Have an art!

Will "recognition" push the burgeoning art industry back into the black economy?

Nobody can fault income tax authorities on their ingenuity in attempting to track wealth, which could explain their eagerness to devour design magazines. Not for vicarious pleasure, no, but because expensive living = hidden monies, right?

It was inevitable then that the axe would fall on spiralling art prices. If you can afford to pay a huge sum of money for a Raza or a Husain, surely you can add to the government's coffers every time you make money from a sale.

The art fraternity has welcomed "the legitimacy of the industry" with swooning enthusiasm. But cocooned so far from tax authorities, are they making too much of it, or merely paying lip service to a recognition that could arrest the rise and rise of contemporary art?

Gallerists like Sunaina Anand (Art Alive) and Ashish Anand (Delhi Art Gallery) are delighted the finance minister's Budget focused attention on art "for the first-ever time". But is that a greenhorn reaction? Sunaina Anand would have preferred "more reasonable taxation", and Ashish Anand wonders why investors would shy away from paying capital gains tax on art investments since it would make the system transparent.

Well, here's why: One, it could encourage the black market industry through under-invoicing, to avoid paying a steep capital gains tax. Two, it could bring back the income tax regime by way of uninformed inspectors, points out collector Arjun Sharma.

"Ninety per cent of global transactions are in cash," he rubbishes claims about galleries and auction houses legitimising the Indian business, "so what does the finance ministry hope to gain? If there were a notional tax of 2-3 per cent, then such transactions might happen in the open, but with steep taxes, it's pushing the industry back into the black regime."

The problem has to do with documentation. Art till a decade or even five years ago was not thought of in terms of investment, and could be a part of inherited collections with no receipts or other documentation. "That could leave things open for an IT officer for whom all Husains are worth a crore," says Sharma. QED: An open source of corruption.

Gallerists says the documentation process currently is comprehensive "" it is "" but it still leaves a wide swathe vulnerable. The good thing, though, is that the capital gains tax will have no effect on art funds, according to Amit Vadehra of Crayon Capital.

"Between buying and selling, any escalation in prices is treated as business income and taxed at 33 per cent," says Vadehra, "which makes the capital gains tax redundant in our case."

But there is some relief. Duties have been revised from 12.5 per cent to 10 per cent, so net duty, in effect has come down from 17.26 per cent to 14.55 per cent. That should help art collectors. Then, central sales tax has come down from 4 to 3 per cent, so those outside Delhi have some room for celebration when investing in art funds.

Meanwhile "" if you didn't know "" art attracts 12.5 per cent value added tax ("unless you're buying from a gallery in Kolkata," says Sunaina Anand), and whether you're selling directly, through a gallery or an auction house, short and long term capital gains will apply, with tax rates set at 30 per cent and 20 per cent respectively.

Psst "" discounts on cash transactions apply.