Wealth tax

Understanding Wealth Tax

Wealth tax was imposed under the Wealth Tax Act of 1957, which aimed to tax the net wealth of individuals and entities. Unlike income tax, which is levied on earnings, wealth tax was imposed on the value of assets owned by an individual or entity. This included real estate, jewellery, cars, yachts, and other luxury items.

The objective of wealth tax was to promote economic equality by ensuring that high-net-worth individuals contributed more to the nation’s revenue. However, due to several inefficiencies in collection and administration, wealth tax was ultimately abolished.
 

Historical Background of Wealth Tax in India

Introduction of Wealth Tax

Wealth tax was introduced in 1957 under the Wealth Tax Act, 1957 as a part of direct taxation policies. The idea was to ensure that individuals and organisations with significant assets contributed more to the government’s revenue pool. The tax was applied annually based on the net wealth of the taxpayer.

Wealth Tax Applicability

Wealth tax was applicable to:

• Individuals (both resident and non-resident Indians)
• Hindu Undivided Families (HUFs)
• Companies (both domestic and foreign)

Wealth Tax Calculation

Wealth tax was levied at 1% on net wealth exceeding ₹30 lakh. The net wealth was determined by calculating the total market value of all taxable assets and deducting any outstanding liabilities related to those assets.

For example, if an individual owned assets worth ₹50 lakh and had liabilities of ₹10 lakh, the net wealth would be ₹40 lakh. Since it exceeded the threshold of ₹30 lakh, the wealth tax would be 1% of ₹10 lakh = ₹10,000.
 

Assets Covered Under Wealth Tax

Wealth tax was applicable to specific assets, which were categorised into the following:

1. Real Estate

• Any second residential property (primary residence was exempt)
• Commercial properties that were not used for business purposes
• Plots of land larger than 500 square metres

2. Luxury Items

• Jewellery, gold, platinum, silver, and other precious metals
• Cars and private aircraft (unless used for commercial purposes)
• Yachts, boats, and other luxury vehicles

3. Cash and Other Assets

• Cash-in-hand exceeding ₹50,000
• Assets transferred to spouses or minor children (to prevent tax evasion)

Exempted Assets

Certain assets were exempt from wealth tax, including:

• Shares, bonds, and securities
• Mutual funds and financial instruments
• Properties rented for 300+ days per year
• Vehicles used for commercial purposes (taxis, rental cars)
• Business assets or stock-in-trade
   

Abolition of Wealth Tax

Reasons for Abolishing Wealth Tax

Despite being in effect for decades, the wealth tax was ultimately abolished in the Union Budget 2015-16 due to several inefficiencies:

1. High Administrative Costs

The government found that the cost of collecting wealth tax far exceeded the revenue generated. The total wealth tax collected in 2013-14 was approximately ₹1,008 crore, which was negligible compared to income tax collections.

2. Difficulty in Valuation of Assets

Determining the market value of assets like real estate and jewellery was complex and led to disputes between taxpayers and the tax department.

3. Tax Evasion and Non-Compliance

Wealth tax led to widespread tax evasion, as individuals often underreported the value of their assets.

4. Simplification of Tax Structure

The abolition of wealth tax was aimed at making tax compliance simpler and more transparent for individuals and businesses.
 

Introduction of Surcharge in Place of Wealth Tax

To compensate for the loss of revenue, the government introduced an additional surcharge on super-rich individuals and companies:

• Individuals earning above ₹1 crore per annum were required to pay a 12% surcharge (later revised to 15%).
• Companies with taxable income above ₹10 crore were subjected to an increase in surcharge from 2% to 12%.

This change was expected to generate ₹9,000 crore annually, compared to the ₹1,000 
crore collected through wealth tax.
 

Impact of Wealth Tax Abolition

1. Super-Rich Individuals Pay More Tax

While wealth tax was abolished, high-net-worth individuals (HNIs) still contribute more through the increased surcharge on income tax.

2. Better Compliance

The removal of wealth tax led to better compliance and less tax evasion, as income tax and surcharge are easier to track.

3. Increase in Government Revenue

The introduction of surcharge on the wealthy resulted in a significant increase in tax collections.

4. Encouragement for Investment in Real Estate

The abolition of wealth tax boosted real estate investments, as taxpayers no longer had to pay tax on multiple properties.
 

Comparison: Wealth Tax vs Income Tax

Future of Wealth Tax in India

Though wealth tax was abolished, there are ongoing debates about reintroducing a similar tax on ultra-rich individuals. Given the rise in economic disparity, some policymakers advocate for a wealth tax on billionaires to generate revenue for social welfare programs.

Globally, countries like France, Spain, and Norway continue to levy a wealth tax, while others, such as the United States and the United Kingdom, rely on progressive income tax systems.

In India, instead of wealth tax, the government may consider increasing the surcharge on high-income individuals or introducing luxury taxes to ensure equitable revenue collection.
 

Conclusion

Wealth tax in India was a direct tax imposed on high-net-worth individuals, HUFs, and companies based on their assets. Despite its noble intention of reducing economic disparity, it proved inefficient due to high administrative costs, tax evasion, and valuation challenges. Consequently, the government abolished wealth tax in 2015 and replaced it with an additional surcharge on high-income earners.

While the abolition of wealth tax simplified tax compliance and increased revenue, debates on reintroducing a progressive wealth tax on billionaires continue. Whether India will reconsider wealth tax in the future depends on economic policies and the evolving needs of the country.

For now, super-rich individuals continue to contribute through surcharges, and wealth creation is incentivised by removing the burden of wealth tax.