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FM proposes to tweak wealth tax
August, 13th 2009

The proposed direct tax code makes major changes in the manner in which wealth tax is to be calculated and the rates applicable to it. In effect, the changes ensure that those with relatively modest wealth go out of the net, while some of the big fish might end up paying more despite lower rates.

The code proposes to raise the threshold limit for wealth tax to become applicable from the current Rs 30 lakh to Rs 50 crore. It also reduces the tax rate from 1% to 0.25%. However, these give-aways are offset by including financial assets in the definition of wealth for the purposes of this tax.

Financial assets include shares held in various companies and fixed deposits. Neither of these was included in wealth so far. The code proposes that all assets will be valued at thecost or at current market value, which ever is lower.

In the case of promoter holdings in listed or unlisted firms, this could mean a significant new source of revenue for the government. The code clarifies that stock kept for stock-in-trade will not be included in assets. But promoters holding obviously cannot be classified as stock-in-trade and hence will qualify for wealth tax.

This could be particularly problematic in cases where the investment is of relatively recent origin, since older investments will have low historical values.

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