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Practical Issues in Wealth tax

Practical Issues in Wealth tax. CA. Divakar Vijayasarathy June 2009. Presentation Schema. Introduction Scope and Purpose Computation Taxable Assets Practical Issues: Taxability of Assets Indian Repatriates Valuation of Assets Challenges Wealth tax planning

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Practical Issues in Wealth tax

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  1. Practical Issues in Wealth tax CA. Divakar Vijayasarathy June 2009

  2. Presentation Schema • Introduction • Scope and Purpose • Computation • Taxable Assets • Practical Issues: • Taxability of Assets • Indian Repatriates • Valuation of Assets • Challenges • Wealth tax planning • Filing of Wealth tax returns

  3. Statistics of Wealth tax ** For the Financial year 2008-09: - Estimated tax collection of Rs 400 crores • Estimated tax collection cost of Rs 174 crores Projections for the Financial 2009-10: - Projected tax collection of Rs 425 crores • Projected tax collection cost of Rs 216 crores **Source: The Economic Times dated 8th April 2009 For every rupee spent, the Government earns Rs 1.97 of wealth tax.

  4. Comparitive Statistics • For every Re spent, the Government collects Rs 60 of income tax (all categories) • For every Re spent, the Government collects Rs 701 of corporate income tax • Cost of collection (Direct Taxes) in other countries: • Britain : 1.53% • Germany : 2.35% • Australia : 1.15%

  5. Global Wealth Tax Parallels* Note: • In Austria, Denmark, Germany, Finland, Iceland, Spain and Luxembourg wealth tax was abolished during the last decade • The concept of Wealth tax does not exist in Belgium and Great Britain.

  6. Scope and Purpose of Taxation • Conceptually wealth tax is a levy on unproductive “assets” held by an assessable person. • Fundamental conditions for wealth tax levy: • Asset must covered u/s 2(ea) • Asset must belong to the assessee • Asset must be held by the assessee on the valuation date

  7. Assessees Direct Assessees Individual HUF Company Indirect Assessees Firm AoP Trust (which is not into religious or charitable activities)

  8. Scope of Taxation

  9. Scope of Taxation • Debts owed in India: • If it is repayable in India or • If the debtors is in India • Assets outside India are not assessable to wealth tax in the case of foreign nationals • Debts incurred outside India in relation to assets located in India shall be deductible for all categories of assessees.

  10. Location of Assets • Circular No 3 dated 28.09.1957 as amended by Circular No 392 dated 24.08.1984

  11. Persons not assessable to Wealth tax – Sec 45 • Company registered u/s 25 of the Companies Act (non profit organizations) • Co operative society • Social club • Political party • Mutual fund u/s 10(23D) of the Income tax Act

  12. Computation of Wealth tax Value of assets as at the Valuation date Add Deemed Wealth u/s 4 Less Exempted Assets u/s 5 Gross Wealth Less Debts Owed Net wealth Less Exemption limit 15 lacs Taxable wealth

  13. Rate of Taxation • 1% on taxable wealth in excess of Rs 15 lacs • Exemption limit of Rs 15 lacs is applicable to all category of assessees • No surcharge levy on wealth tax • No cess levy on wealth tax

  14. Taxable Assets – Sec 2(ea) • House property • Urban Land • Motor Cars • Cash in Hand • Boats, Yachts & Aircrafts • Jewellery, bullion, furniture, utensils etc made of precious metals Please Refer to Annexure 1 for detailed explanation on taxable assets.

  15. Taxable Assets : House / Buildings Includes: • Any building or land appurtenant thereto whether used for the purpose residential, commercial, guest house etc • Any farm house if situated within 25 kms from local limits of any municipality or cantonment board A building which is not a farm house is taxable irrespective of its place of location subject to exceptions provided.

  16. Taxable Assets : House Property Excludes: • House meant exclusively for residential purposes occupied by an employee/ officer/director of a company, having a gross salary of less than Rs 5 lacs • House held as stock in trade by the assessee • Any house occupied by the assessee for the purpose assessee’s business or profession • Any residential property let out for not less than 300 days in the previous year • Any property in the nature of commercial establishments or complexes

  17. Taxable Assets: Motor Car • Includes all motor cars whether Indian or Foreign • Excludes: • Cars held as stock in trade • Cars used by the assessee in the business of running them on hire

  18. Taxable Assets : Jewellery Bullion etc • Includes jewellery, bullion, furniture, utensils or any other article made wholly or partly of gold, silver, platinum or any other precious metal or any alloy containing one or more of such precious metal • Excludes assets held as stock in trade

  19. Taxable Assets: Yachts, boats and aircrafts • Includes all categories of Yachts, boats and aircrafts • Excludes those yachts, boats and aircrafts used for commercial purposes

  20. Taxable Assets: Urban land Urban land means land situated: • In any municipality or cantonment which has a population of not less than 10,000 as per latest available census prior to the valuation date. • Within 8 kms from an municipality or cantonment

  21. Taxable Assets: Urban land Excludes: • Land on which construction is not possible • Land on which building has been constructed with approval of the appropriate authority • Unused land held by the assessee for industrial purposes for a period of 2 years from the date of acquisition • Land held as stock in trade for a period of 10 years from the date of acquisition

  22. Deemed Assets – Sec 4 • Assets transferred to spouse /son’s spouse for inadequate consideration • Assets transferred to minor child • Assets transferred to any AoP/ person for inadequate consideration - for the benefit of the individual /spouse/son’s wife • Revocable transfer of assets • Converted property of an HUF • Holder of an impartible estate

  23. Deemed Assets – Sec 4 • Interest in a firm or AoP • Gifts made by means of book entries where money has not been actually delivered • Membership under a house building scheme • Possession of a building u/s 53A of Transfer of Property Act • Lessee in a lease transaction u/s 269 UA

  24. Exempted Assets – Sec 5 • Property held under trust for charitable and religious purposes in India • Interest in the coparcenary property of the HUF • One official residence of a Ruler • Heirloom jewellery of an erstwhile Ruler • Money and assets brought into India by Indian repatriates • One house or part of a house or plot of land not exceeding 500 sq mts for an individual or HUF assessee

  25. Concept of Debts Owed • Debts owed must be in relation to the taxable asset. • Where a debt is taken against multiple assets, proportionate value of the debt shall be allowed. • Debts may be in India or outside India • Un paid purchase consideration is debt owed for the purpose of wealth tax

  26. Assets outside the purview of Wealth tax • Ships • Farm house located beyond 25 kms from any municipality or cantonment • Cars owned by cab operators and tourist cars • Antique furniture not containing any precious or semi precious stones or metals • Paintings , sculptures and other similar works of art • Archeological possessions • Computers, laptops and other gadgets • Two wheelers, trucks, buses and lorries

  27. Practical Issues- Taxability of assets .

  28. House Property located in a Village • An assessee has an ancestral property (residential house) which is located in a village beyond 30kms from the Municipality limits. • The value of the property as per Sch III is Rs 40 lacs. • Is the property assessable to wealth tax

  29. House property located in a Village Issues for Consideration: • - Property consists of building • - A farm house which is located beyond 25kms from municipal limits is not an asset The property would be regarded as a taxable asset.

  30. Property of a Partner used by the firm • A firm of chartered accountants, operates out of an apartment owned by one of its partners. • The value of the property is Rs 60 lacs. • The partner claims the property is being used for profession hence it is not an asset for wealth tax purposes.

  31. Property of a Partner used by the firm Issues for Consideration: • - Whether a business/profession of a firm is different from that of its partner Asset is exempt from wealth tax in the case of : CIT vsRasiklalBalabhai Gujarat 119 ITR 303 CIT vsP.T.Manuel 47 Taxman 108 (Kerala) 1989 CIT vsK.M.Jagannathan 180 ITR 191 (Madras) (1989) Contrary judgment in the case of : CIT vsK.N.Guruswamy Karnataka High Court – 146 ITR 34 (1984)

  32. Employer buying cars for and on behalf of the employees • An employer has an employee scheme whereby the employee would pay 20% of the cost of a car and pay the balance with an interest of 3% over five years. • The car would be used by the employee however it would be owned by the employer till the repayment of loan is complete. • In whose hands is the car assessable to tax?

  33. Employer buying cars for and on behalf of the employees Issues for Consideration: • - Who is the owner of the vehicle • - What is the value of the car for wealth tax • - Is there any loan which is deductible in either case. The car would be assessed in the hands of the employer. The contribution of the employee shall be considered as Debt Owed in respect of the vehicle – Thermax Ltd vs CWT (2008) 110 ITD 591 (Pune)

  34. Real Estate Investments - Urban Agricultural Land • An assessee has 2 acres of land at Chennai which is classified as “agricultural land” by the local authorities. • The assessee claims that the property is not assessable to wealth tax as it is agricultural land. Discuss.

  35. Real Estate Investments - Urban Agricultural Land • Issues for Consideration: • - When is land considered as a taxable asset • - Does the nature of the land determine its taxability An urban land is an asset whether it is agricultural land or non agricultural land – Meena Jacob vs WTO (2007) 14 SOT 486 (Cochin)

  36. Building under construction • An assessee purchased a piece of land on 1st of Jan 2009 and started construction on the property on 10th of February 2009. • The property was complete on 15th of July 2009. • Is this property a taxable asset for the previous year 2008-09?

  37. Building under construction • Issues for consideration: • Is building under construction a taxable asset • If yes, should the asset be considered as land or building Land on which construction has started loses the its character of urban land and is outside the purview of Sec 2(ea) – Mathew L. Chakolavs CWT (2006) 9 SOT 617 (Cochin)/ Meera Jacob vs WTO (2007) 14 SOT 486 (Cochin). However Karnataka High Court in the case of CWT vsGiridhar G. Yadalam (2007) 163 taxman held a contrary view.

  38. Boats/ Aircraft used by Directors • Kingfisher Airlines is into operating commercial aircrafts within and outside India. During the year the company acquired an aircraft for the exclusive use of its Chairman Mr Vijay Mallya for Rs 150 crores. Is this asset a taxable asset for wealth tax purposes?

  39. Boats/ Aircraft used by Directors • Issues for Consideration: • What is commercial purpose • Is the aircraft used for a commercial purpose If an asset is used for doing business, the object of which is to make profits, such asset would be deemed to have been used for commercial purposes. It is not necessary for the asset to be let out on hire. – Amalgamated Electricity Co Ltd vs State of Rajasthan AIR 1983 Raj 154.

  40. Clubbing of Assets- Conversion of Assets • An assessee gifted a sum of Rs 10 lacs to his spouse. • His spouse invested the amount towards purchase of shares (Rs 4 lacs) and purchase of an urban plot (Rs 6 lacs). The values of the assets as on the valuation date were Rs 8 lacs and 16 lacs respectively. • Determine the amounts to be clubbed.

  41. Clubbing of Assets- Conversion of Assets • Issues for consideration: • What should be clubbed (original asset or converted asset) • What is the value for clubbing (valuation of the original asset or converted asset) Where the asset transferred is converted into another asset, the value of the converted asset (if such converted asset is assessable to wealth tax)on the valuation date shall be clubbed V.Vaidya Subramaniam vs CWT (1977) 108 ITR 538 (Madras) Therefore in this case only Rs 16 lacs being the value of land shall be clubbed.

  42. Clubbing of Assets- Conversion of Assets • An assessee gifted 10000 shares of HLL to his spouse. • She sold these shares in the market for Rs 20 lacs and invested in a house property. • The value of the house property on valuation date is Rs 35 lacs. Discuss.

  43. Clubbing of Assets- Conversion of Assets • Issues for consideration: • The original asset transferred is not a taxable asset • The converted asset is a taxable asset • Value for the purposes of clubbing Based on the rationale pronounced in V.Vaidya Subramaniam vs CWT (1977) 108 ITR 538 (Madras) the value of the house property on the valuation date ie Rs 35 lacs shall be clubbed in the hands of the assessee.

  44. Clubbing of Assets – Relationship between transferor and transferee • An assessee gifted a property to his fiancé on 1st of December 2008. • They both got married on 28th February 2009. The value of the property on 31st of March was Rs 35 lacs. Discuss.

  45. Clubbing of Assets – Relationship between transferor and transferee • Issues for Consideration: • Husband wife relationship did not exist on the date of transfer • Would the provisions of clubbing apply Relationship between husband and wife should subsist both at the time of transfer and on the valuation date – CWT vs Khan Saheb Dost MohdAlladin (1973) 91 ITR 179 (AP)

  46. Practical Issues in Wealth tax – Indian Repatriates .

  47. Non residents returning to India Exemption u/s 5(v) is available provided: • Assessee is an individual • Assessee is a citizen of India or a PIO • Assessee was ordinarily residing in a foreign country • Assessee has returned to India with an intention to permanently reside in India

  48. “Ordinarily Residing” in a Foreign Country • The term “ordinarily residing” has not been defined • Madras High Court in the case of Periannan vs CWT has enunciated that: • Ordinarily residing refers to residence of long duration outside India • A person for whom India is a permanent residence cannot claim exemption under this section merely by travelling abroad and residing abroad for a period of one year and thereafter returning to his own country

  49. Assets Exempted • Money • Value of assets brought into India • Value of assets acquired out of such money: • Within one year prior to the date of return • Any time after the date of return Period of Exemption: - 7 consecutive previous years beginning from the year of return.

  50. Case Study 1 • An assessee being an Indian citizen returned from Dubai after having served there for almost 25 years during the previous year. • He bought 10 kgs of gold and a Rolls royce car (estimated at Rs 1 crore) along with him. • Immediately on landing, he sold the gold in the open market for a consideration of Rs 10 lacs per kg and invested the consideration towards acquiring a piece of land in Chennai. • Fair market value of the land in Chennai on valuation date is Rs 1.3 crores. • Where an asset brought from outside India is subsequent sold for a consideration and such consideration is invested in an asset in India- exemption shall be available in respect of such converted as well – CWT vs K.O.Mathews Kerala High Court

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