WEALTH TAX is a tax on the value of wealth owned by a person, levied under the Wealth Tax Act. 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. This is similar to the basic exemption limit of Rs.1,00,000 provided under the Income Tax Act.
Earlier, there was no distinction between movable or immovable properties / productive or non-productive assets. However, the Finance Act, 1992, made drastic changes to the Wealth Tax Act, in order to tone down the rigorous implications of the law. Accordingly, at present, the law is applicable only to non-productive assets held by an assessee. The Wealth tax Act has differential treatment for property with building and a landed property for the levy of tax, which is as follows:
Basically, the definition of the term `Asset’ includes any building, whether it is used for residential or commercial purposes or for the purpose of maintaining a guesthouse. It also includes a farmhouse situated within 25 kms from the local limits of any municipality, corporation or a cantonment board. However, the following assets are not taxable under the Wealth Tax Act.
In the case of a corporate, any house meant exclusively for residential purposes and which is allotted to a director / employee, who is in whole time employment. This exemption is available only in case such director / employee is drawing a gross annual salary of less than Rs. 5 lakhs.
In the case of a builder, a house, which is residential or commercial, held as stock-in-trade of business.
Any house, which is occupied by the assessee for his business or profession.
Any residential property, which is let-out for a minimum period of 300 days in the previous year. This benefit is not applicable to a commercial property which is therefore, taxable under the Wealth Tax Act.
Any property in the nature of commercial establishments or complexes owned by the assessee.
Apart from the above five exceptions, all the other buildings are subject to wealth tax.
Though land is an asset, in case it is situated in a rural area, wealth tax is not applicable. The levy of wealth tax is applicable only to an urban land situated in specified area. Specified area means -
Any area which is comprised within the jurisdiction of a municipality or a cantonment board and which has a population of not less than 10,000 according to the last preceding census; or
Any area within the distance of 8 kms from the limits of such municipality or cantonment board and notified by the Central Government in the Official Gazette.
Even in respect of urban land, in the following situations, it is not subject to levy of tax:
Urban land on which construction of a building is not permissible under any law in force. Eg. Lands, which are subject to Coastal Regulation Zone;
Land occupied by any building which has been constructed with the approval of the appropriate authority;
Any unused land held by the assessee for industrial purposes for a period of two years from the date of its acquisition by him; or
Any land held by the assessee as stock-in-trade for a period of 10 years from the date of its acquisition by him.
From the value arrived in respect of building and land, any loan borrowed for bringing the asset into existence may be reduced for arriving at the taxable wealth tax.
Building under construction: Having said that the value of urban land and building is subject to tax, one may be interested to know as to the treatment of building under construction. One view is that it is neither a building nor a land and therefore, nothing is subject to wealth tax.
However, the more prudent view would be that an un-built or un-finished building couldn’t be treated as a building for any purposes. Further, what is contemplated in the law is completed building, which is capable of being used as building. Therefore, incase where building is under construction, the value of urban land on which such building is being constructed is subject to tax.
Exemptions: In the case of individuals or Hindu undivided families, the following properties are exempt from wealth tax:
One house or a part of house; or
A plot of land not exceeding 500 sq. meters in area.
Unlike Income-tax Act where the income derived through out the year needs to be considered in computation of total income, under the Wealth-tax Act, the value of assets as on the valuation date i.e. 31st March alone should be considered.
For instance, Mr. A may hold urban land worth Rs.50 crores from the beginning of the year but in March he disposes of the land and invests in commercial complex, then as on 31st March he is holding an asset which is not taxable under the Wealth-tax Act and therefore, his liability is nil. On the other hand, Mr. B may hold commercial building worth Rs. 1 crore, which he may dispose of and invest in urban land by 31st March. In this case, all through the year he did not have taxable assets but as on the valuation date he has converted that into taxable form. Consequently, he shall be assessable for Wealth-tax.