Though the inheritance tax was abolished in India in 1985 due to increased costs of collection, the hike in the levy of inheritance tax in the US has forced the Indian government to relook the introduction of the tax, says Dinesh Kanabar of KPMG explains in an analysis on CNBC-TV18.
Though Kanabar is firmly opposed to the levy of such a tax due to its deleterious effects on the process of wealth-creation, it will be much mulled over for the finance minister who is faced with the challenge of bridging the Budget deficit.
Below is an edited transcript of the analysis on CNBC-TV18
Q: Do you accept the logic of an inheritance tax? How is it normally implemented and what kind of capital assets is it normally levied on? Is it dovetailed to the inheritor's income?
A: The estate duty in India was abolished in 1985 as the cost of collecting this tax was far higher than the revenues earned due to the ambiguities such as the computation of the wealth and valuation of the shares of an unlisted company that trapped the government in a landmine of litigation.
In the US, the Senate in the fiscal cliff legislation has enhanced the estate duty from 35 percent to 40 percent in an effort to increase the tax-base. With governments worldwide struggling to increase their tax base, India does not want to lag behind. But the lack of political will has resulted in a reduced tax base.
Q: What would be the possible rate of inheritance tax if it is enacted? How exactly would it be implemented?
A: The two questions are linked to each other. It must be noted that if there is an inheritance tax then a gift tax would have to be introduced simultaneously otherwise people will give away gifts inter vivos and would frustrate the levying of inheritance tax.
The rate of either a gift tax or inheritance tax would have to be equated with the maximum marginal rate of income tax. The problems involved in the valuation of assets to calculate inheritance tax are universal. It is not unusual for people who inherit large houses or shares to actually sell them off to pay inheritance tax.
The global trend levies inheritance tax on all assets, with exemptions on assets that are places of residence, and if the value of the inheritance exceeds a certain threshold.
Q: In your opinion, should India levy and collect an inheritance tax?
A: No. With the Indian economy in a process of creating wealth, a bulk of which is in the form of real estate or shares in listed companies, the levy of an estate duty cause a liquidation of those assets and arrest economic development. The time is not right to plan for the introduction of an inheritance tax or an estate duty.
Q: How does one bridge the deficit with 50 percent of the population below the poverty line and the rich who do not pay tax on the dividend they receive? Do you recommend a more rigorous tax administration?
A: India does need to relook its tax base. Are we really monitoring our taxes? Little is being done to tax the huge amount of cash expenditure. I also recommend the state to abolish the dividend distribution tax and revert to the scheme of the recipient having to pay tax. The government seriously needs to look again at the capital gains tax regime. There is also potential for the enhancement of indirect taxes.
Q: What is your viewpoint with regards to the likelihood of the inheritance tax being enacted?
A: Though I cannot comment on its introduction, I do see a serious challenge for the finance minister in trying to ignore the potential levy of the inheritance tax with the USA looking at increasing inheritance tax to 40 percent.