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Why it is important to pay wealth tax and file the return
July, 02nd 2012

The din generated by income tax returns tends to push the other taxes into the background. The wealth tax is the neglected child of the direct taxes family.

However, remember that ignoring wealth tax can lead to serious problems for a taxpayer, with the penalty ranging from 100% to 500% of the unpaid tax. "In extreme cases of willful default, a taxpayer may be punished with imprisonment ranging from six months to seven years," says Sunil Jain, partner of Gurgaon-based law firm J Sagar Associates.

Wealth tax raked in only Rs 787 crore for the exchequer in 2011-12, which was a piffling 0.16% of the total direct tax kitty of Rs 4,93,912 crore. The securities transaction tax brings in seven times as much revenue as the wealth tax. "The government is not paying too much attention to wealth tax because the collection is very low," says Amarpal S Chadha, tax partner, Ernst & Young.

This laxity on the part of the government has encouraged taxpayers to ignore their wealth tax liability. According to the Wealth Report 2012 of the Boston Consulting Group, India's rich are becoming richer. Nearly 28,000 Indian households crossed the threshold to become dollar millionaires (financial investments of over Rs 5.5 crore) in 2011.

Though financial assets do not invite wealth tax, real estate and gold, two favourite investment options of the super rich, are included. In the past 4-5 years, crores of rupees of HNI money has flowed into real estate, while gold prices have more than doubled in the past three years.

However, this is not reflected in the wealth tax collection, which has grown at a tardy pace, to say the least ( see char t) . However, this could soon change. A committee headed by former CBDT chairman, MC Joshi, has sought stricter punishment for tax evasion. The panel wants the minimum imprisonment for income tax and wealth tax evasion to be three years.

Most investors in real estate have no idea about the tax implication of buying a second property. A second house won't attract wealth tax only if it is rented out for at least 300 days in a year.

It can be a double whammy for the owner if the house is lying vacant, for he will not only have to pay tax on the notional rental income, but the value of the house will be added to his net taxable wealth. This is why savvy investors prefer to put money in commercial real estate, which does not attract wealth tax.

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