Art is now being recommended as an investment avenue by advisers on account of its potential for appreciation. There are of course commercial considerations that you need to take into account while investing in art. For example, the lack of an open and transparent market for art and, consequently, the low liquidity. However, if you do decide to invest in art, how would you be taxed on such investment?
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Can you say that a painting or a sculpture is a personal asset acquired for personal pleasure and, therefore, any gain that you make on the sale of such painting or sculpture is not taxable? This was indeed the position till 31 March 2007, when a painting or sculpture was not regarded as a capital asset. Therefore, any gains that one made on sale of such art was not subject to capital gains tax since only gains on the sale of a capital asset can be taxed. However, from 1 April 2007, the gain is no longer tax-free since the definition of capital asset has been amended to include paintings, sculptures, drawings, archaeological collections or any work of art.
If you hold the painting or sculpture for at least three years, the gains you make would be regarded as long-term capital gains. The gains would be computed by indexing the cost applying the cost inflation index and taxed at 20%, the effective rate being less than 20% of the actual gains on account of the cost indexation benefit. If you sell it within three years of acquiring it, the gains would be treated as short-term capital gains taxable at your normal tax slab rates.
The sales tax or value-added tax that you pay on the purchase of a work of art would also form part of your cost of acquisition for computing your capital gains. If you have bought an old painting and have spent on restoring it, can you claim the restoration cost as a deduction in computing your capital gains or as a normal expense? Such restoration cost would normally not be allowed as a deduction from your normal income, unless you earn income from the painting, such as by renting it to a gallery, in which case the amount could possibly be claimed as a deduction from such income. If you are unable to claim such expense, then at the time of sale, such restoration cost could be claimed as a cost of improvement if you are able to prove that the painting was in a damaged state when you acquired it, and by restoration, the value of the painting has been enhanced. The restoration cost, being a cost of improvement, would be eligible for indexation from the year in which it was incurred.
If you store a painting in a vault, can you claim the storage expenses as a deduction? Such storage expenses are actually expenses of holding on to the asset and do not contribute to the improvement of the asset or earning of income in any way. Such storage costs are, therefore, normally not allowed as a deduction either from normal income, or from the capital gains earned at the time of sale.
Any income earned while you own the painting, such as rent for allowing it to be displayed in an exhibition, or a fee for allowing it to be reprinted in a book, would be taxed as your normal income under the head “income from other sources”.
Would the painting or sculpture be liable to wealth tax? Fortunately, till now, the definition of asset under the Wealth Tax Act does not include such paintings, sculptures or works of art, and, therefore, such assets are currently not subject to wealth tax. However, the Direct Taxes Code (DTC), which is to come into effect from April 2012 and is currently in the form of a Bill awaiting enactment, proposes to extend the levy of wealth tax to include archaeological collections, drawings, paintings, sculptures or any other works of art. Such assets would, therefore, be subject to wealth tax. How such assets are to be valued would be a major bone of contention as valuation of art can be highly subjective. As the saying goes: “Beauty lies in the eyes of the beholder.” Fortunately, the wealth tax limit is reasonably high at Rs1 crore.
Works of art would continue to be liable to capital gains tax under the DTC as all types of property, other than stock-in-trade, would be regarded as capital assets. The DTC also proposes to change the long-term capital gains tax rate to normal tax slab rates, though the benefit of cost indexation would be available if the asset has been held for at least one year from the end of the year in which the asset is acquired (instead of the current three years).
If you receive gifts of paintings, sculptures or other works of art whose aggregate value exceeds Rs50,000 during a year, such a gift received by you is subject to income-tax, taxable at tax slab rates. Not only that, if you buy such works of art at concessional prices and the value of the concession exceeds Rs50,000 in a year, the value of the concession that you obtained is also subject to income-tax as a deemed gift. Again, what constitutes a concession (since the market value is subjective) is a highly debatable issue. Fortunately, if the painting has been recently purchased from a dealer, the dealer’s sale price can be taken as the market value.
Even from a taxation perspective, art is a highly risky investment indeed.
Gautam Nayak is a chartered accountant. Your comments are welcome at email@example.com