An inheritance tax or estate tax is a levy paid by a person who inherits money or property or a tax on the estate (total value of the money and property) of a person who has died. In international tax law, there is a distinction between an estate tax and an inheritance tax: an estate tax is assessed on the assets of the deceased, while an inheritance tax is assessed on the legacies received by the beneficiaries of the estate. However, this distinction is not always respected in the language of tax laws. For example, the “inheritance tax” in the United Kingdom is a tax on the assets of the deceased, and is therefore, strictly speaking, an estate tax.
In some jurisdictions the term used is death duty. For historical reasons that term is used colloquially (though not legally) in the United Kingdom and some Commonwealth nations.
Actor Amitabh Bachhan recently said you could not escape death and income-tax. If economists’ suggestions are incorporated in the Budget for 2013-14, one will not be able to escape ‘death tax’ as well.
Economists prefer death tax, also known as inheritance tax, over the so-called super-rich tax as a prescription for raising resources for the government in the Budget.
They, however, also cautioned the government to resort to the new tax only when it could prune subsidies. Otherwise, they feel the government would raise money on the one hand, and over-spend on the other.
Inheritance tax, called estate duty in India, was scrapped in 1985 by then finance minister V P Singh under the Rajiv Gandhi government. Singh at that time had said benefits from the tax were not as high as cost of its administration. He had also said: “I am of the view that estate duty has not achieved the twin objectives with which it was introduced, namely, to reduce unequal distribution of wealth and assist the states in financing their development schemes.”
The tax garnered Rs 20 crore in 1984-85, constituting 0.4 per cent of Rs 5,329 crore of direct taxes. Assuming that the Budget for 2013-14 sets a target of 14 per cent increase in direct tax realisation, which it had kept in this fiscal Budget, the direct tax proceeds would be Rs 6.5 lakh crore, provided the budget’s target is met. If inheritance tax this time also contributes 0.4 per cent of direct tax kitty, the new tax could give the exchequer Rs 2,600 crore.
But economists warned that this is not the correct way of calculating the money that could be garnered through the new tax. Now, asset generation is much more. India’s gross domestic product is nearly 35 times of what it was in 1984-85. It was Rs 88 lakh crore in 2011-12, against Rs 2.5 lakh crore in 1984-85.
On the other hand, the tax cannot be as high as it used to be. The estate duty used to be as high as 85 per cent over Rs 20 lakh of assets inherited. Chidambaram, known for moderate tax rates, may not go for such a heavy levy, analysts said.
Economists believe that if he indeed levies inheritance tax, it would be at most 30 per cent, the highest rate in income-tax in India currently. In 1984-85, the highest slab of income-tax was 50 per cent.
We cannot compare the two times. Since GDP is much bigger in size compared to 1985, the relative high cost of administration argument won’t hold true
The world over, the attempt today is to raise revenue. In India economists are of view that if estate duty is introduced, it will be at par with the income-tax rate. This means, inheritance tax rate would be 30 per cent at its peak. As part of a deal on fiscal cliff, the US increased inheritance tax from 35 per cent to 40 per cent.
Rajiv Kumar, a senior economist, agreed with the idea of reintroduction of inheritance tax in the country as it would help in reducing inequality. “We can look at a high cut off and a nominal rate to start with”.
According to him, though it is legitimate for a person to pass on assets to his son and daughter, those inheriting should also contribute to the society rather than live on rental income. “Moreover, if a person is rich, the society has also contributed to his/her wealth. This will also help in reducing inequality in the economy”.
On the face of it, inheritance tax does not seem like a good idea, says Surjit S Bhalla of Oxus Research. “In the pre-budget meet with the finance minister, I was of the view that in case inheritance tax is imposed, subsidies should be cut,” Bhalla said.
Former chief statistician Pronab Sen agrees. The US raised the rate in a deal to avert the fiscal cliff. With the high inheritance tax, the US government wants to say that there is no point saving and creating assets as anyway they will take about half of it away and future generations won’t get it.
“It’s saying that you are better off spending now, but for India it is a very bad idea at this point of time. If people start spending, the inflation will spike up,” Sen said.
The Federation of Indian Chambers of Commerce and Industry (FICCI) also opposed the inheritance tax. Former FICCI President R V Kanoria had said: “We strongly oppose any imposition of Inheritance Tax.”
Industry captains opposed the suggestion of reintroducing inheritance tax and subjecting the “super rich” to a higher tax burden. “A higher rate of tax on high income group taxpayers is uncalled for as this would discourage entrepreneurship. It could lead to professionals relocating to low tax domiciles such as Singapore,” FICCI president and HSBC India chief Naina Lal Kidwai said.
Instead, chambers suggested that the existing tax rates should be maintained. “We have said any increase in taxes (on rich) will create a negative perception on investment and therefore should be avoided,” CII president Adi Godrej said.
India Inc also cautioned against imposition of inheritance tax — a suggestion that the finance minister had himself made — arguing that the move would deter savings and investments, and impact capital formation. After the meeting, Mahindra & Mahindra chairman Anand Mahindra said the FM pointed out that the primary concern of the government was to kickstart investments, consumption and ensure there is sustained flow of investments from overseas, while he also pointed to emerging green shoots. The industry also pointed to the need for a stable policy regime. “We are on the verge of making a very major investment but we are held up by an uncertain regulatory regime that is all this talk about taxes on diesel cars,” Mahindra said.
Lets see how our FM responds to the issue.