TAX NEWS - June 2010

Financial assets not in wealth tax ambit

Financial assets such as securities would be kept out of the ambit while assessing wealth tax, the revised draft of the direct tax code has proposed.

The earlier draft code, released in August, had suggested that financial assets be included in wealth tax calculations, a move that was aimed at bringing about an element of equity when assets are transferred across generations in a country that levies no inheritance tax.

This is a policy rethink, said Shefali Goradia, partner at consultancy firm BMR Advisors.

The August draft had proposed to levy 0.25% of the wealth in excess of Rs50 crore, including financial assets, of an individual or a Hindu undivided family.

The proposals of the revised draft code now stick to the current regime that does not levy wealth tax on financial assets.

Bringing financial assets into wealth taxation was an effective way to partially capture tax that is currently avoided, said an income-tax official, adding that once financial assets are removed from the ambit of wealth tax, it would weaken the tracking measure.

Current wealth tax rules do not allow the income tax department to ask an assessee to report assets that are exempt from wealth tax, according to another official of the income-tax department. Both officials spoke on condition of anonymity.

According to the first official cited above, the moot point is whether the deterrents are strong enough to persuade assessees to report their financial worth accurately now that the provisions on wealth tax are diluted.

"Consequence drives most of compliance," Goradia said on the generally observed behaviour on tax compliance.

Wealth tax was not among the nine proposals of the August draft, which made up the lion's share of around 1,600 representations the income tax department received, according to Sunil Mitra, revenue secretary of the finance ministry, who made the revised draft available to the media on Tuesday.

The revised draft code covers the nine proposals that attracted the most attention, and two more, of which wealth tax was one.

Wealth tax historically has been an insignificant part of revenue collection. In the current fiscal, it is expected to raise only Rs603 crore of the Rs4.21 trillion direct tax collection forecast in the budget.

At best, a few thousand assessees would have been covered by the wealth tax proposals of the August draft code, the first tax official quoted earlier said.