DTC Proposals on Wealth Tax May Encourage Evasion

If you have bought a watch worth more than Rs 50,000, purchased an expensive painting, own a sculpture that adorns your living room or have inherited jewellery from your forefathers but have not bothered to mention it in your income-tax returns, beware. The taxman is watching you. The 

Direct Taxes Code (DTC) Bill, introduced in Parliament last year, has proposed to levy wealth tax on the specified unproductive assets of all taxpayers, except for non-profit organisations. 

The scope of 'assets' to be included in 'net wealth' will be widened to include watches that cost more than Rs 50,000, archeological collections, drawings, paintings, sculptures or any other work of art and bank deposits outside India, cash in hand of more than Rs 2 lakh.

In addition, if a person has any interest in a foreign trust or holds any equity or preference shares in a controlled foreign company (CFC), these will also be counted as assets on which wealth tax will to have to be paid.

The DTC Bill, if legislated in its present form, will imply that a person will have to pay wealth tax at the rate of 1% if the total value of such assets is more than Rs 1 crore, even though no income is being earned on these-up from the existing limit of Rs 30 lakh at the rate of 1%.

Parliament's Standing Committee on Finance is examining the Bill.

Wealth tax is an anti-abuse measure in any integrated system and is there to ensure reporting of significant assets held by a taxpayer.

Experts, however, cautioned that improper implementation of wealth tax measures carry a high risk of encouraging people to evade taxes.

"A lot will depend on how the government plans to implement these measures. The bill does not specify how the authorities will determine that a person possesses some of these assets," said Vikas Vasal, executive director, KPMG, India.

A government source, who did not wish to be identified, said the tax department is likely to carry out random surveys by enquiries on architects, interior decorators, imported watch dealers and even art galleries to collect information on spending on such items that are proposed to be included as assets for purposes of wealth tax.

"Taxmen are not expected to carry out a door-to-door enumeration of to find out assets for imposition of wealth tax. There is a lot of clarity that is needed on this aspect," Vasal said.

"That (collecting information on possession of assets) has always been a challenge for implementation of wealth tax. It is not clear whether these data will be gathered from the points of purchase or assessees' statement of accounts," Gokul Chaudhri, Partner, BMR Advisors.

"One of the major constraints was the absence of information about spending where cash was the dominant mode of payment," the source said.

Hindustan Times, New Delhi, 03-08-2011