T N Pandey: Take a re-look at wealth tax law

TAXING MATTERS

Disclosures by candidates for the 2004 Lok Sabha elections regarding their and their spouses' wealth have indicated considerable prosperity in the country.

According to a report in an English daily from Delhi, nine candidates for the Lok Sabha seats in Delhi have disclosed a total wealth of Rs 50.23 crore, the break-up being Rs 31.60 crore for four Congress candidates, Rs 3.69 crore for two Bharatiya Janata Party (BJP) candidates and Rs 14.94 crore for three others.

A film actor, contesting from Mumbai, is reported to have disclosed wealth of more than Rs 15 crore (including jewellery worth Rs 2 crore), a candidate from the Northeast region is said to have mentioned agricultural lands worth more than Rs 9000 crore!

Such disclosures show how prosperous, some sections in the country are. And the values shown have not been cross-checked by the Election Commissioner or by any other government authorities.

The indications are that most of the assets shown have been under-valued and the wealth possessed could be much more than what has been declared.

Besides the disclosures by the candidates, there are bound to be a large number of people, who possess enormous wealth, but pay no tax.

According to a report in an economic daily, the wealth in the form of shares and securities of a couple in Mumbai is Rs 1,700 crore and they have not to pay the wealth tax on the same as such assets are exempt.

Similarly, candidates, who (if the report published is correct) owns agricultural lands of the value of more than Rs 9,000 crore is also exempt from tax on his wealth.

Is such a situation justified in a country, where nearly 26 per cent of the population lives below the poverty line and substantial number of people are just managing to get two meals a day after strenuous labour and efforts.

Are the more prosperous ones not expected to contribute something so that the lot of unfortunate people could be improved. And this is despite the fact that the Constitution proclaims, inter-alia, India to be a socialist republic.

The fault for this cannot be found with "haves" or "have-nots" but with the Centre that administers the tax laws. The coverage of the Wealth Tax Act, 1957 was curtailed by the Finance Act, 1992.

Prior to this, the wealth tax was levied on "property of every description, movable or immovable", barring few exceptions mentioned in Section 2(e) of the Wealth Tax Act, 1957 (Act), prominent among whom was farm land and other assets relating to agriculture.

From April 1, 1993, the wealth tax is leviable only in respect of the following assets:-

• Any building/ apartment land ("house"), whether residential or commercial or meant as guest house, including farm house within 25 km from local limits of any municipality, but excluding.
• House allotted by company to any employee/director/officer, who is in whole-time employment, having gross annual salary of less than Rs 5 lakh;
• Any house (residential or commercial), which forms part of stock-in-trade;
• Any house, which assessee may occupy for his business or profession;
• Any residential property that has been let out for at least 300 days in the previous year;
• Any property in the nature of commercial establishments or complexes;
• Motors cars (other than those used by assessee in the business of running them on hire, or as stock-in-trade);
• Jewellery, bullion, furniture, utensils or any other article made wholly or partly of gold, silver, platinum or any precious metals, or any alloy containing one or more of such precious metals (except when held as stock-in-trade, or as Gold Deposits Bonds);
• Yachts, boats and aircraft (other than those used for commercial purposes);
• Cash in hand""individuals and the Hindu undivided family in excess of Rs 50,000;
• Urban land and
• Any amount not recorded in the books of account.

Thus, a large number of assets (including farm wealth) are now outside the purview of the law. The issue is why such a situation should continue? The ground given for not taxing farm land and other agricultural assets had been said to be constitutional bar.

This myth has been exploded by the Supreme Court, which held that there was no constitutional bar for taxing farm wealth.

Similarly, there is no justification for exempting entire holdings from the wealth tax in the form of shares /securities on the ground of development of the capital market, which has, by now, acquired sufficient standing on its own and amounts payable by way of the wealth tax is not going to have any impact on its growth or development.

The wealth tax will not impede economic growth. The consensus of most economists appears to be that most wealth taxes, whether low rate taxes levied annually or high rate taxes levied at death, are unlikely to adversely affect work/leisure, saving/consumption, or the choice of what sorts of assets to acquire.

The government must give a re-look to the Wealth Tax Act to make it effective and a potent source of revenue besides levelling inequalities.

The imposition of a structured wealth tax regime will lead to efficiency, equity and revenue generation and enable the government to achieve the basic objectives enshrined in the Preamble to the Constitution of a socialist democratic republic and the policy enshrined in the Directive Principles that the economic system should not work to the common detriment and it does not lead to concentration of economic power in fewer hands.