By Preet Shah
Introduction
Estate duty and inheritance tax (Death tax) are broadly similar because both are generally triggered by death. Estate taxes are levied on the net value of property owned by a deceased person on the date of death. In contrast, inheritance taxes are levied on the recipients of the property.
Introduced in 1953 in India, peak rate of Estate duty was 85 per cent. However, in 1985, Estate duty was abolished by the Rajiv Gandhi government because of its high administration cost which covered up revenue collected, increasing opposition and failure to accomplish the main objectives to reduce income inequality and broad basing of direct taxes.
Estate Duty/Inheritance tax in other parts of the world
Estate duty/Inheritance tax exists in developed nations like USA (40 per cent), Japan (55 per cent), South Korea (50 per cent), France (45 per cent), etc. Other developed nations like Australia, Singapore, Canada, Russia and Sweden have abolished this tax. China brought out the rules for inheritance tax in 2002 but has not introduced it yet.
In many developed countries, Inheritance tax/Estate duty is not successful because of high administration cost and tax avoidance mainly by distribution of wealth through gifts to relatives or retiring at age of 50-51 to reap the benefits of accumulated wealth and thereby reduce tax burden by entering into exemption limit or lower tax range of Inheritance tax/Estate Duty. In some developed nations, people have committed suicide to die rich. It is difficult to digest this, isn’t it? In the year 2010 when USA declared inheritance tax free year, the country witnessed many billionaires passing away. The year was declared as best year to die rich. Similar case happened in Sweden in the year 2005 when it scrapped Inheritance tax.
Important arguments on Estate duty in India are as follows:
Should Estate duty be re-imposed in India?
Recent IMF report has given clear warning that in India, income inequality, as measured by the Gini coefficient (The Gini coefficient is a measure of inequality of a distribution), has also been on the rise. In 1990, inequality in India was higher than China, with a net Gini of around 45. By 2013(latest), the net Gini in India had increased to 51, also higher than that seen in other regions. As in China, inequality in India has been rising more sharply in urban areas as the income shares of the top decile in urban areas have risen significantly more. Hence, there is a need to bring life back into death tax because the primary objective of Estate duty is to bring down inequality by levying heavy tax on inherent wealth which is the biggest source of income inequality in India. Apart from that, it will serve as an additional revenue stream for government to achieve fiscal deficit target and second, wealth accumulators will start spending and save less which will boost consumption and reduce saving glut which is more prominent in countries like India and China and thus it will help in reviving real interest rate. Past failures and experiences of developed nations can be used as inputs to bring the best out of Estate duty.
Don’t wake the beast
Introducing Estate duty will lead to tax avoidance, which is experienced in most of the developed nations, migration of high net worth individuals towards tax havens, and generation of Black Money. After all, who will pay 50 to 85 per cent tax on income accumulated by their predecessors after lot of hard work? It is part of Indian culture to protect inherent property and pass on good values to next generation through them. Estate duty levied on market values of properties inherited in a city like Mumbai may prove to be too heavy a burden for a legal heir and may find no option but to sell properties to discharge the tax liability. When it comes to concentration of power if an individual with a total worth of Rs 50 crore leaves the estate to his two children, this wealth has already been split into two parts.
Agreed that inherent wealth is the biggest source of income inequality but there are other sources contributing to it such as indirect taxation which makes no difference between rich and poor. We need to focus on redistribution of income by generating equal employment opportunities, building infrastructure, broadening access to education etc.
Impact on Bull
It is not the right time to introduce such tax when we want country to grow at 7.5 to 8%. For a country to grow, it is important to provide social security to the citizens. India stands at a better place without Estate duty because most of the Indians like to accumulate wealth, invest and earn a good return. Imposing such kind of taxes will lead to outflow of wealth from the country and will also reduce investments and capital formation and thus dampening economic growth. There should be a balance between both and in order to reduce income inequality we cannot sacrifice economic growth.
P.C Combscartoons
