The Hindu Business Line : Voluntary taxation of wealth

Some rich Germans have petitioned the newly re-elected government of Chancellor Angela Merkel to resume the levy of wealth tax to help Germany bounce back from the economic crisis. The text, posted on www.appell-vermoegensabgabe.de ., has been signed by some 40 wealthy Germans . For retired doctor Dieter Kelmukuhl, 66, it is time the wealthy came to the aid of their country. He reckons that if the 2.2 million Germans, who have personal fortunes of more than $750,000, paid a tax of 5 per cent this year and next, it will provide the state with 100 billion euros.

Peter Vollmer, 69, said he backed the petition because he had inherited “a lot of money” he did not need.

The Indian scene

The report of the Comptroller and Auditor General of India (CAG) on Direct Taxes for 2007-08 shows that wealth tax collection in 2007-08 was Rs 340.32 crore, a mere 0.1 per cent of the direct tax collections. This needs to be viewed in the background of media reports that there are nearly a million billionaires in Mumbai alone. Apart from the taxpayers’ general tendency to conceal and not pay their taxes correctly, the Government’s policies have been largely responsible for such a sorry state of affairs as far as wealth tax is concerned.

Wealth tax was introduced in the country on the basis of Prof Kaldor’s recommendation for an integrated tax structure from the assessment year (AY) 1957-58. Section 3 of the Act imposes tax in respect of ‘net wealth’ on the valuation date for every AY on the net wealth exceeding Rs 15 lakh at 1 per cent.

This limit of Rs 15 lakh was raised to Rs 30 lakh by the Finance Act, 2009. Net wealth includes all assets of an assessee minus the value of permitted debts owed. The definition of assets, when the Act was enacted, was comprehensive and included ‘property of every description owned by an assessee’ — moveable or immoveable — barring those specifically excluded.

From April 1, 1993, its coverage was made very narrow and net wealth chargeable to tax since then included very few assets, such as guesthouse, jewellery, urban land (barring excluded categories), motorcars (not being run for hire or forming part of stock-in-trade), yachts, boats and aircraft (not used for commercial purposes) and cash (exceeding Rs 50,000).

This definition has been in vogue since AY 1993-94. There is no point commenting on the change made now as it will be history after the Direct Taxes Code comes into force. Considerably narrowing the concept of ‘assets’ for levy of wealth tax has narrowed the tax base substantially.

The future looks equally dismal. The Government does not seem serious enough about taxing the wealthy and providing relief to nearly a third of the people living below the poverty line.

The outlook

The DTC proposes to raise the exemption limit for wealth tax from the present Rs 30 lakh to Rs 50 crore and reduce the tax rate from 1 per cent to 0.25 per cent without giving any reasons.

How can taxpayers respond in the way the German taxpayers have done when the Government itself does not wish to collect more wealth tax from the rich and the super-rich, while subjecting the lower- and middle-income groups to higher tax burdens.

Prima facie, the policy on taxation of wealth has been unduly liberal, without justification. And the correction proposed in Code, of taxing all the wealth of an assessee, would be negated by the high exemption limit and very low tax rate. The number of taxpayers and the collections will not improve if the proposals in the Code are implemented.

(The author is a former chairman of CBDT.)