Abolition of wealth tax as proposed in the Finance Bill, 2015 - Whether well-conceived? - T. N. Pandey - Article published in Business Advisor, dated March 10, 2015 http://www.magzter.com/IN/Shrinikethan/Business-Advisor/Business/

1. Volume X Part 5 March 10, 2015 3 Business Advisor
Abolition of wealth tax as proposed in the
Finance Bill, 2015: Whether well-
conceived?
T. N. Pandey
The abolition of wealth tax, as proposed in the Finance
Bill, 2015, is the step to do away with the concept of
integrated taxation, which was brought in tax scene of
the country during the budget exercises for the year
1957. The enactment of Wealth Tax Act was as a result
of the proposal of Nicholas Kaldor, who was at the
relevant time, a Reader in Economics in the University of
Cambridge and a distinguished economist.
At the Finance Ministry‟s request, Kaldor in his report
(Indian Tax Reform) suggested broadening the tax base in the country
through the introduction of an annual tax on wealth, the taxation of capital
gains, a general gift tax and a personal expenditure tax (the last in partial
substitution of the then super tax on income).
The five taxes – income tax, capital gains tax, annual wealth tax, personal
expenditure tax and the general gift tax – were, according to Kaldor, to be
assessed simultaneously on the basis of a single comprehensive return.
Thus, these were „self-checking‟ in character, both in the sense that
concealment or understatement of items in order to minimise liability to
some of the taxes might involve an added liability with regard to others, and
in the sense that the information furnished by a taxpayer in the interest of
preventing over assessment with regard to his own liabilities would
automatically bring to light the receipts and gains made by other taxpayers.
However, by the passage of time since their enactments, Gift Tax and
Expenditure Tax stand abolished, Estate Duty, which was already there at
the time of Kaldor‟s study, also stands abolished. With the abolition of
wealth tax, capital gains tax, being a segment of income tax, the theory of

2. Volume X Part 5 March 10, 2015 4 Business Advisor
integrated taxation in the Indian context comes to an end.
Wealth Tax Act was examined for major changes in the year 1992 when the
theory of taxation only of non-productive assets was mooted. Since then,
this tax is being levied only on non-productive assets as defined in section
2(ea) of the W.T. Act. The rate of wealth tax was also revised from 2% to 1%.
The result was that the scope of this tax was greatly curtailed and revenues
from this came down severely as compared to the pre-1992 period. The FM
has proposed in the Finance Bill, 2015, for the abolition of this tax. Its
revenue during the last FY was only Rs 1,008 crore.
The loss of revenue is proposed to be made up by levy of extra surcharge
@2% on persons having income exceeding Rs 1 crore. This means that such
persons will pay surcharge @12% of income tax. This is expected to generate
revenue of Rs 9,000 crore. Thus, this Act stands abolished from 01.04.2015.
There could be debate on the issue whether the abolition of wealth tax is a
justified measure. Viewing only from the angle of revenue, perhaps, it could
be said that the return by way of revenue is not commensurate with the
botheration associated with the implementation of the Act. According to the
FM, it is a high-cost-low-return tax and, hence, there is no justification for
keeping it in the statute book.
However, the reasons for low revenue are not because of any inherent
deficiency in the conceptualisation of the tax but because of its
implementation. When the majority of assets are excluded from the purview
of the Act on the ground that the same are productive assets and when the
rate is reduced by 50%, revenue is bound to decline.
The theory of taxing non-productive assets is highly debatable. For instance,
why should the dividend income from shares and securities be exempt and

3. Volume X Part 5 March 10, 2015 5 Business Advisor
also the assets that produce such income? Thus, there is apparent
contradiction in the theory of low yield from this tax.
The result of the change proposed would now lead to taxation of income
from productive assets. It would be against the concept mooted in the year
1992 when productive assets, including their income, like dividend, etc.,
were not to be subjected to tax. How this will impact the capital market will
be known only after some time.
The abolition of wealth tax goes against Article 39(b) & (c) relating to
Directive Principle of State Policy. These read as under:-
“[b] that the ownership and control of the material resources of the community
are so distributed as best to subserve the common good;
[c] that the operation of the economic system does not result in the
concentration of wealth and means of production to the common detriment;”
Also, this goes against the concept mooted in the Preamble of the
Constitution of India, which conceives India as a „Sovereign Socialist…
Republic.‟
To ensure that the income, leading to generation of assets, does not go
untaxed, the proposal is that the details about wealth tax assets, which are
presently being given in the wealth tax returns, are now given in the I.T.
returns of the concerned persons.
This will make the I.T. returns more bulky and would go against the
principle of simplification of I.T. returns.
There could be difference of views on the issue whether the proposed
measure is well conceived. The arguments against abolition could be said to
be based on traditional approach; nonetheless, the same cannot be brushed
aside as irrelevant.
(T. N. Pandey is Former Chairman, Central Board of Direct Taxes)
To ensure that the income, leading to generation of assets,
does not go untaxed, the proposal is that the details about
wealth tax assets, which are presently being given in the
wealth tax returns, are now given in the I.T. returns of the
concerned persons.