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
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. Many economists suggested the new tax at their pre-budget consultations with finance minister P Chidambaram earlier this week, an official statement had said.
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," Dinesh Kanabar, deputy chief executive officer of KPMG, said.
He said world over, the attempt today was to raise revenue. "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, said 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.”
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However, any decision on this unlikely soon as new EGoM would be formed after new govt takes over