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Tax Planning and Management

Tax Planning and Management. Unit –IV Wealth tax- Part-1 (Basics). CONTENTS. What is wealth tax Legal framework Charging of wealth tax What is net wealth Who is assessee Valuation date Deemed assets Debts owed by the assessee. Summary. What is wealth Tax?.

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Tax Planning and Management

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  1. Tax Planning and Management Unit –IV Wealth tax- Part-1 (Basics)

  2. CONTENTS What is wealth tax Legal framework Charging of wealth tax What is net wealth Who is assessee Valuation date Deemed assets Debts owed by the assessee. Summary

  3. What is wealth Tax? Wealth Tax is a tax on the value of wealth owned by a person, levied under the Wealth Tax Act,1957. It is one of the direct taxes. It is annual tax.It is charged for every assessment year commencing from 1st April, 1957 The tax is levied @ 1 per cent on the amount of wealth as on 31st March of every year, where such amount exceeds Rs.15,00,000.

  4. Legal Framework Wealth tax is charged under the provisions of WEALTH TAX ACT,1957 read with WEALTH TAX RULES, 1957 Contd.

  5. WEALTH TAX ACT, 1957 THIS Act came in to force with effect from 1st April, 1957. This Act extends to the whole of india. This Act is divided into 8 chapters and contains 119 (in numbers) sections and 3 Schdules. This Act has detailed provisions regarding levy and collection of wealth tax.

  6. Charging Of Wealth Tax Section 3 of wealth Tax Act, 1957 provides that every Individual, HUF or Company, who is an assessee shall be charged wealth tax @1% on the amount by which his net wealth, determined on the basis of nationality and residential status, on the relevant valuation date, exceeds Rs. 15,00,000. But following are not subject to wealth tax u/s 45:

  7. Who are not subject to wealth tax? Section 45 of Wealth Tax Act provides that no wealth tax shall be levied in respect of the net wealth of the following persons: • Section 25 company • Any co-operative society • Any social club • Any political party • A mutual fund specified u/s10 (23D) of the Income tax Act.

  8. What is Net Wealth [sec. 2(m)] Section 2(m) of Wealth Tax Act, 1957 defines what is ‘Net Wealth’. In simple words, Net Wealth means: Contd.

  9. Contd.Basis of computing net wealth [Sec. 6] Net wealth is to be computed : In case of Individual In case of HUF and Company On the basis of his Nationality and Residential status in the previous year ending on the valuation date. (for valuation date 31.03.07 previous year is 06-07) On the basis of its Residential status in the previous year ending on the valuation date.

  10. Who is an assessee[Sec.2(c) ] • Assessee means a person by whom wealth tax or any other sum of money (I.e. penalty, interest) is payable under this Act, and includes:

  11. WHAT IS AN ASSET?[sec. 2(ea)] • The term Assets has been defined under section 2(ea) of wealth Tax Act, 1957. • This definition covers only 6 types of assets ,basically these are unproductive in nature. • It is to be noted that for the purpose of charging wealth tax “ there must be an asset with in the meaning of sec.[2(ea)]

  12. 1. Building 1. Any building or land appurtenant thereto whether used for Residential purpose or Commercial purpose or for the purpose of maintaining a guest house or otherwise, including a Farm House situated within 25 kms from the local limits of the municipality BUT subject to the following exceptions

  13. Exceptions to the definition of house The following shall not be included in the definition of house: Any house allotted by a company for residential purpose to an employee or an officer or a director who is in full time employment having a gross annual salary of less than Rs.5 lakh. Any house for residential or commercial purpose, which forms part of stock in trade of the assessee. Contd.

  14. Contd. House used by the assessee for the purpose of his business or profession. Any residential property that has been let out for a minimum period of 300 days in the previous year, Any property in the nature of commercial establishment or complexes

  15. 2.Motor car(whether Indian or foreign) But following will not be considered as asset A car used for running on hire A car held as stock in trade.

  16. 3. Jewellery, Bullion, Furniture, utensils, or any other article made (wholly or partly) of gold, silver or any precious metals But Jewellery held as stock in trade is not an asset.

  17. 4. Yachts, boats and aircrafts But yachts, boats and aircrafts used for commercial purpose are not assets. Meaning of commercial purpose (e.g. using for earning income or held as stock in trade.

  18. 5. Urban Land Urban land means land situated in any area which is with in the jurisdiction of a municipality and which has a population of not less than 10,000 according to the preceding published census. Or In any area with in such distance, not being more than 8 km. From the local limits of any municipality or cantonment board , notified by the central government. But subject to the following exceptions:

  19. The following urban land shall not be treated as asset: • Land on which construction of building is not permissible under any law. • The land occupied by any building which has been constructed with the approval of appropriate authority. • Any unused land held by the assessee for industrial purpose for a period of two years from the date of its acquisition. • Any land held by the assessee as stock in trade for a period of ten (10) years from the date of its acquisition.

  20. 6. Cash in Hand • In case of Individual and HUF: cash in hand in excess of Rs. 50,000, whether recorded in books of account or not. • In case of Company: any cash not recorded in the books of account

  21. What is valuation date • A very important date in the wealth tax. • All the assets held by the assessee on that day are counted for the purpose of wealth tax. • 31 March preceding the relevant assessment year is the valuation date.

  22. Problem: • Determine whether following are assets or not under Sec.2(ea):

  23. Deemed Assets [sec. 4] • Deemed assets means those assets which do not belong to assessee but they are included in computing the net wealth of the assessee. Types of deemed assets A B Deemed assets which are included in computing net wealth of an individual assessee only. Deemed assets which are included in computing net wealth of any assessee (individual, HUF, Company).

  24. Conditions for inclusion of Deemed Assets • The individual (transferor) must be the owner of the asset transferred on the date of transfer. • These assets must be transferred without adequate consideration. • These assets must be held by the transferee on the valuation date.

  25. ‘Type A’ Deemed Assets • Following deemed assets will be included in the net wealth of individual assessee only:

  26. 1. Asset transferred to spouse [Sec.4(1)(a)(I) • If any asset has been transferred by an individual to his/her spouse, directly or indirectly without adequate consideration, then such asset shall be included in the net wealth of the transferor. EXCEPTION: • If such asset has been transferred in connection with an agreement to live apart then such asset shall not be included in the net wealth of the transferor.

  27. Contd. • The relationship of husband and wife must exist on both the dates, I.e, date of transfer and valuation date. • ‘Love and affection’ is a good consideration but not an ‘adequate consideration’.

  28. 2. Assets held by a minor child [sec. 4(1)(a)(ii)] • Assets held by a minor child are included in the net wreath of the parent. • However, the following assets shall not be included in the net wealth of parent and would be taxable in the hands of the minor only. Contd.

  29. Contd. • Assets held by a minor child suffering from any disability of the nature specified u/s 80U of Income Tax Act, • Assets held by a minor married daughter. • Assets acquired by a minor child out of the following income referred to in proviso to Section 64 (1A) of the Income Tax Act: • Income from manual work done by him, • Income from activity involving application of his/her skill, talent or specialised knowledge or experience.

  30. Contd. • It should be noted that the child must be minor on the valuation date , otherwise, clubbing provision shall not apply. • Question: in which parent’s income the net wealth of the minor child will be clubbed?

  31. contd. • If marriage subsist: • In the net wealth of that parent whose net wealth (excluding the assets of minor child) is greater. • If marriage does not subsist: • In the net wealth of that parent who maintains the minor child in the previous year, and where any such assets are once included in the net wealth of either parent, they will not be included in the net wealth of other parent unless permitted by the assessing officer.

  32. 3. Assets transferred to a person or association of persons [sec.4(1)(a)(iii)] • If any asset [within the meaning of Sec2(ea) ] has been transferred by an individual to a person or association of person, directly or indirectly, without adequate consideration for the immediate benefit of the : • Individual himself or herself • His/her spouse, then such asset will be included in the net wealth of the transferor. Again the relationship of husband and wife must exist on the valuation date.

  33. 4. Asset transferred under Revocable Transfer [sec.4(1)(a)(iv)] • If any asset [within the meaning of Sec2(ea) ] has been transferred by an individual to a person or association of person, directly or indirectly, otherwise than under an IrrevocableTransfer, then such asset will be included in the net wealth of the transferor. Contd.

  34. Contd.Meaning of revocable transfer • Following transactions are treated as revocable: • Transfer revocable within a period of six years or during the transferee’s lifetime; or • If the transferor derives any benefit, directly or indirectly, from the assets transferred; or • If the transferor has a right to re-transfer, directly or indirectly, whole or any part of the assets or income from the assets transferred. • If the transferor has a right to re-assume power, directly or indirectly, over the whole or any part of the assets or income from the assets so transferred.

  35. 5. An Asset transferred to son’s wife [sec.4(1)(a)(v)] • If any asset [within the meaning of Sec2(ea)] has been transferred by an individual to his/her son's wife directly or indirectly, without adequate consideration , then such asset shall be included in the net wealth of transferor. • Imp. It is be noted that relationship between individual (transferor) and daughter-in law must exist on both the date- date of transfer and valuation date.

  36. Problem on previous slide • Mr. X have transferred his building (with in the meaning of Sec.2(ea) ) to MS. Y who later on married Mr. Z (son of Mr. X). • Problem: In whose net wealth this asset will be included?

  37. 6. Asset transferred to person or association of person [sec.4(1)(a)(vi)] • If any asset [within the meaning of Sec2(ea) ] has been transferred by an individual to a person or association of person, directly or indirectly, without adequate consideration for the immediate, or deferred benefit of the son’s wifethen such asset will be included in the net wealth of the transferor. • It is be noted that relationship between individual (transferor) and daughter-in law must exist on both the date- date of transfer and valuation date

  38. Some important facts or points • Asset transferred must be an asset with in the meaning of Sec. 2 (ea) on the ‘valuation date’ and not on the date of transfer. • Example:

  39. 7. Converted Property [Sec.4(1A)] • Where an individual, who is a member of a Hindu Undivided Family, converts his individual property in to the property of the family • through the act of impressing such separate property with the character of property belonging to the family, or • throwing it into the common stock of the family,or • By way of gift, then such property is know as ‘converted property’. • And the value of such converted property on the valuation date shall be included in the net wealth of the individual.

  40. 8. Holder of an impartible estate • The holder of an impartible estate shall be deemed to be the owner of all the properties comprised in the estate.

  41. Type “B” Deemed Assets • The following assets will be included in the net wealth of any of assessee (i.e. individual, HUF, or Company)

  42. 1. Interest in a firm or Association of Persons [Sec. 4 (1) (b)] • In case of an assessee who is a partner in a firm or a member of an association of persons, then the value of his/her interest in the assets of the firm or association, determined in a manner laid down in Schedule III. • If a minor is admitted to the benefits of the partnership in a firm, the value of the interest of such minor in the firm shall be included in the net wealth of the parent of the minor.

  43. 2. Gift made by means of book entries [Sec.4 (5A)] • Where a gift of money from one person to another person is made by means entries in the books maintained by anyone or more of the following: • Donor • An individual or HUF or firm or an AOP or body of individual with which the donor has business or other relationship, Then the value of such gift shall be included in the net wealth of the donor.

  44. 3.Building or part allotted under a House Building Scheme[Sec.4 • Where the assessee is a member of a co-operative society, company or other association of persons and a building or part thereof is allotted or leased to him under a house building scheme of the society, company or other association, as the case may be, the assessee shall be deemed to be the owner of such building or part thereof.

  45. Some important facts or points • Asset transferred must be an asset with in the meaning of Sec. 2 (ea) on the ‘valuation date’ and not on the date of transfer. • The asset transferred need not be in the same form in which it was transferred by the transferor. • Any accretions to the asset transferred do not come with in the scope of Section 4. [CWT v. Saraswathi Achi (1980)]

  46. Case-1 • ‘X’ gifts units of UTI to his wife on 21.10.05. The units were sold by Mrs.X on 04.01.07 and she purchased gold ornaments on 05.02.07 out of the sale proceeds of the units. Solve the case with justification.

  47. Case-2 • ‘X’ gifts gold ornaments to his wife on 21.10.05. These gold ornaments were sold by Mrs.X on 04.01.07 and she purchased shares of RIL on 05.02.07 out of the sale proceeds of the gold ornaments. Solve the case

  48. Case-3 • ‘X’ gifts gold ornaments to his wife on 21.10.05. Mrs.X further makes a gift of gold ornaments to her sister on 4.01.07. • If these gold ornaments are destroyed by fire on 4.01.07, then what will be the situation? • If these gold ornaments were gifted by Mrs. X to her daughter in law, then what will be the situation? Solve the case.

  49. Debt owed by the assessee • For calculating net wealth of an assessee debts owed by the assessee shall be deductible subject to the following condition: • Debs should have been incurred in relation to taxable assets. • Such debt should be still outstanding on the valuation date. • Debts located in India or outside India shall be deductible on the basis of nationality and residential status, as the case may be. Liability under wealth tax Act is not a debt.

  50. Summary • For charging Wealth Tax the following points should be kept in mind: • Wealth tax is chargeable only in case of three categories of persons, namely, individual, HUF, Company. • Wealth tax is charged @ 1% on the net wealth exceeding Rs. 15,00,000. • Net wealth of the assessee is to be computed as on the valuation date. • For computing net wealth residential status and nationality of the assessee will be considered. • Asset must be an asset within the meaning of Sec.2 (ea). • Such asset must belong to the assessee, however, deemed asset under sec. 4 will also be considered. • Such asset must be held by the assessee or the transferee under section 4 on the valuation date. • For calculating net wealth exempt assets will not be considered. • For calculating net wealth debts owed by the assessee on the valuation date will be considered.

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