The scope of wealth tax, which is currently levied on unproductive assets like jewellery, yacht and aircraft will be extended to productive assets like equity or preference shares held by an Indian company in its overseas subsidiary and interest in foreign trusts or any other body located outside the country by residents.
The provision to tax productive assets will be implemented once the Direct Tax Code regime, which seeks to replace the Income Tax Act, 1961, is implemented from April 2012.
In short, investment by Indians in controlled foreign corporations (CFCs) will be liable to wealth tax, once DTC becomes law. Under the 20th Schedule of DTC, an entity is considered a CFC when one or more persons residing in India exercise control over a foreign company.
This is the first time since 1992 that the tax regime is attempting to tax productive assets. Until now, only non-productive assets were brought under the Wealth tax Act.
Wealth Tax Act in its current form charges tax only on non-productive assets such as urban car, motor vehicles, jewellery, yachts, boats, aircraft etc, at the rate of 1% on wealth exceeding `15 lakh. The productive assets such as investment with financial institutions, bank balances, land and machinery etc are not liable for wealth tax.
DTC is proposing to cover productive assets such as investments in equity and preference shares of a CFC. Many Indian companies have investments in CFCs and DTC is proposing to tax these investments.