The issue for consideration is whether Wealth Tax is payable on the shares of foreign companies held by Indian companies or other Indian entities? The existing scheme of Wealth Tax is that the shares of companies are not liable to Wealth Tax, being outside the definition of assets in the Wealth Tax Act. Accordingly, shares of companies – whether such companies are Indian companies or foreign companies will be outside the purview of Wealth Tax levy. Until 1992 shares held in a company were liable to wealth tax. However, with a view to channelise investment to productive areas, the definition of the term ‘asset’ was amended by Finance Act, 1992.
As a result of the afore-said amendment, wealth-tax stood abolished on shares. In fact the memorandum explaining the provisions of Finance Bill, 1992 provided that “with a view to stimulating investment in productive assets, it is proposed to abolish wealth-tax on all assets except certain specified assets.”
The above position is now sought to be disturbed in respect of shares of foreign companies by introduction of “Controlled Foreign Company” (CFC) regime. The Income-tax Act as well as the Wealth tax Act is proposed to be substituted by the revised Direct Taxes Code (DTC). The revised DTC contains provision relating to Controlled Foreign Companies (CFC).
Provisions relating to wealth tax have been incorporated in Chapter X of the revised DTC. It is provided that every person, except a non-profit organi-sation, shall be liable to pay wealth tax on the net wealth at 1 per cent if the net wealth as on the valuation date exceeds Rs 1 crore. The Wealth-tax is chargeable only on the wealth exceeding Rs 1 crore. For the purpose of computing the net wealth, any equity or pre-ference shares held by a resident in a controlled foreign company shall be considered as taxable.
“Controlled Foreign Company” has been defined in the Twentieth Schedule of the revised DTC to mean a company which satisfies all the following conditions:
The company is registered in lower tax jurisdiction outside India, and; The shares of the com-pany are not listed in that cou-ntry, and;
Indian resident exercises control over the company, and; The company is not enga-ged in any active trade or bus-iness, and;
The specified income of the company is more than Rs 25 lakh.
In other words, an Indian company or other Indian entity shall be required to pay wealth tax on shares held by it in controlled foreign companies. However, the sha-res held in Indian compa-nies are still outside the pur-view of the wealth tax. Furt-her, the value of shares in the step down companies of CFCs may also be liable for wealth tax in India.
In this context, it may also be mentioned that the original draft of DTC which was circulated by the Government on 12.08.2009 for review of the public, contained provision levying wealth-tax on the shares of Indian companies as well as foreign companies. However, revised DTC proposes wealth-tax only on shares of foreign controlled companies. There is no wealth-tax on the shares of Indian companies.
The discussion paper on the revised DTC recognises the principle that there sho-uld be no wealth-tax on productive assets. It says that “Accordingly, specified ‘Unproductive Assets’ will be subject to wealth-tax”.
Shares were excluded from the purview of wealth tax by Finance Act 1992 on the principle that wealth tax should not be levied on assets which are productive. The above principle is apparently being violated by the revised Direct Taxes Code, inasmuch as shares in foreign companies (CFCs) are proposed to be subjected to wealth-tax. Since shares of Indian companies are not liable to wealth-tax, it is clear that the shares of Indian companies have been considered by the DTC as productive asset but shares of a foreign company have been considered non-productive. This discrimination is neither logical nor conducive to economic growth of the country. CFC rules, therefore, require a review.
The author is a Sr. Partner in S S Kothari Mehta & Co.