Target the rich effectively: Many wealth tax advocates believe that this type of taxation is the best way to tax the wealthy who make most of their money through investment and real estate. According to these wealth tax proponents, income tax does not apply to the rich, as it does to regular salaried employees. Therefore, wealth tax is a more effective way to actually obtain tax from the rich.
- Lead to double taxation: Firstly, one of the main flaws of wealth tax is that it leads to double taxation. Taxing wealth every year basically means that the wealthy will pay separate fees to the national tax authorities. One for earning income and the other for retaining the same income.
- Lead to capital flight: Secondly, a frequently mentioned criticism of the wealth tax is that it encourages the wealthy to transfer their assets abroad. Fortune merchants can easily move out and never return to avoid having to deal with this kind of tax.
- Difficult to calculate: Lastly, a big problem with wealth tax is how to calculate it.
How is Income Tax different from Wealth Tax?
1. Firstly, the most important difference between income tax and wealth tax is that Income Tax is the tax payable on the income of a fiscal year. Whereas Wealth Tax is the tax payable on anything you buy with money after paying income tax.
2. Above all, individuals belonging to the wealthy class of society pay wealth tax to ensure that high-income entities pay higher taxes. Individuals, HUF, and companies whose annual income exceeds Rs 3 million will be charged at 1%. Whereas Income Tax is the amount of tax that you need to pay when your income exceeds the tax allowance.
Indian residents are obligated to pay wealth taxes on their global assets. While NRI should only pay wealth taxes on assets held in India.
According to the "Income Tax Act", taxpayers are obliged to pay Income Tax. They are also entitled to claim deductions and tax refunds.
A wealthier segment of society pays wealth tax. The purpose of this is to achieve equality between taxpayers. However, due to the 2015 budget, the wealth tax abolished because the cost of recovering the tax exceeds the benefit.
The abolition of the wealth tax also simplified the tax structure. Hence, as an alternative to the wealth tax, the Minister of Finance raised the surcharge for the super-rich from 2% to 12%.
Individuals earning more than Rs 1 crore and companies earning more than Rs 100 crore belonging to the super-rich market.
According to the Wealth Tax Act of 1957, wealth tax is a direct tax that applies to individuals’ personal assets.
The Wealth Tax act has been replaced by a 12% surcharge on the income of high-net-worth individuals, Hindu minor households, and companies.
HNI refers to people with an income of 10 million rupees or more, and companies with an annual income of 10 million rupees or more.
The purpose of wealth tax is to increase the direct tax levied from the rich to reduce the inequality of wealth in India as a whole and to ensure that these people make a greater contribution to India’s income.
Why is Wealth Tax in India abolished?
Wealth tax abolished in India due to the following reasons:
1. A simpler tax system: Firstly, by abolishing the wealth tax, the government taking advantage of loopholes in the wealth tax. Thereby reducing the scope of some taxpayers.
2. Simple taxation procedures: Secondly, the Indian government wants to simplify procedures to simplify tracking. It will also increase transparency in response to the complex nature of Indian tax laws.
3. Prevention of leakage: Thirdly, detailed information about the assets submitted by taxpayers in income tax returns will help officials associate declared wealth with declared income. Therefore, tax officials can ensure that there is no tax "leakage".
4. Improved reporting function: Moreover, under the levy surcharge system, taxpayers will have to report any other information in their income tax returns to list their assets and liabilities.
5. Curbing the expansion of the tax base: Considering that the number of individuals submitting income tax returns exceeds the number of individuals submitting wealth tax returns, the Indian government hopes to include more people in its tax network.
6. Expensive distribution: Additionally, the cost of a wealth tax is much higher than the benefit. In addition, wealth tax accounts for a small percentage of direct taxes levied in India.
7. Administrative burden: Every taxpayer must value its assets in accordance with the Wealth Tax Rules to calculate its net wealth. For certain assets such as jewelry, taxpayers must obtain an assessment report from a registered appraiser, which in turn increases the tax collection process.
A closing thought
Wealth tax help reduce the vast income and wealth inequality in the country. The purpose of levying wealth tax is to make wealthy and wealthier taxpayers equal. The key factor in applying wealth tax is resident status.
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