The finance minister, P Chidambaram, recently revived an issue V P Singh had buried three decades ago when finance minister. Chidambaram sparked a debate on imposition of an inheritance tax, abolished by Singh 27 years before, when it was called ‘estate duty’. This has fuelled speculation that the duty might be back in the form of an inheritance tax.
"Sometimes, I doubt if we have taken moderation (in tax rates) too far. Have we paid little attention to accumulation of wealth in a few hands? I am still hesitant to talk on inter-generational equity and, therefore, inheritance tax. I think these are the questions we should debate," he said on November 8, at the Dr Raja J Chelliah Memorial Lecture, organised by the National Institute of Public Finance and Policy.
In the current scheme of things, children of the rich stay rich but if the tax is collected by the government on inherited wealth, the gains will get redistributed. This is why the Estate Duty Act was introduced in 1953. Abolishing it in 1985, Singh said it hadn’t reduced inequality.
So, what changed between 1985 and 2012, that led the government to start talk of reintroducing it? The biggest factor that appears to be making the finance minster think on those lines is the government’s fiscal condition. As the 2014 general elections are not too far away, it is not in a position to cut expenditure on subsidies meant for the poor. On the revenue front, it is struggling to meet the targets.
In 1984-85, estate duty contributed only about Rs 20 crore to the government coffers, 0.4 per cent of the total direct tax collections of Rs 5,329 crore during the year. The direct tax collection target for 2012-13 is Rs 5.7 lakh crore and 0.4 per cent of that would be Rs 2,281 crore. However, given the exponential rise in the wealth of Indians over these years, the government can expect to get more.
Inheritance tax is levied when a person inherits wealth in the form of money, real estate, shares or any other from a person who has died. There is also a wealth tax which is levied during the life of a person. If the finance ministry introduces an inheritance tax, it will be expected to build adequate safeguards and provide a threshold for levying the tax so that people are not harassed unnecessarily.
“Tax laws are already complex in India and introducing another levy would further complicate it. Many a time when people inherit property, they don’t have cash to pay. If at all it is introduced, that should happen after a proper debate and the cut-off limit should be set high,” said Rajesh Srinivasan, partner, Deloitte. He added that even the wealth tax should be abolished, as these taxes include the compliance burden on the taxpayers.
Singh had also said the existence of two separate laws with reference to the same property amounted to procedural harassment to taxpayers and heirs of the deceased. After giving an exemption of Rs 20 lakh, the estate duty was levied at 7.50-40 per cent. Besides, he had said the administrative cost of levying estate duty was very high.
Though administrative costs might be relatively lower today, as the income-tax department is armed with a lot of information and tools to track assets, the government will have to see what would comprise wealth — whether it would exclude one house, jewellery or shares, and how these things would be evaluated. The criteria for evaluating wealth, if not laid down properly, could lead to litigation.
The government may thus tread cautiously while determining the rate of taxation on inherited property as too high and too many taxes may lead to tax evasion.
One may have already paid wealth tax, stamp duty as well as tax on income inherited from the asset inherited. Just like estate tax, it may have to introduce provisions for avoidance of double taxation if the asset is inherited in another country.
Chidambaram, the finance minister with a proclivity for new taxes, has dropped enough hints that the rich may have to shell out more as the government would try to protect the poor.