(NC Hegde is partner, Zainab Bookwala is manager and Risha Gandhi is assistant manager at Deloitte Haskins & Sells LLP)
As proclaimed in the Budget speech by the Finance Minister, one of the five pillars on which budget 2015 is laid is 'More governance and less government'. The objective is two fold - ease of doing business and simplification of tax procedures. Both the objectives will definitely ensure growth of business as well as growth of Indian economy in the long run.
Currently, the Indian tax law appears to have a great number of complexities which lead to a lot of tax litigation. The government has started taking measures to streamline the same by proposals such as introduction of GST, clarification regarding indirect transfers, deferment of GAAR, etc. One such proposal which will help to simplify the tax laws to some extent and remove administrative burden is the abolition of wealth tax, a tax introduced w.e.f. 1957 and subsequently thoroughly amended under the recommendations of the Chelliah Committee w.e.f 1993. It is pertinent to note that the Chelliah Committee had recommended abolition of wealth tax in respect of all items of wealth other than those which can be regarded as unproductive forms of wealth (viz, vacant land not used for agriculture, etc).
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As per the existing direct tax law, a person has to comply with the income tax laws as well as the wealth tax legislation. Wealth tax is a levy of tax on the net wealth including foreign assets and liabilities as on the year end. The primary motive of wealth tax was to tax the rich taxpayers who had accumulated wealth either on their own or by inheritance and were thus required to contribute more to the exchequer. Net wealth is the aggregate value of all assets (excluding exempted assets) of a person on the valuation date, in excess of the aggregate value of all debts owed by the said person on the valuation date which have been incurred in relation to the taxable assets.
In the previous Finance Bill, wealth tax return was made mandatory for all the individuals wherein disclosure of all the assets and liabilities was to be provided even if the threshold of INR 30 lakh was not met. This increased the compliance hardship and also added to litigation compliance costs for all taxpayers. In the year 2013-14, the total wealth tax collected in the country was INR 1008 crore. The Finance Minister mentioned during his budget speech that wealth tax leads to high cost of collection and a low yield and is accordingly, replaced with a low cost and higher yield tax. Consequently, wealth tax is proposed to be abolished and in order to compensate the loss of revenue; the same is to be replaced with a levy of additional 2 per cent surcharge on super-rich earning income above Rs 1 crore. This measure shall result into higher effective yield for the government. Also it may be noted that the term 'super-rich' as used by the Finance Minister would not be limited to individuals and would cover all taxpayer earning more than the threshold specified.
The move of abolishing wealth tax and levying additional surcharge on income tax will continue to make the rich pay more tax than the less affluent ones. This will also lead to tax simplification and enable the income tax authorities to focus more on ensuring tax compliance and widening the tax base. As estimated by the government, the said amendment will lead to an increase in the revenue collection to Rs 9000 crore as against Rs 1008 crore collected from wealth tax.
In case of domestic companies, the additional surcharge of 2 per cent will reset the surcharge at 7 per cent where income exceeds Rs 1 crore and 12 per cent where income exceeds Rs 10 crore. However, the moot point is whether substitution of 1 per cent of wealth tax with additional 2 per cent surcharge will while leading to a greater outflow of tax for a person compensate for the reduced compliance burden.
In parallel, the tax authorities are spared from the additional administrative burden and cost of collection of taxes. So, while one may say it's a win-win situation for both tax payers as well as the income tax authorities, in the overall analysis, the Revenue will be bigger gainer. Tax payers will need to comply with some additional reporting of information in their income tax return as regard the assets and liabilities which earlier were disclosed under the wealth tax return. This will ensure that abolition of wealth tax does not lead to escape of any income from the tax net. The information of assets submitted by the tax payer will help the revenue to correlate the wealth with the income offered for tax. The details of all the assets will now be readily available in the income tax return which will enable the tax officer to ensure that there is no leakage of tax through any source of income possessed by the tax payer. Further, given that an individual assessee who may not have drawn up a balance sheet till date will now be required to draw up one now, one may wonder whether this is a simplification measure for taxpayers or will it impose a greater burden from financial and reporting perspective, in true sense.
So the question that remains to be answered is whether abolition of wealth tax will be a sugar coated pill for ensuring greater tax collection and meticulous reporting by all taxpayers alike.
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