Inheritance Tax: Time to scrap the thought

By Subhash Lakhotia, Tax Guru : CNBC Awaaz, Tax & Investment Consultant

Sometimes a thought might come in the minds of the tax gatherers that why not introduce “Inheritance Tax” to gather more revenue for the Government.  Well, it is time right now to debate on the theme of introduction of Inheritance Tax in the present scenario in the country. In last three decades specially because of tax reforms specially in the field of cutting down of income-tax payment in the country the voluntary compliance of the tax payers has increased to an unprecedented level. It is also a fact right now that the Government is finding it less cumbersome to collect tax revenue from the tax payers of the country. Voluntary compliance specially relating to income-tax collection  is still increasing day by day and more so in last one decade ever since the tax rate became reasonable. It is in this context that  the law makers are required to think and come to a conclusion that today and in future no thought at all should come in the minds of the law makers and the tax gatherers of introducing a tax by the name of Inheritance Tax. In case the Government decides at any point of time to levy Inheritance Tax, then surely the culture of the tax payers which has been changed in last two decades will take a u-turn and the entire exercise of the Government in educating the tax payers for better compliance and achieving the desired results as a result of tax rate deduction would all be washed away. Hence, it is time now that we Indians stop debating on imposition of Inheritance Tax in the country.  Rather one single focus which should be in the minds of the law makers is to further simplify the tax laws of the country to make it more tax payer friendly and to make it simple and  easy so that better revenue is derived by the Government by way of income-tax collection. 

It is because of non-applicability of the Inheritance Tax in the country the author is of the view that a large number of Non-Resident Indians presently residing in different countries of the world would be tempted to bring in their funds in India in their old age so as to do away with Inheritance Tax.  It is expected that a large population of Non-Resident Indians would migrate into India after reaching the age of 50 years and they will not come alone but they will come with their money power back in India because there is no Inheritance Tax in India.  It is a fact that non-chargeability of Inheritance Tax in India is really an inspiration specially for Non-Resident Indians to come back to their home country with all their money in hand and save their Inheritance Tax which otherwise was applicable in many other countries of the world.  Reversely,  if the Government at all were to think about imposing of Inheritance Tax, then immediately we would see the shift in the mindset of the tax payers of the country and it is expected that black money and tax  evasion transactions would be  roaring high. Hence, if the Government wants that indulgence of the tax payers in the black money activities and transactions is done away with, then surely no thought  ever should come in the minds of the tax collectors  to bring the tax for inheritance of the assets. 

If we have a deep peep into tax laws of our country, we find that once upon a time in India we had a tax known as “Estate Duty” which was payable after the death of the person on his assets and the shocking news was that the maximum rate of Estate Duty payment consequent to the death of a person was as high as 85 per cent.  Well, how the Government can expect a person to be honest specially when Estate Duty was as high as 85 per cent.  It was really nice that Shri V.P. Singh, the then Finance Minister of India way back in the year 1985 immediately scrapped the Estate Duty Law.  If we compare the statistics  in black money transactions, we would surely come to a conclusion that because of doing away of the Estate Duty the tax payers easily could keep the money under their control and would pay taxes on the same because there was no fear of the Estate Duty liability being affected on them at the time of their death.  If today a fear is brought in the minds of the tax payers about the likelihood introduction of the Inheritance Tax, in that situation a large number of tax payers of India would try to resort  to illegal way of keeping their assets and money so that they are not liable to payment of Inheritance Tax if introduced in the country. Hence, the Government should make a categorical announcement that it has no intention of ever introducing Inheritance Tax in the country. If at all the Government is interested to receive tax revenue by imposing Inheritance Tax, then such type of Inheritance Tax sould be introduced only for persons having wealth exceeding  Rs.100 crores so that majority of the tax payers of India are not affected at all. 

The fact remains that in many countries Inheritance Tax is in operation.  But it is because of the operation of Inheritance Tax in those countries our Non-Resident Indian friends who are based in those countries are trying to come back to India after selling all their assets abroad just to save Inheritance Tax.  For example in London the families are liable to 40 per cent Inheritance Tax Bill on everything they inherit above a nil rate band of pound 3,25,000.  Although the allowance is double for married couples. They may have to settle the tax bill before they can inherit any assets. It is expected that in India in the regime of Zero Inheritance Tax the economy is flourishing and tax payers are now resorting to healthy practices of tax payment and are not interested to carry on nefarious activities and tax evading activities but in case Inheritance Tax comes into picture, then the effort put in by various Governments in the last three decades in particular will lose its shine and again we might have the atmosphere of higher rise in parallel economy in the country. 

It is suggested that if the Government makes clear cut announcement that there is no proposal to bring Inheritance Tax at any point of time, then surely this one announcement itself will help the tax payers  to continue making  payment of their  share of Income-tax payment.

It may be noted that Inheritance Tax is a tax on the assets which a persons receives after the demise of another person. Generally the Inheritance Tax world over is paid by the person who inherits certain assets on the death of another  person. Due to Inheritance Tax large number of gifts are being made by tax payers the world over before their demise so that these assets are tax free and do not come within the clutches of Inheritance Tax. In India if at all Inheritance Tax is introduced, then it is expected that many tax payers would indulge in these activities namely of gifting the asset while they are alive thereby nullifying the impact of Inheritance Tax.  As the tax paying public of India is aware that there is no Inheritance Tax in India, therefore, they continue to maintain assets, properties in their names and easily they continue to pay income-tax on the income arising from all the assets held by them in their name.  But if something like Inheritance Tax is expected to come, then such tax payers will do everything to break the law and would distribute their assets during their life time whereby the impact of tax collection would be visible right now and the purpose of introduction of Inheritance Tax would be defeated.  Hence, the Government should not at all think about introduction of Inheritance Tax at least for a decade and then it may be reviewed later on depending on the situation prevailing at later point of time.

The author is Tax and Investment Consultant at New Delhi for last 40 years.  He is also Director of M/s R.N. Lakhotia & Associates LLP & The Strategy Group.E-mail : slakhotia@airtelmail.in