For the past 5-6 years, there has been buzz around re-imposition of inheritance tax ahead of the Budget, but the finance ministers — either P Chidambaram or incumbent Arun Jaitley — have been convinced of it so far.
The buzz is again doing the rounds. Will Jaitley agree to it and include it in the last Budget of this government after over 20 years.
He does it or not, but people have started finding ways to not pay this tax, notoriously called death tax. Many of them have started forming family trusts on which inheritance tax will not apply.
Inheritance tax, then referred to as estate duty in India, was scrapped in 1985 by the then finance minister V P Singh. His argument was that benefits from the tax were not as high as cost of its administration. "Estate duty hasn't achieved the twin objectives with which it was introduced — to reduce unequal distribution of wealth and assist states in financing their development schemes," Singh had said.
The tax garnered from the duty had stood at Rs 20 crore in 1984-85, which was 0.4 per cent of the Rs 5,329 crore collected through direct taxes that year. But the estate duty earlier used to be as high as 85 per cent over Rs 20 lakh of assets inherited. Such a high tax cannot be levied today and is talk of 5-10 per cent tax is doing the rounds.
Economists, however, say the tax collection would still be high, as asset generation is much more today. India's gross domestic product had increased 45 times from 2.5 lakh crore in 1984-85 to Rs 113 lakh crore in 2013-14.
Globally, the debate was sparked off by French economist Thomas Piketty, who in his renowned book, Capital in the Twenty-First Century, mooted the idea of imposing a tax to reduce wealth inequalities.
In India, the issue of imposition of inheritance tax/estate duty again was started by former Finance Minister P Chidambaram ahead of Budget 2013-14. But industry chambers had strongly opposed the tax, calling it regressive -something that could dampen sentiment.
In some countries where inheritance tax is levied, the maximum rate is as high as 80 per cent. It is usually levied on the net value of assets passed on to legal heirs of a deceased person. The US, UK, Spain, Belgium, the Netherlands, Finland and Germany levy this tax. But, unlike India, many of these countries also provide social security to their citizens.
Coincidentally, the abolition, restoration and change in duty rate of the tax law have an impact on death numbers in some countries. During a one-year inheritance tax holiday in the US, the country saw many billionaires passing away and their heirs paying much less tax than those whose parents died in earlier or later years. When Sweden scrapped it on January 1, 2005, more people died in the New Year than on December 31, 2004.