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Business News/ Money / Personal Finance/  Is it viable to reintroduce estate tax in the upcoming budget?
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Is it viable to reintroduce estate tax in the upcoming budget?

Ahead of the Budget 2019, there is speculation that the govt may reintroduce estate taxes in order to enhance tax revenue
  • Ashwini Kumar Sharma asked 4 experts how viable it is to reintroduce inheritance tax in India, whether it will boost tax collection, and how it can impact taxpayers
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    Ahead of the Union budget later this week, there is speculation that the government may reintroduce inheritance or estate taxes in order to enhance tax revenue and improve tax parity. Such tax was abolished in India in 1985 due to meagre tax collection and high costs, besides inefficiencies in implementation. Moreover, wealth tax was abolished as recently as 2015, on the same grounds. Ashwini Kumar Sharma asked four experts how viable it is to reintroduce inheritance tax in India, whether it will boost tax collection, and how it can impact taxpayers

    Abhishek A Rastogi, Partner, Khaitan & Co.

    Abhishek A Rastogi, Khaitan and Co.
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    Abhishek A Rastogi, Khaitan and Co.

    Not pragmatic in absence of social security framework

    Taxes like estate duty are successfully levied in highly developed economies which can support taxpayers with a robust social security incentive.

    In the absence of a strong social security framework, the pressure on individuals to have enough wealth stashed away for future uncertainties poses a roadblock in the successful implementation of such a tax.

    Further, the existing high rate of income tax for high-income groups and capital gains tax impose enough of a tax burden on an estate which would suffer even more from the levy of an additional inheritance tax.

    Such a move, which is aimed at the reduction of inequalities and redistribution of wealth, would not be well received by the financially stronger sections of society. Thus, introduction of inheritance tax, if it happens at all, must be carried out with low rates, high thresholds and adequate exemptions such as in case of inheritance of single property.

    Lastly, the cost of collecting the tax might turn out to be too high compared to the total collections, and may not result in it being a “pragmatic tax".

    Sandeep Nerlekar, founder and managing director, Terentia

    Sandeep Nerlekar, Terentia
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    Sandeep Nerlekar, Terentia

    If reintroduced, it can lead to reduction in direct tax rates

    Most developed countries in the world levy an inheritance tax. The basic goal of imposing estate duty is to bring in equality of income among taxpayers. The objective is to tax the rich and distribute it to the poor.

    I would not be surprised if estate tax is reintroduced. The richest 10% of Indians own 77.4% of the country’s wealth. The bottom 60%, which is the majority of the population, owns 4.7%. The richest 1% own 51.5%. There is a huge gap between the rich and the poor, and estate tax can bring equality in distribution of income and wealth. This could be a significant step in that direction. Aside from the economic agenda, the reintroduction can be also politically guided.

    Earlier, information collation was a difficult process, but in today’s digital age, information is available at the click of a button. If reintroduced, I feel that inheritance tax would be in the range of 30-40%.

    Reintroduction of estate tax could lead to some hight net-worth individuals moving out of the country, but the number may be limited. If implemented, this can lead to reduction in direct tax rates.

    Rakesh Nangia, managing partner, Nangia Advisors (Andersen Global)

    Rakesh Nangia, managing partner, Nangia Advisors (Andersen Global)
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    Rakesh Nangia, managing partner, Nangia Advisors (Andersen Global)

    Govt should levy it only under specific circumstances

    Inheritance tax is levied mostly in developed countries, at rates as high as 55%. In India, it was in force till 1985, payable on a slab basis, ranging from 10% to 85% of the principal value of the property. However, implementation and procedural issues resulted in its elimination.

    Inheritance tax, if reintroduced, is expected to bring economic stability in India. Moreover, it would reduce wealth concentration, widen tax base and enhance revenue, which may eventually lead to reduction in tax rates.

    However, reintroduction of the tax might be met with resistance from Indian taxpayers, as the same property would then incur both income tax and inheritance tax. The government should, thus, consider levying it only under specified circumstances, along with exclusions and limits. For instance, the inheritance of one residential house property may be exempt from this tax. This would also necessitate a strong social security system to circumvent any setbacks.

    The government must also try to find a way to prevent Indians from taking or retaining their wealth outside India.

    Surabhi Marwah, tax partner and private client services leader, EY India

    Surabhi Marwah, tax partner and private client services leader, EY India
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    Surabhi Marwah, tax partner and private client services leader, EY India

    Proposed duty may appease some sections of the society

    There are whispers in the official corridors surrounding the reintroduction of estate duty. The re-elected government has made references to some kind of tax on the “rich" in the past as well. So the intrigue continues.

    Estate duty was abolished in India in the year 1985 in view of narrow estate assets and meagre revenue sources with high administrative costs.

    The proposed duty may appease certain sections of the society, who believe that its reintroduction may reduce wealth polarization in India and do away with concentration of wealth in a few hands. It could also potentially help the government fund its dream of an equitable society. According to a survey conducted by Oxfam, 58% of India’s total wealth is concentrated within 1% of its population.

    If the tax is reintroduced, the asset base, rates and corresponding exemptions should be carefully thought through and fair exemptions or limits put in place. There has been a gradual shift in the restructuring landscape, with individuals considering formal sophisticated arrangements such as private trusts.

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    Published: 01 Jul 2019, 10:54 PM IST
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