Will rich farmers, a class which never even pays income tax, be brought under the ambit of the inheritance tax?
With the fiscal deficit rising, the government is under pressure to moblise revenue. The recent telecom spectrum auction has not fetched the government enough revenue. Tax collection as a percentage of the GDP is low and our finance minister is adept in identifying new avenues to improve collection. In 2005, during his earlier tenure, he introduced the fringe benefit tax. Now, he could be looking at inheritance tax.
The Indian economy has been growing with a 32 per cent saving rate and the number of rich people is also increasing. The prices of real estate and gold have increased manifold in the recent past. These are good factors for the FM to explore the tax levy.
It is a tax levied on the wealth passed on to legal heirs upon the death of their parent. Many developed countries such as the US, the UK, Spain, Belgium, the Netherlands, Finland and Germany levy this tax. The primary objective is redistribution of wealth.
The government collects this tax upon the death of the individual and spends it for the welfare of the public. In other countries, there are threshold limits for it, beyond which it is levied at progressive rates. The rate is low when the wealth passes on to close relatives such as spouse, children, etc, and will go up when it goes to other relatives (uncles, aunties, nephews, etc), and the rate will be even more if the wealth passes to other legal heirs. Some countries also have a gift tax. In other words, whether you transfer assets during your lifetime or after death, there is a tax on the transfer. Further, some of these countries also have wealth tax and/or estate duty.
In India, there used to be an estate duty levy, abolished in the mid-1980s. Currently, we have wealth tax, which is levied at the rate of one per cent on net wealth exceeding Rs 30 lakh. But collection from such a tax is not that great. There also used to be a gift tax in India, which was abolished in the late 1990s. However, lately, certain gifts from strangers have been made taxable in the hands of the recipient. Gifts from close relatives still continue to be tax-exempt.
Several factors need to be considered before introducing inheritance tax in India. One, there is a huge gap between the rich and the poor. The middle class segment is growing at a faster pace. Developed countries impose this tax at a high rate, but they have a smaller population base and strong social security systems. But in India, there is no strong social security system and this growing working class would easily get hurt if they are not properly protected.
In India, farmers, including the rich ones, do not pay any income tax on their agricultural income. Will rich farmers, a class which never even paid income tax, be brought under the ambit of this tax? These realities cannot be ignored by the finance minister.
Certain Budget changes such as provisions relating to the General Anti Avoidance Rules and amendments with retrospective effect were not well received by the business community and they have dampened the market sentiment. This forced the government to review those changes before implementation, in order to improve the general business confidence and environment. Therefore, it would be a good idea if the government brings out a discussion paper on this tax to seek public opinion. China brought out rules for it in 2002, but it has not levied an inheritance tax so far. Countries such as Australia, Brazil and Russia do not have the tax. If Chidambaram decides to go for the tax, the ground realities, as discussed above, should not be ignored.
The government has already proposed a simplified tax regime such as a direct taxes code and a goods and services tax. This should also be kept in mind before bringing in the levy.
ED, Tax & Regulatory Services, PwC India
(Views expressed are personal)