By Srinivasan Anand.G
Union Budget 2019 India: An inheritance tax is a state tax that you pay when you receive money or property from the estate of a deceased person. Unlike the estate tax, the beneficiary of the property is responsible for paying the tax, not the estate. The key difference between estate tax and inheritance tax lies in who is responsible for paying it. An estate tax is levied on the total value of a deceased person's money and property and is paid out of the decedent’s assets before any distribution to beneficiaries. Once the executor of the estate has divided up the assets and distributed them to the beneficiaries, the inheritance tax comes into play. The tax amount is calculated separately for each individual beneficiary, and the beneficiary must pay the tax.
Inheritance tax was there in India as Estate Duty under the Estate Duty Act,1985. Estate duty was abolished in 1985 as it was not revenue productive. The Finance Minister in his Budget Speech explained that he proposed abolition of estate duty as it had “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”. Further, “the yield from estate duty is only about Rs.20 crores, its cost of administration is relatively high”. India had a plethora of taxes in the pre-1991 socialist era with low revenue productivity, high rates and high evasion. This model failed miserably.
The trend in the last 5 years is to have fewer taxes but revenue productive ones.We have seen this trend in indirect taxes side where, in 2017,Goods and Services Tax (GST) consolidated multiple central and state indirect taxes into one levy . We have also seen this trend on direct taxes side where Wealth Tax Act,1957 was repealed in 2015 and instead the government increased the surcharge on the super-rich(ie individuals having income more than Rs.1 cr) from 10% to 12%. This surcharge was further increased to 15% in the 2016 Budget. The 2017 Budget introduced a 10% surcharge on individuals having total income exceeding Rupees 50 lakhs but not less than Rs.1 crore. The Finance Minister explained this is para 113 of Budget Speech of 2015 as a “proposal is regarding minimum government and maximum governance with focus on ease of doing business and simplification of Tax Procedures without compromising on tax revenues”. The Finance Minister further explained that “The total wealth tax collection in the country was Rs 1,008 crore in 2013-14. Should a tax which leads to high cost of collection and a low yield be continued or should it be replaced with a low cost and higher yield tax? The rich and wealthy must pay more tax than the less affluent ones. I have therefore decided to abolish the wealth tax and replace it with an additional surcharge of 2% on the super-rich with a taxable income of over Rs.1 crore. This will lead to tax simplification and enable the Department to focus more on ensuring tax compliance and widening the tax base.” One does not see how and why this trend of reducing the number of taxes to few productive ones will be reversed.
In the past 5 years,India has leapfrogged 65 places in World Bank’s Ease of Doing Business from 142nd rank to 77th rank. India is eyeing a place in top 50 in Ease of Doing Business and is unlikely to complicate compliances with one more direct tax levy when the easier option of increasing surcharges on income-tax for super-rich taxpayers are there.
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There was an earlier experiment of bringing back old socialist disallowance raj under section 37 of the Income-Tax Act,1961. The clauses of section 37 pertaining to disallowance of entertainment expenditure, expenditure on cars, guesthouses were omitted in 1997. These were brought back in a new avatar as “Fringe Benefit Tax”(FBT) in 2005. It met with stiff opposition as industry said “raise income tax rate by 1% or 2% instead of imposing so much compliance and accounting burden”. The result was that FBT was abolished in 2009 . The Finance Minister in his budget speech explained that FBT has been “perceived as imposing considerable compliance burden”.
Those who back the idea of inheritance tax acknowledge that the threshold limit needs to be high (say those who own assets of Rs.50 crores). The tax rates are likely to be high (in US and UK, these are 40%). Thus,the inheritance tax, by its very nature,will have a narrow base, high rates and will be highly evasion-prone leading to low revenue productivity. If rates are not going to be high, then it doesnt serve its purpose This is the reason why estate duty was abolished in 1985. These are precisely the reasons why people seek abolition of this tax in US and UK,. Besides, there is no merit of dictating how someone should will his assets earned with his had income-tax-paid money. This will lead to flight of capital and migration of millionaires in large numbers to foreign tax havens and will hurt investments and jobs in India.
Given the trend in the past 5 years of reducing the number of taxes and having few revenue-productive taxes instead of multiple unproductive taxes imposing undue compliance burden on people, it looks like inheritance tax will not find a place in tomorrow’s budget. No Government will be wanting to be seen to be straying off the reform path and making doing business more complex. There is nothing stopping the Finance Minister from increasing the surcharge on super rich by 1% or 2%. Also, nothing stops the Govt from introducing surcharge on individuals earning from Rs.30,00,000 to Rs.50,00,000 per annum. These are far more viable options than an inheritance tax.
(The author is Sr.Consultant, M/s Taxmann Publications Pvt Ltd..Views are the author’s personal views)