Without taxes, the government would be unable to meet the demands of society. Therefore, it is vital that taxes are imposed and duly paid as this money is collected and used to fund the social projects carried out throughout the year. A capital tax, also known as wealth tax, is a tax on a person's possession of assets. Assets are resources held by a business or an entity. Thus, the wealth tax is a charge levied on personal assets, overall or market value. However, the application of the Wealth Tax Act was discontinued on the 1st of April 2016. This happened due to the extremely low level of awareness and yield and the increased collection cost and administrative burden. Given the difference in income between the wealthy and the underprivileged in this country, the wealth tax holds special significance in today's India. The increasing number of billionaires in the country is the main reason. Wealth tax was calculated at 1% on each person's net wealth above ₹30 lakhs.
Did you know?
Wealth tax was mainly levied on non-productive assets or possession. So, productive investments such as mutual funds, FDs, or traded gold funds are not part of the wealth tax.
Also Read: Capital Gains Tax – Definition, Types, Exemptions & Tax Saving
Why are Taxes Important in India?
Before we begin to understand the purpose of wealth tax, let us study taxes in this country. Taxes are the means through which the government makes its revenue. The government imposes taxes on health, education, governance, etc. This is done to meet the country's budget for development and progress.
Without taxes, the government would be unable to meet the demands of society. Therefore, it is vital that taxes are imposed and duly paid as this money is collected and used to fund the social projects carried out throughout the year.
The projects for which taxes are required include:
1) Education: This is probably one of the most deserving recipients of tax funds. The government gives huge importance to developing human capital, and money is put into funding and maintaining the public education system.
2) Health: The government's contribution to the health sector is only possible because of taxes. Social healthcare and security, medical research, etc., are all required.
3) Governance: It is an important component in the smooth running of its affairs. If the governance becomes poor, several people and organisations will suffer the consequences. On the other hand, good governance ensures that the tax money benefits all the citizens living in India. It is so as the money goes to pay public servants, police officers, the postal system, etc.
4) Apart from education, health, and governance, the money collected from taxes is also used to fund other sectors. These are the sectors such as security and environmental protection, which are crucial for the well-being of the Indian citizens.
5) The remaining money is channelled to fund pensions, unemployment benefits, etc.
Therefore, taxes are essential for the smooth running and maintenance of a country such as India.
What is Wealth Tax?
A capital tax, also known as wealth tax, is a tax on a person's possession of assets. Assets are resources held by a business or an entity. Thus, the wealth tax is a charge levied on personal assets overall, also known as equity tax or capital when it came into existence tax at first. Nowadays, it is commonly known as wealth tax. It included specific prescribed assets like lands or buildings, jewellery, boats or aircraft (not the commercial ones), and cash which exceeded a specific amount.
The wealth tax was not part of the Income Tax Return(ITR), but it was a form of direct tax. The wealth tax is paid separately at the end of each financial year.
The assets which were exempted from wealth tax:
1) A self-occupied house (residential) or a plot under 500 square meters.
2) Jewellery is possessed by an affluent or a ruler rather than personal property.
3) Properties held under trust for charitable or religious, or spiritual purposes.
4) The interest in joint-heirship property of an undivided Hindu family.
The groups that are not included under wealth tax:
1) Co-operative societies
2) Companies that were registered under section 25 of the Companies Act
3) Social clubs
4) Political parties
5) RBI or Reserve Bank of India
6) Mutual funds which were registered under section 10(23D) of the Income Tax Act
7) Trusts
8) Artificial judicial persons
10) Association of Persons (AOPs)
Apart from this, a house or commercial building that was a part of stock-in-trade or a part of any business purpose was also excluded from the purview of the wealth tax.
For taxpayers with more than one property apart from their residential house, the additional properties are excluded from the wealth tax only if they were let out for at least 300 days during the previous financial year.
Wealth tax was mainly levied on non-productive assets or possession. So, the wealth tax never included productive investments such as mutual funds, FDs, or traded gold funds.
What is the Wealth Tax Act?
The Wealth Tax Act was established and implied in 1957 in India. According to the Wealth Tax Act, a person, the Hindu Undivided Family(HUF), and business companies need to pay the wealth tax. This wealth tax was to be paid at 1% on their net wealth exceeding ₹30 lakhs on the last day.
This act came into existence in 1957 and was applicable across India. All those required to pay the tax did so by the end of the financial year.
However, the application of the Wealth Tax Act was discontinued on the 1st of April, 2016. This happened due to the extremely low level of awareness and yield and the increased collection cost and administrative burden. The wealth tax was abolished on 28 February 2016 in the Union Budget (2016-2017). It was replaced with an additional charge of 2% on those with annual taxable incomes that exceeded ₹1 crore. The wealth tax was mainly focused on the super-rich people, with hefty assets and money, either through their own money or through a legacy of their forefathers. The wealth tax was not part of the income tax return (ITR) but was a direct tax form, paid separately at the end of each financial year.
Also Read: Taxable Income: What is it, and How Can You Reduce It?
What is the Significance of Wealth Tax?
Given the difference in income between the wealthy and the underprivileged in this country, the wealth tax holds special significance in today's India. The increasing number of billionaires in the country is the main reason.
Wealth Tax Rates in India
Wealth tax was calculated based on March 31 and was applicable to any assets acquired at the end of the financial year. However, assets sold during the same year don't come under the wealth tax. Wealth tax was calculated at 1% on each person's net wealth above ₹30 lakhs.
Why Was the Wealth Tax Abolished?
The application of the wealth tax act was discontinued on the first of April, 2016. This happened due to the extremely low level of awareness and yield and the increased collection cost and administrative burden.
Conclusion
Therefore, from the above article, you can understand that taxes are basically the means through which the government makes its revenue. Given the difference in income between the wealthy and the underprivileged in this country, the wealth tax holds special significance in today's India. The increasing number of billionaires in the country is the main reason for the presence of wealth tax. Although, as you already know, the wealth tax has been replaced by an additional charge of 2% on those with annual taxable incomes that exceeded ₹1 crore.
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