Bootstrapping ---- Laws/procedures to improve wealth tax collectiion
Proposed administrative procedure - TX.03
Procedures/Laws   to   improve   wealth   tax   tax   collection
- Wealth tax on land, shares and gold
- Registration of tax-IDs on land/houses and shares
- Problem in drafting laws for wealth tax on land/houses
- Overview of proposed wealth tax over land
- Wealth tax in simple case
- Definition of a family, solitary individual etc
- Computing wealth tax on gold
- Computing wealth tax on shares
- Draft of the act to create procedure TX.03
Wealth tax on land, shares and gold
My proposal is that GoI (center, state as well districts) MUST collect a wealth tax on gold, shares and land/houses. The wealth tax on gold/shares should be collected ONLY by Central Govt, while wealth tax on land/houses should be collected by Central, State as well as District Govts. This is necessary to reduce income tax, and completely cancel regressive taxes like octroi, excise, service tax, sales tax and VAT.
On this web-page, I have provided details of procedures that can be used to collect wealth tax on shares, gold and land/houses fairly, with minimal possible evasion, and without any harshness.
A general step to improve wealth tax --- registration of tax-IDs on land, shares etc
The above procedure will enable the wealth tax dept to ensure that a person is indeed reporting all his wealth in the wealth tax return.
- The income tax dept, or some other agency of GoI, will need to issue univeral and unique IDs to every individual, firm, trust etc. which is entitled to own land/building/shares etc. To issue unique IDs to individuals, please see procedure ID.03 and to issue unique ID to every plot/flat, please see procedure ID.05.
- The income tax dept should ask local land records officer to obtain tax-IDs of ALL owners or every perticular plot/flat, and their %-ownerships. Till tax-IDs of all owners of a plot/flat are registered, the officer must freeze the sale, additional construction, mortgage etc of the plot/flat.
- The land record office will also send changes in ownership to income tax dept every quarter.
- The income tax dept should also ask ALL companies/registrars to obtain tax-IDs of the shareholders, and report shares held by each tax-ID. The deemat providers should be also asked to obtain tax-ID of each account holder. The registrars should be required to send this report every quarter.
- Every person should be required to file gold disclosure along with his income tax return. He must also show the gold he purchased/sold in the past financial year. And he should also give closing balance of the gold he had at the year end.
Problem in drafting laws for wealth tax on land/houses
Drafting rules for wealth tax for gold and shares is a simpler task as market value of gold, shares etc can be obtained without actually selling the gold, share etc. But this is NOT the case in case of land/house --- quite often one cannot get market value without actually selling the plot/house. So market value of plot/house can only be "guessed", and so there is inherent possibility of dispute and manipulation.
Also, if a person does NOT have savings/income to pay the wealth tax due on gold or shares, it is a non-issue, as the person can sell part of his gold, share etc holding without disturbing other parts of his life. But such thing is NOT easy in case of land/house. The land/houses are NOT as liquid as shares/gold and often, one cannot sell "part of it".
So like most laws, and perticularly most tax laws, I have seen no land/house tax laws, which are unambiguous and not prone to litigation. I will propose land/house tax laws that I think are perhaps least unfair, and least ambiguous and least prone to litigation. The wealth tax law I am proposing is mixture of some of the "good" wealth tax laws I have seen.
Overview of proposed wealth tax over land/houses
- The plots/flats will get classified into two catagories --
- personal properties : that are owned by individuals/families for personal use, be residential or business
- non-personal properties : properties owned by non-individuals or huge properties owned by individuals/families.
- On personal properties, a lower wealth tax rate will apply, and valuation is lesser of the indexed book value or market value
- On impersonal properties, the tax is strictly based on self disclosed market value. What will ensure that owner is disclosing the market value correctly? Any party will be free to purchase the property at 1.25 times the price. This will ensure that the owner will correctly guess the market price.
Wealth tax in simple case
The wealth tax law on land that I have proposed, is extremely simple in simple cases where a person/family owns 1 or a few properties, and perticularly simple if a person/family owns only 1-2 small properties. So the cost of compliance is very low. In complex cases, where a person/family has several propereties, the law becomes complex, and cost of compliance increases as the person/family now may need a qualified accountant to decide the exact tax amount. But even in this case, if the person/family wants to reduce compliance cost/hassle, there are simple provisions they can use.
Consider the tax law in following simple cases
- Say a family of four owns a house worth less Rs 1 cr. Then the tax will be 0.2% of the house value, and there are several ways to compute values, and the owner can take the one which gives him the LEAST value.
- Say a family of 4 owns several houses, whose combined value is less than Rs 1 cr. Then the tax will be 0.2% of the values.
- Say a family of 4 owns a property worth over Rs 1 cr. Then the tax will be 0.2% on first Rs 1 cr of the value i.e. Rs 20000, and 1% on the remainder oif the value. But the laws to decide the house value are complex. But Surely, a family with so much wealth can afford a fee of say Rs 500 to obtain valuation.
- In general, if a family of N members owns one large property worth Rs 20 * (N + 1), the proposed wealth tax would be mere 0.2% of the value. And there are several ways to value a property, and family may chose the one which gives the lowest valuation.
- Say a solo person owns a house worth less than Rs 40 lakhs. Then the tax will be 0.2% of the house value.
- Say a solo person owns a house worth MORE than Rs 40 lakhs. Then the tax will be 0.2% of the house value on first Rs 40 lakhs i.e. Rs 8000 and 1% on the remainder of the value. But the valuation laws are bit complex. Surely, a person with so much wealth can afford a fee of Rs 500 to obtain valuation.
- Say a land/flat is jointly onwed by a two-more individuals who are NOT family members or say a land/building is owned by a firm. Then irrespective of the value, the rule is simple --- the property tax 1% of self-disclosed market value. But if the dept feels that value is under-estimated, and they can find a person who is willing to pay 120% of self disclosed value, the owner will get that price, and lose the property.
Definition of a family, solitary individual and property owned by family or solitary individuals
In simple cases, if the family owns 1-2 properties valuing LESS than Rs 40 lakhs, or if a couple owns a house below Rs 60 lakhs, they dont even need to know the definition of family. But if they have 1-more properties valuing much much higher, they will need to hire a CA to who can go thru following definition of family, and enable the famnily to decide the tax amount.
For the purpose of wealth tax, a family will be defined as follows
Solitary individual : A solitary individual for the wealth tax purpose will be defined as person who is NOT head/member of any family. He may be married or unmarried. For a person above 18, he may declare himself as solitary. If he is below 18, and eighter parent decide to register him as solitary for the wealth tax purpose, he will get registered as solitary. Alternatively, one can see solitary individual as an individual who is the head of the family with only one member i.e. himself.
- Summary of the definition : A family will consist of head of the family and individuals (citizens) who are members. An individual cannot be member of two families. An individual may be member of NO family in which case he would be called as solitary, or solo.
The detailed definition of family would be as follows
- A family must have a head of the family. The tax-ID of the family will be same as tax-ID of the head. The head of the family must be above 18, can be married/unmarried and cannot be head/member of any other family.
- For the purpose of wealth tax, the head of the family will have to register his family and specify the tax-IDs of the members. If an individual is above 18, he must give consent that he is member of the family. If individual is below 18, consent of BOTH parents will be must and sufficient.
- A head of the family may expel a member any time.
- Following relatives of the head can become member of the family : himself, at most one spouse, at most 2 children, children's spouse, sibbling, sibbling's spouse, 2 grand children per child, and spouses of grand children, and grand grand children and spouses of grand grand children, children of sibbling, spouses of sibbling's children, parents, grand parents from maternal as well as paternal side and great grand parents,
- An individual cannot be member of two families. When a member becomes member of second family, his
- Say husband and wife have registered themselves as members of one family. The wife, without breaking the marriage, may decide to register another family for wealth tax purpose, after her tax-ID. In such case, she will be cease to be the member of the husband's family.
- If the head of the family expires, and but the spouse is alive, she may take over as head of the family. If head of the family has expired and spouse is NOT alive, or refuses to become head of the family, the family will be considered dissolved within next 1 year.
House/plot owned by family : A house/plot will be considered as owned family iff ALL owners are members of same family.
House/plot owned by solitary person : A house will be considered as owned by a solitary individual if there is one and ONLY one owner, and he is registered as solitary individual.
Details of proposed wealth tax on land/houses
In the wealth tax I have proposed, there are 4 parts in computing wealth tax :
- Deciding standard value of the property
- Classifying properties as personal and impersonal
- Deciding value of the property : the method will depend on whether property is personal or impersonal
- Deciding tax on the wealth
The above rules will be sufficient to obtain a flat wealth tax.
- I am proposing two types tax rates --- 0.2% for personal properties worthy certain certain lakhs per person, and 1% on impersonal properies. I will later define what is personal/impersonal properties, and rules to categorize it.
- Associated with each property will be THREE types of values --- published value, indexed book value and market value. The published value is ONLY to decide the tax rate (0.2% or 1%) that will apply. The value on which tax is computed is indexed book value or market value.
A. Deciding published value of the property :
- The purpose of published value is mainly to decide whether a property can be classifed as personal property or impersonal property. It will NOT be used to compute the final wealth tax.
- Associated with each property will be land area it occupies. In case of independent tenaments, the land area is clearly defined. In case of flats or row houses, where several units exist in one plot and there is common plot between blocks, the land area of each flat will be as per contract amongst flat owners or as per their carpet areas. And the external area is built up area that is outside the flat but inside the building such as staircases etc. The builtup area will be divided amongst flats as per their carpet areas. So each flat (unit) will have two parameters attached to it --- land area and super built up area.
- The wealth tax dept will publish per sqmt published land price and per sqmt standard built up area for each ward every year. The published land price may depend on factors like promixity to small/big roads and recent transactions etc. The published construction price will depend on prevailing construction price aand age.
- Based on the published land price and published construction price, the owner will derive the standard value of the property.
B. Marking properties as personal and non-personal and "partly personal" properties :
- There is a lower tax rate on personal properties. So an onwer may wish to see if his property classifies as definition of personal property. If it does, he should take this option.
- The owners will derive the PUBLISHED value of each properties they own, using land rates and construction values as published by wealth tax dept.
- A head of the family can mark any number of properties his family owns worth below (Rs 20 lakhs * (number of family members + 1)) as personal properties, and other properties will be treated as impersonal properties. (the value used here will be PUBLISHED values). So consider a family of 3. Then the total expemption limit will be (Rs 20 * (3 + 1)) = Rs 80 lakhs. If the head or family owns 10 flats whose published value is Rs 8 lakhs, he may mark ALL of them as personal flats. But say if they have 6 flats worth Rs 25 lakhs each, then any three flats can be marked as personal, one flat can be marked as partially personal and partly impersonal, and remaining will be impersonal. At most one property can part personal and part impersonal.
- If a person is solitary, i.e. he is NOT a member of any family, he can mark any number of properties, owned ONLY by himself, total publishd value below Rs 40 lakhs and other as will be treated as impersonal properties. If he has ONLY one property whose published value is Rs 60 lakhs, it would considered as 2/3rd personal and 1/3rd impersonal.
- If the property is owned by 1 person, who has registered himself as member of some family, he can mark his properties with published values below Rs 20 lakhs as personal, and remaining as impersonal.
- All properties where 1-more owners are non-individuals like firms, companies etc will be marked as impersonal.
- All properties which has more than 1 owners, and owners are NOT members of same registered family, will be marked as impersonal, for the purpose of wealth tax.
C. Deciding taxable value of the property :
- If the property is marked as personal property, the value of the property, for the purpose of wealth tax will be purchase price plus 1/3rd the increase occued by index (as defined by income tax dept for capital gains purpose). The alterations will be added in same way i.e book price plus 1/3rd the increase due to indexation. Example : Say a house is purchased in 1990 for Rs 800,000 and index was 200. Say today it is 2003 and index if 260. Then increase in price due to indexation will be 30%. For wealth tax purpose, increase will be taken as 1/3rd i.e. 10%. So for wealth tax puprpose, the value of house will be (Cost + 10% of cost) = Rs 880,000.
- In addition, the owner may voluntarily state the market price for wealth tax purpose, which may be lower than BOTH the above mentioned prices, and pay wealth tax ONLY as per market value. But in this case, the wealth tax dept may give him 125% of the value, and obtain the property from him. The wealth tax dept cannot decide to purchase the property unilaterally --- it can do so ONLY when a private party deposits 130% of the disclosed price.
- Valuation of non-personal properties will be strictly on the basis of market value. The owners must voluntarily state the market price for wealth tax purpose, which may be lower than book value, and pay wealth tax ONLY as per market value. But in this case, the wealth tax dept may give him 125% of the value, and obtain the property from him. The wealth tax dept cannot decide to purchase the property unilaterally --- it can do so ONLY when a private party deposits 130% of the disclosed price.
- Valuation of partly personal and partly impersonal properties : Say a property is marked as partly personal and partly impersonal. Then owner can take lower of the two --- indexed book value and value as computed by price of land/construction as disclosed by wealth tax dept for that ward. Say that price is Rs X. In addition, the owner will have to state the market price of the property best according to his judgement. Say that price is Rs. Y. Now say the property is a% personal and (100-a)% impersonal. Then net value of property will be
Rs. (X*a + Y*(100-a))/100.
And the wealth tax dept can buy the property by paying Rs. (2*X + 1.25*Y) if they think that the owner has drastically under-reported the price. And walth tax dept cannot issue the purchase demand unilaterally -- it can do so ONLY when a party approaches wealth tax dept and deposists 5% more than Rs. (2*X + 1.25*Y).
- Valuation of rented property : A property, if rented for a duration longer than 12 months, will be considered as impersonal property, and BOTH, the tenant and owner will have to state the market price of the property as they may seem fit.
D. Computing wealth tax on land/houses
- Upon recieving a counter offer 130% of the value stated by the owner, wealth tax dept may purchase the property from the owner by giving him 125% of the value he stated, in which case the tenant will continue for the time as specified in the lease.
- Upon recieving a counter offer of 130% of the value stated by the tenant, wealth tax dept may purchase the tenancy rights from the tenant by giving him 125% of the value he stated, in which case the new tenant will continue for the time as specified in the lease.
- If a property gets marked as personal, property tax will be 0.2% of the value of the property and if the property is impersonal, it will be 1% of the value.
- If a property is partly personal, then wealth tax will be 0.2% on personal value and 1% on impersonal value.
- The property tax will be paid by the owners in the same ratio as their ownership.
- If the owners fail to pay the property tax, the transfer of property will be frozen till all the tax due has been paid. If the unpaid tax crosses 34% of market value, the wealth tax dept will confiscate the property, auction it, deduct the taxes plus auctioining charges, and pay the remaining sum to the owners in the proportion they own.
- The wealth tax paid will be deductible from income tax next year.
The above rules may seem complicated, but they are complicated ONLY when a person/family has a large number of properties. In such cases, the compliance will need assistance of a qualified professional. But in cases where a family/person has 1-2 properties of moderate values, or when property is owned by non-individual entity, the rules are trivially simple, as I had shown earlier.
Computing wealth tax on gold
I propose following rules for computing wealth tax on gold
- Every person, in the income tax return he files, must disclose the gold, silver, precious stones etc he had in the begining of financial year, gold etc he sold/purchased during the year, and how much gold, silver etc he had at the closing of the year.
- If later, it is found that person was possessing more gold etc than he stated, 60% of the gold found will be confiscated.
- The person will have to pay 0.2% of value below Rs 100,000 and 0.5% of value above Rs 100,000 as wealth tax. In addition, he will need to pay 0.5% tax on the gold he purchased that year (gold purchased, NOT the net gold purchased), except if he is a registered gold trader (i.e. seller-buyer).
- The registered gold buyers/sellers will have to pay 0.1% sales tax on gold they buy/sell, and will also have to pay 0.5% of wealth tax on gold average daily closing gold balance of the year. The registered gold buyers will need to obtai and report tax-IDs of persons they buy/sell gold from. For the payments they give/take in cash, there will be another 1% charge on it, and there will be no such charge if payments are given/taken by credit cards or bank checks.
- The wealth tax paid will be duductible as expense from total income next year.
Computing wealth tax on shares
I propose following rules for computing wealth tax on shares
- The income tax dept will ask every company to deematize the shares. The income tax dept will ask every company and Deemat account providers to obtain tax-ID of the shareholders. This will make evasion impossible.
- The wealth tax on shares can be paid by the company or the shareholders.
- If the company decides to pay the wealth tax on shares, they must announce it at least 1 quarter before, and if they later decide to give up this responsibility, they will need to announce it 2 quarters ahead. If the company is paying the wealth tax, the company may deduct the property tax it has paid on gold and land/buildings, and pay only the balance.
- If company decides to pay the wealth tax, tax rate will be 1% per year of average daily values of the share. The average daily value will be decided by average price for which the share was traded on that day on various exchange it was listed.
- If the company has refused to pay the wealth tax, the tax will be paid by the shareholder and tax rate will be 1.5% per year, and will be computed using the dalily average values.
- For all shares where companies have decided NOT to pay the wealth tax, the wealth tax dept will provide the daily averages to deemat providers, and deemat provoders will issue a monthly statement to each user showing his holdings and daily values of shares, and thus daily values of his portfolios. The deemat providers may charge a fee to issue this statement. There will be NO such statement if sharedolder is holding ONLY those shares where company has agreed to pay the wealth tax on shares, and no charge will be applicable.
- The wealth tax paid will be duductible as expense from total income next year.
Draft of the act to create procedure TX.03
I have proposed 3 drafts to enacts some parts of TX.03.
To see the text of these drafts, please click here.
- To collect wealth tax on land/houses, the citizens would need to pass a law in the Parliament.
- To collect wealth tax on wealth except plots/flats, such as gold, shares/bonds etc citizens would need to pass a law in Parliament.
Now citizens can ask MPs to pass this Act. But IMO, it will be wiser for citizens to first enact procedure LM.03, and then use LM.03 to pass these drafts WITHOUT any help from MPs. To know about procedure LM.03, please click here .
If you have any other question, please mail it to MehtaRahulC@yahoo.com. Thousand thanks in advance.
Next - TX.04 : Procedures to reduce regressive tax