Wealth tax at 1% is payable on net assets above Rs.30 lakhs. This is actually an irritant and works against wealth creation
Not many are aware but anyone holding net wealth above the Rs.30 lakh limit is liable to pay wealth tax. Productive assets like shares, mutual funds, FDs and bonds are outside the purview of wealth tax. Typically, your holdings in real estate, jewellery as well as other assets like paintings, artefacts, yachts, luxury cars etc are liable to wealth tax. The second problem is that this asset is charged on market value. This becomes a problem in case of assets like gold, jewellery and real estate. The market value of these assets has appreciated sharply over the years but most people do not sell such holdings. Also since they may have been bought long ago at low prices, there will hardly be any liability against these assets.
There are a few things that are critical here. Firstly, a net wealth level of Rs.30 lakhs is unrealistic. The creamy layer typically owns shares which are exempt from wealth tax and earn dividends which are anyways exempt from income tax. On the other hand the vast middle class population does not have the required confidence and expertise in dealing in financial assets. Hence they stick to the time-tested assets like gold, jewellery, land, property, all of which are subject to wealth tax. One thing the government can do is to increase the limit of wealth tax levy from Rs.30 lakh to Rs.10 crore. Secondly, jewellery can be removed from the ambit of wealth tax altogether. That will typically leave the middle class population out of the ambit of wealth tax. There will be another bigger advantage in doing this.
Today, thanks to gold loan companies, families are able to leverage their jewellery to meet liquidity requirements. Many people do not approach banks for gold loans as they fear that these assets may be linked to their PAN card. In the process, they are keeping their assets idle and not exactly monetizing the same. Exemption from wealth tax will encourage people to leverage their asset more effectively and more profitably too.