Arun Jaitley increased the tax surcharge to 12% on individuals earning Rs1 crore and above annually
The finance minister did not announce any change in basic tax slabs, but some of the deductions and allowances that has not been changed since long have been modified. Apart from this, the super rich will have to pay more taxes with increase on surcharge. Some respite comes in the way of no more wealth tax, effective 1 April 2015.
Till now, an individual, a Hindu Undivided Family or a company had to pay 1% as wealth tax on net wealth of value over ₹ 30 lakh. For the purpose of valuation of assets, which included immovable assets, vehicles, jewellery, bullion, yachts, boats, aircraft, and so on, the value as of 31 March was taken, subject to certain exemptions such productive assets which included mutual funds, fixed deposits, exchange-traded gold funds and savings bank accounts. Other than this, a self-occupied residential house or a plot of land that is not bigger than 500 sq. metres is exempt from wealth tax.
For the financial year 2013-14, total wealth tax collection was ₹ 1,008 crore.
From the next financial year, 2015-16, there will be no wealth tax. The decision to abolish this was taken considering the high cost involved in collecting it. Finance minister Arun Jaitley said, “Should a tax which leads to high cost of collection and a low yield be continued or should it be replaced with a low cost and higher yield tax?"
Abolishing the wealth tax does not mean lesser tax. “The rich and wealthy must pay more tax than the less affluent ones. This will lead to tax simplification and enable the department to focus more on ensuring tax compliance and widening the tax base," Jaitley had said, and raised the surcharge by 2% to 12% for assessees having income more than ₹ 1 crore in a year.
As the minister stated, though abolishing wealth tax will result in loss of ₹ 1,008 crore in taxes, but the additional surcharge will bring in about ₹ 9,000 crore.
Earlier, taxation on wealth meant that details of assets were filed. This information will still be tracked through one’s income tax return. The finance minister said, “The information regarding the assets which are currently required to be furnished in wealth tax return will be captured in the income tax returns. This will ensure that the abolition of wealth tax does not lead to escape of any income from the tax net."
Overall, the move is being seen as positive. “It’s good that the wealth tax has gone as it didn’t generate much revenue. Increasing the surcharge is better because it is easier to administer. The effective rate after the hike in surcharge on the super- rich will be 34.61%," said Nikhil Bhatia, executive director, PwC India.
Other agree with this opinion. “It’s good news for those having income over ₹ 1 crore and also paying substantial wealth tax. The overall tax liability will be lesser for such tax payers now," said Suresh Surana, founder of accounting and auditing firm RSM Astute Consulting Pvt. Ltd.
How is surcharge calculated
Surcharge was implemented by the United Progressive Alliance (UPA) government in the 2013-14 budget. It was meant only for the assessment year (AY) 2014-15, but has been carried over since.
To calculate the net taxable income, take the gross total income and deduct the investments and expenses that qualify for deduction under various sections of the income tax Act.
Let’s take an example to understand how this works. For instance, if an individual’s gross total income is ₹ 1.2 crore, out of which she invests ₹ 1.5 lakh in different avenues (such as Public Provident Fund, equity-linked savings scheme, Kisan Vikas Patra, and so on), this amount qualifies for deduction under section 80C. Apart from this, she is also servicing a home loan, where she paid ₹ 2 lakh as interest for the year, and which qualifies for deduction under section 24(b). Taking into consideration her investment and expenses, her net taxable income after deduction comes to ₹ 116.5 lakh ( ₹ 1.20 crore as gross income minus ₹ 3.5 lakh as combined deduction). As her net taxable income is over ₹ 1 crore, it attracts surcharge. The surcharge has now gone up from 10% to 12 %. So, as per the current rules, her tax liability excluding cess would be ₹ 33.2 lakh and surcharge would be ₹ 3.32 lakh excluding cess (at 10%). With 12% surcharge, this amount would be about ₹ 3.98 lakh excluding cess, which is ₹ 68,000 higher. But it is subject to marginal relief.
This is applicable in cases where a person’s net income exceeds ₹ 1 crore, and thus attracts surcharge, but the amount payable as surcharge is more than the income above ₹ 1 crore. In such cases, the amount of surcharge does not exceed the net income over and above ₹ 1 crore.
Eye on transactions
A large part of the budget’s focus was on black money and reducing its quantum and influence in the economy. In order to curb the involvement of black money in various transactions, a few measures were introduced by the finance minister.
“The government is going to bring in Benami Transaction Prohibition Bill to put a check on people buying property in the names of others," said Surana.
Apart from that, now you may also need to mention your Permanent Account Number (PAN) in more transactions than where it is already used.
“Quoting of PAN has now been made mandatory for any purchases over ₹ 1 lakh," said Girish Vanvari, co-head of tax, KPMG in India.
Since long, to combat tax evasion and curb black money, the income tax department has tried to make PAN mandatory in almost all financial transactions, especially those that are above a certain value.
The role of PAN is very important. The 10-charater long PAN has become an essential detail required in almost all financial transactions. Its main purpose is to link all transactions of a person—identified by the assigned PAN—with the Income Tax Department.
It also connects various documents, including payment of taxes, assessment, tax demand, tax arrears and so on. It facilitates retrieval and matching information related to investment, loans and other business activities of taxpayers. As a result, instances of tax evasion can be detected and the tax base made broader.
Rule 114B (of the income tax Act) provides the list of transactions and the monetary limits over which furnishing of PAN is mandatory. However, till now, in some cases such as when buying jewellery, you have to mention PAN only if the amount is above ₹ 5 lakh. This will change. “Now, if you buy jewellery or other assets such as cars, whose value is over ₹ 1 lakh, you will have to mention PAN," said Vanvari. With so many transactions soon needing PAN, maybe it’s time for you to memorize this alpha-numeric series.
While the additional surcharge may be applicable for the super-rich, more frequent use of PAN has a wider impact.
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