Wealthy face taxing times under DTC

Source:TNN, Sep 9, 2010, 12.32am IST

MUMBAI/NEW DELHI: Do you possess wealth of over Rs 1 crore? Do you also collect art works and invest in stocks of foreign companies? Add a rare watch from your grandfather's collection and some artefacts you would have inherited as part of the family heirloom to the list. If the answer is yes, be prepared to deal with the Income Tax department sometime in the future.




The proposed Direct Taxes Code, which is expected to replace the existing Income Tax Act in 2012, has proposed to impose 1% tax on net wealth in excess of Rs 1 crore. The rate may seem harmless, but the trouble is that it has included archaeological collections, drawings, paintings, sculptures, wristwatches worth over Rs 50,000, besides cash in hand above Rs 2 lakh among other things into the list that forms wealth. In short, the high net-worth individual ( HNI) is in for some taxing times.



Under the existing law, the threshold level to kick in the wealth tax provisions is Rs 30 lakh. However, in the existing provision, items like watches, paintings and sculptures and deposits with foreign banks are not included.



According to HNIs and the experts who manage their money, these seemingly innocent additions to the list in the new tax co de bill are likely to make life difficult for them. There would be disputes over the valuations of these pieces with the IT department as there is no uniform method to value them. This could almost result in a throwback to an era when an encounter with the I-T officials used to give people sweaty palms. Sadly, it may also have an adverse impact on individuals' appetite for collecting artworks and artefacts, a trend slowly emerging in the country, with unintended victims being budding artists and tribal artisans.



"It is too early to comment, but it would be very challenging to implement," says Robin Roy, associate director, PriceWater Coopers. "It is very difficult to administer wealth tax. That is why many countries, including the USA and UK, have done away with wealth tax," says Dilip De, a businessman and art collector.



Besides, subjectivity also creeps in. "The onus of getting the valuation of the assets lies with the owner. He can't feign ignorance on the value of his assets for not paying the tax," says Amitabh Singh, tax partner, Ernst & Young. That is where the problem lies. Even if you value the article with an expert, an IT official can always challenge your claim, as there is no uniform way to calculate the value of paintings or precious artefacts.



"The move to include watches, archaeological collections, drawings, paintings, sculptureS and suchlike would actually end up harassing people. There will be disputes over revaluation of old watches, art objects and other art works. The mechanism to correctly value these things is not in place as we have very few qualified honest valuers of international repute in this country," says De. "Most people are attached to their family heirloom, but they won't be valuing it regularly. Also, there is a question about how do you value them? It is just a matter of opinion," adds Roy.



A small solace is that the first house is exempt from the wealth tax net. Considering the runaway price in real estate, it would have otherwise cast every owner of a modest 2-BHK in the suburbs into the tax net.



The DTC provision is particularly harsh on foreign citizens, including the person of Indian origin, says Singh. If you have worked abroad, created some assets there and moving back to India, you will have to pay wealth tax on your foreign assets if you have taken Indian resident status. In such a situation, you will have to pay 1% tax on your deposits in foreign banks and on the value of other assets in foreign countries.