Inheritance tax unlikely to be re-imposed

Finance Minister Arun Jaitley is unlikely to heed economists' suggestion that an inheritance tax be introduced in Budget 2014­15 as an additional revenue stream.

For a government that is struggling to keep its fiscal deficit low, levying a tax on inherited wealth might be a tempting way to shore up tax revenues. However, according to officials, "the finance minister is of the view that inheritance tax won't make much sense, as people in India don't inherit much".

In a pre­Budget meeting with Finance Minister Arun Jaitley, economists had batted for introduction of this tax, also known as estate duty, above a certain threshold - as in many developed countries.

INHERITING A TAX

HISTORY

• Inheritance tax was known as an estate duty in India
• Abolished in 1985 by the Rajiv Gandhi govt
• V P Singh, the then FM said it failed to reduce wealth inequality

ECONOMICS

• Economists want it reintroduced for lowering inequality and boosting revenue
• Jaitley is said to believe Indian taxpayers don’t inherit as much as those in developed nations

MATHEMATICS

• The tax garnered Rs 20 cr in FY85 (0.4% of direct taxes)
• If the share remains the same, it could fetch Rs 3,029 crore in 2014­15

GEOGRAPHY

• Levied in the US, UK, Spain, Belgium, Netherlands, Finland and Germany
• Australia, Sweden, scrapped it; China brought rules but didn’t introduce it

"The biggest source of economic inequality today is inherited wealth. It's an anomaly in tax structure that the least distorting tax is absent from there," said economist Nitin Desai. Calling for a debate on the issue, he said the tax could always be calibrated by offering exemptions to certain people.

Rajiv Kumar, a senior fellow at the Centre for Policy Research, said: "I fully support inheritance tax. It discourages rentier income and encourages professionalism and enterprise."

But Bajaj Group Chairman Rahul Bajaj was against it. He said he would be surprised if it was imposed in this year's Budget. "Our economy needs investments and higher growth. Inheritance tax could lead to people taking their business income abroad. When we become a well-developed society like the US, we could consider it for reducing inequality and making children fend for themselves."

He said if inheritance tax is also imposed on shares of companies owned by promoters, the issue of control could emerge in groups like his, as 90 per cent of its wealth was in shares of group companies.

Inheritance tax, then referred to as estate duty in India, was scrapped in 1985 by the then finance minister

V P Singh. His argument was that benefits from the tax were not as high as cost of its administration. "Estate duty hasn't achieved the twin objectives with which it was introduced - to reduce unequal distribution of wealth and assist states in financing their development schemes," Singh had said.

The tax garnered from the duty had stood at Rs 20 crore in 1984-85, which was 0.4 per cent of the Rs 5,329 crore collected through direct taxes that year. The interim budget target for direct tax collections in 2014-15 is Rs 7,57,471 crore. Assuming a share of 0.4 per cent in direct taxes, inheritance tax, if imposed, could fetch the government about Rs 3,029 crore this year. But the estate duty earlier used to be as high as 85 per cent over Rs 20 lakh of assets inherited. Such a high tax cannot be levied today.

Economists, however, say the tax collection would still be high, as asset generation is much more today. India's gross domestic product had increased 45 times from 2.5 lakh crore in 1984-85 to Rs 113 lakh crore in 2013-14.

Globally, the debate was sparked off by French economist Thomas Piketty, who in his renowned book, Capital in the Twenty-First Century, mooted the idea of imposing a tax to reduce wealth inequalities.

In India, the issue of imposition of inheritance tax/estate duty again was started by former Finance Minister P Chidambaram ahead of Budget 2013­14. But industry chambers had strongly opposed the tax, calling it regressive -something that could dampen sentiment.

"Sometimes, I doubt whether we have taken moderation (in tax rates) too far. Have we paid little attention to accumulation of wealth in few hands? I am still hesitant to talk about intergenerational equity and, therefore, inheritance tax," Chidambaram had said in late 2012.

He, however, did not introduce the levy, and instead imposed a 10 per cent surcharge on annual income above Rs 1 crore. Draft Direct Taxes Code also proposed 35 per cent tax on annual income above Rs 10 crore, clearly indicating the United Progressive Alliance (UPA) government wanted the rich to pay more tax. Already, wealth tax is levied at one per cent if one possesses more than one property and the value of one's assets is more than Rs 30 lakh.

In some countries where inheritance tax is levied - and is referred to as death tax - the maximum rate is as high as 80 per cent. It is usually levied on the net value of assets passed on to legal heirs of a deceased person. China brought out the rules for inheritance tax in 2002 but has not yet been able to introduce it due to widespread opposition. The US, UK, Spain, Belgium, the Netherlands, Finland and Germany levy this tax. But, unlike India, many of these countries also provide social security to their citizens.

Coincidentally, the abolition, restoration and change in duty rate of the tax law have an impact on death numbers in some countries. During a one-year inheritance tax holiday in the US, the country saw many billionaires passing away and their heirs paying much less tax than those whose parents died in earlier or later years. When Sweden scrapped it on January 1, 2005, more people died on the New Year than on December 31, 2004.