If inheritance tax is in any way reintroduced, it would require careful deliberation from the government with regards to its structure. To function effectively, a strong digital database system is a necessity for tracking real asset transactions and holdings
Murmurs surrounding the reintroduction of inheritance tax in India are growing stronger by the day. As per media reports, the government is keen to shore up tax collections and is reportedly planning to propose an inheritance tax as part of the forthcoming Budget.
The objective behind the reintroduction of an inheritance tax could be two-fold. First, it could address the problem of economic inequality. Second, it would generate higher revenue, leading to higher public spending by the government.
In India, estate duty (as it was then known) was introduced in 1953 under the Estate Duty Act, 1953 as an attempt to reduce economic disparity. Estate duty rates were progressive and rose as far as 85 percent on estates exceeding Rs 20 lakh.
Estate duty was levied on the market value of all immovable properties in India, as well as on all movable property (whether in India or outside) passed on to successors upon the death of an individual. The erstwhile law also had an anti-avoidance mechanism in place to curb certain transactions such as gifts made 'in contemplation of death' or gifts given within two years prior to death.
Despite its noble objectives, the estate duty law was met with significant disapproval throughout its existence due to a number of factors: (a) The law was complex and led to higher litigation and higher administration costs, (b) Perceived double taxation on the same assets in the form of estate duty and wealth tax (later abolished w.e.f. from FY16), and (c) Lower estate duty collections as a result of illegal concealment and the practice of holding benami properties.
Today, many developed countries such as the US, UK, France, Japan and the Netherlands have inheritance tax laws in place. The US imposes Gift Tax and Estate Tax (both taxes levied on the donor) at 40 percent with a combined lifetime exemption threshold for both taxes amounting to approximately $11 million per person. Likewise, inheritance tax in the UK is levied at 40 percent, but with a far lower exemption threshold.
According to a survey conducted by Oxfam, 58 percent of India’s total wealth is concentrated within one percent of its population -- higher than the global average of about 50 percent.
Thus, there is growing concern surrounding India’s increasing economic disparity. Considering the objective to prevent wealth accumulation in the hands of a small population, and the need for better distribution of wealth, there is a school of thought according to which the imposition of estate duty may seem desirable. The reintroduction of inheritance tax may also find political support as it may be perceived as a Robin Hood tax by India’s large middle-class population, thus strengthening the pro-poor image of the current government.
Arguments against the levy of inheritance tax mainly revolve around fears regarding the outflow of entrepreneurial human capital and financial resources going abroad. With India being a developing country, keeping capital intact in the hands of entrepreneurs may represent a more efficient investment for economic development.
An inheritance tax law must provide generous exemption thresholds, a moderate inheritance tax rate, exemption for the surviving spouse and/or minor children of the deceased, exemption for residential houses and agricultural land, a phased payment mechanism in case of illiquid wealth, etc. All of these factors would go a long way to encouraging full and proper compliance, building acceptability and creating a wider taxpayer base.
Hurried introduction of such far-reaching legislation should be avoided, and it will augur well from a long-term perspective if the government comes up with a public discussion paper and invites the views of a wider audience in order to ensure a robust inheritance tax framework.Vishal Gada is a partner and Paras Sheth and Jainik Shah are Senior Associates at Dhruva Advisors LLP. The opinions expressed here represent the authors’ own personal views