Wealth tax: To whom does it apply?

In a recent judgement, the Supreme Court has stated that the Bangalore Club, one of the oldest clubs in India, does not have to pay wealth tax.

What is wealth tax?

As a concept, wealth tax is a tax that is imposed on the richer sections of society. Wealth tax was introduced in India in 1957, in order to tax the assets of certain high-income individuals, Hindu Undivided Families, and companies. The tax covered assets like property, houses, gold jewellery, motor cars, aircrafts etc.

However, the Union Budget of 2015 abolished wealth tax, as the cost of collecting wealth tax was more than the benefits. Under the current direct tax structure, instead of wealth tax, tax authorities apply a surcharge (additional tax) on people with higher income.

The surcharge is calculated based on income tax. If your annual taxable income is higher than 50 lakh rupees, then a surcharge is applied on your income tax. For example, if your annual taxable income is more than Rs. 1 crore, you additionally have to pay a surcharge at the rate of 15%, i.e., the surcharge will be 15% of your income tax.

Assets of associations

The Supreme Court had to decide whether the Bangalore Club has a legal responsibility to pay wealth tax. In India, matters related to wealth tax are regulated as per the Wealth-tax Act, 1957. Section 21AA of the Act speaks of wealth tax assessment when taxable assets are held by an association of people. The section states that if an association has certain taxable assets, and the shares of individual members in the association is unknown, then the wealth tax will be recovered from the association itself.

The Supreme Court held that in order to be considered as an association of persons under Section 21AA of the Wealth-tax Act, it is necessary that the people in the association come together with some business or commercial purpose. The objective of Section 21AA is to avoid tax evasion, and the section itself only speaks of a business or profession carried on by an association of persons. The Court stated that the Bangalore Club is a social club whose members do not come together for any business or commercial purpose, or to make income or profits. Hence, the Court said that the Bangalore Club does not have to pay wealth tax.