Inheritance Tax – Are we ready


Inheritance Tax – Are we ready

Rumours & Sentiments are high on the possible re-introduction of Inheritance Tax in the Union Budget to be presented on 5th July 2019, first by Smt. Nirmala Sitharaman.

India is a country of inequalities with rising gap in income & wealth amongst citizens. Estate Tax is viewed as a viable instrument in the hands of the state to control inequality and mobile revenue from rich for the welfare of the poor. It is also referred to as theRobin-hood taxation as it is aimed at striking the balance in the society by redistribution of wealth. Estate Tax & Inheritance tax are often used interchangeably as both are trigged upon the death of a person. Though broadly the nature is similar, the hand of taxation could differ in both the tax. An inheritance tax is levied on recipient of the property of deceased whereas estate tax is levied on the estate of a person who has died

Indian & Global existence of Estate Tax

Different countries have different variations & nomenclature ranging from transfer tax, succession tax, death tax etc. In India, estate tax was first introduced in 1953 and it was abolished in 1985 as it seriously failed to reduce the wealth gap. When in existence in India, it was payable only by legal heirs on an estate above some threshold & slab rate was generally around 40%.

Wherever estate tax exists in the world, rate varies from country to country. Japan stands at the top with rate of 55%, whereas South Korea is @ 50%, USA @ 46%, France & UK @ 40%. An innovative mode exists in Canada & few other countries where &there is no such thing called as Inheritance Tax. In these countries, estate devolving to legal heir is considered to have been sold at fair market price immediately before his death and tax is levied accordingly. As a result, deemed gains are then taxed at the applicable capital gains tax rates.

If re-introduced, it will obviously provide for some threshold exemption limit so as to exclude common citizen from its purview. It certainly will not be a flat tax but slab wise rate could be provided which probably may be in between 5% to 15%. Certain categories of recipient may be exempt from the tax. Estate taxes don’t affect everyone. Considering global taxation scenario & need for getting higher revenue, there are the chances that Government may reintroduce Estate Duty now

Is it worth to implement Inheritance Tax:

It is true that various Democracies across the world have the inheritance tax but for its real success, social security ideally must exits. There are various countries which have abolished it after implementing for the reason that the inheritance tax was poor revenue generator & have also failed to serve its purpose of bringing equality in the society.

Inheritance tax & Wealth Tax was abolished in India in 1985 & 2016 on the ground of high administration cost & lower revenue collections. In my view, the same will also hold good for this tax as well. India doesn’t have any social security system & average Indians do not inherits assets with high values. Indians have a mentality of saving which has its own time tested importance. Inheritance tax may adversely impact the saving sentiment & passing on the wealth for the next generation. Merely floating it because it exists elsewhere in the world cannot place India at par with other counterparts. With this background, Estate and Inheritance taxes may be considered as poor economic policy and a poor source of revenue for the country.

 If implemented, the cost of administration, corruption, tax consultation, endless litigation, may be much higher than the actual revenue. Undeniably, all this resources could be more gainfully employed in the growing & productive economy. Law to tax again only few strata of the society who are otherwise also contributing to the welfare state can never be a good law. Further, estate cannot be equated with liquid cash which is necessary to pay off the estate tax. Rather, accumulated wealth will make India richer and more productive as a whole.

The ultimate purpose of tax collection is revenue generation and since its base will be narrow, it is sure to result in poor revenue contribution. Citizens are not laboratory species for the trial & error of various economic policies. Fringe Benefit Tax (FBT), Banking Cash Transactions Tax (BCCT), Wealth Tax, etc have not generated revenue for the state but have contributed to the harassment of the taxpayers. Let inheritance tax not result in a flight of talent and capital out of the country.