Should India reintroduce inheritance tax? Here are 4 expert views
ET Bureau|
Oct 16, 2017, 06.30 AM IST
The government reportedly wants to bring back the inheritance tax that was abolished in 1986. Known as the estate tax, it is levied on the value of assets passed on to legal heirs through inheritance. Yogita Khatri reached out to experts to know their views on the subject.
Vivek Gupta
Partner and National Head, Deal
Advisory-M&A Tax, KPMG India
YES, BUT...
Democracies across the world have the inheritance tax built into their tax system. We are a nation of inequalities— with a relentlessly rising gap. This government has shown the will for bold structural reforms. Now is undoubtedly the time for a fair tax. The naysayers make some persuasive arguments. But these relate to design flaws. The “how to” rather than “whether to”. This tax is based on data.
Technology has made data on the financial side available. What is sorely lacking is data on the real assets side. For inheritance tax to function, robust mechanisms that digitally validate real assets holdings must emerge. The second issue is the very Indian Hindu Undivided Family structure, which is a strong asset owning format. How inheritance tax transitions with this format needs to be thought of. Third, this tax must address two realities— we love our owned house and real estate prices reflect a lot more than purchasing power. Hence, inheritance tax must provide generous exemption thresholds like one property per inheritor. Last, it must be gentle. High threshold (Rs 25-30 crore), low tax rate (10%), no inheritance tax on same generation transfers and phased payment (three years) will encourage compliance, build acceptability and create a base of taxes as well as data. Once the base of assets is in the system, collections of income and other taxes will rise.
Amarpal Chadha
Tax Partner and India Mobility
Leader, EY India
MAYBE
Governments across the world look for opportunities to streamline taxation to ensure maximum coverage both in terms of sources of income and the number of people under the tax net. At the same time, governments need to balance the impact of taxes. Given our current system of social security, there is always an unsettling urge to save for the future, save for the next generation. Reintroduction of inheritance tax may negatively impact this sentiment of saving for the future and or passing on the wealth for the next generation. However, if this can be re-introduced in a measured way, it may work. The tax should be made applicable on or above a certain monetary limit of inheritance and exclude some basic assets like one house. This way, it will protect those who do not fall under the thresholds that will attract inheritance tax. The government is working to widen the taxpayer base. One way to encourage this could be to give taxpayers exemptions if their assets go through inheritance. The idea of taxation hovers around the effective distribution of the tax burden across income levels/asset value. Inheritance tax may be a success if it is developed keeping in mind the various facets of tax burden, tax status of an individual, social factors impacting inheritance and the international experience.
Sumit K. Batra
Tax and corporate lawyer
NO
It is illogical to tax an estate that has in a way already suffered income tax and capital gain tax. Merely introducing taxes with similar names as prevalent in foreign countries would not put us on par with foreign countries in terms of economic and financial stability. The basic idea for levying such taxes abroad is to generate revenue for social security programmes, which is still a distant dream in India.
It will in a way burden that strata of the population, which is already paying substantial taxes and contributes to the direct tax collections in a big way. If at all such a tax is introduced, HNIs would always have the option to form family trusts. The family trusts would be out of the taxation net since no ownership is transferred but only the shareholding of the trust changes. The option of making a family trust outside India will also be available, which would not only result in avoidance of tax in India but would also lead to accumulation of wealth outside the country. While the government is time and again promising the citizens of bringing back the accumulated wealth of certain persons stashed outside India, a move like the introduction of inheritance tax might result in further stashing of wealth abroad. The need of the hour is a robust taxing mechanism and not for hit and trial mode in anticipation of finding a successful revenue collection model.
Rupesh Satnaliwala
MD and CEO, Universal Trustees
NO
Is India ready for such a tax? Estate duty or inheritance tax is there in most developed countries like US, UK, Japan, France etc. and the taxes in these countries are as high as 50-55%. However, these countries have a structured social security and retirement plan in place. India is a developing country and still a has a long way to go to become a developed economy. We struggle with basic infrastructure issues in India. At the current juncture, we need to keep incentivising entrepreneurial spirit so that more private investment happens, leading to employment and allied opportunities. In this regard, the government has rightfully provided incentives by exempting long-term equity investments from income tax and allowing a slew of exemptions for investment in certain sectors. There are several countries such as Singapore, Hong Kong, Australia and the GCC (Gulf Cooperation Council) countries where either inheritance tax does not exist or has been repealed. Introduction of inheritance tax should not result in a flight of talent and capital out of our country. If at all such a tax is introduced, it would require a careful deliberation on the structure for it to be effective and not intrusive. It should provide a basic exemption limit above which such a tax should be levied, exempting the main residential house of the person, bequeathing to surviving spouse and minor children amongst others.
Vivek Gupta
Partner and National Head, Deal
Advisory-M&A Tax, KPMG India
YES, BUT...
Democracies across the world have the inheritance tax built into their tax system. We are a nation of inequalities— with a relentlessly rising gap. This government has shown the will for bold structural reforms. Now is undoubtedly the time for a fair tax. The naysayers make some persuasive arguments. But these relate to design flaws. The “how to” rather than “whether to”. This tax is based on data.
Technology has made data on the financial side available. What is sorely lacking is data on the real assets side. For inheritance tax to function, robust mechanisms that digitally validate real assets holdings must emerge. The second issue is the very Indian Hindu Undivided Family structure, which is a strong asset owning format. How inheritance tax transitions with this format needs to be thought of. Third, this tax must address two realities— we love our owned house and real estate prices reflect a lot more than purchasing power. Hence, inheritance tax must provide generous exemption thresholds like one property per inheritor. Last, it must be gentle. High threshold (Rs 25-30 crore), low tax rate (10%), no inheritance tax on same generation transfers and phased payment (three years) will encourage compliance, build acceptability and create a base of taxes as well as data. Once the base of assets is in the system, collections of income and other taxes will rise.
Amarpal Chadha
Tax Partner and India Mobility
Leader, EY India
MAYBE
Governments across the world look for opportunities to streamline taxation to ensure maximum coverage both in terms of sources of income and the number of people under the tax net. At the same time, governments need to balance the impact of taxes. Given our current system of social security, there is always an unsettling urge to save for the future, save for the next generation. Reintroduction of inheritance tax may negatively impact this sentiment of saving for the future and or passing on the wealth for the next generation. However, if this can be re-introduced in a measured way, it may work. The tax should be made applicable on or above a certain monetary limit of inheritance and exclude some basic assets like one house. This way, it will protect those who do not fall under the thresholds that will attract inheritance tax. The government is working to widen the taxpayer base. One way to encourage this could be to give taxpayers exemptions if their assets go through inheritance. The idea of taxation hovers around the effective distribution of the tax burden across income levels/asset value. Inheritance tax may be a success if it is developed keeping in mind the various facets of tax burden, tax status of an individual, social factors impacting inheritance and the international experience.
Sumit K. Batra
Tax and corporate lawyer
NO
It is illogical to tax an estate that has in a way already suffered income tax and capital gain tax. Merely introducing taxes with similar names as prevalent in foreign countries would not put us on par with foreign countries in terms of economic and financial stability. The basic idea for levying such taxes abroad is to generate revenue for social security programmes, which is still a distant dream in India.
It will in a way burden that strata of the population, which is already paying substantial taxes and contributes to the direct tax collections in a big way. If at all such a tax is introduced, HNIs would always have the option to form family trusts. The family trusts would be out of the taxation net since no ownership is transferred but only the shareholding of the trust changes. The option of making a family trust outside India will also be available, which would not only result in avoidance of tax in India but would also lead to accumulation of wealth outside the country. While the government is time and again promising the citizens of bringing back the accumulated wealth of certain persons stashed outside India, a move like the introduction of inheritance tax might result in further stashing of wealth abroad. The need of the hour is a robust taxing mechanism and not for hit and trial mode in anticipation of finding a successful revenue collection model.
Rupesh Satnaliwala
MD and CEO, Universal Trustees
NO
Is India ready for such a tax? Estate duty or inheritance tax is there in most developed countries like US, UK, Japan, France etc. and the taxes in these countries are as high as 50-55%. However, these countries have a structured social security and retirement plan in place. India is a developing country and still a has a long way to go to become a developed economy. We struggle with basic infrastructure issues in India. At the current juncture, we need to keep incentivising entrepreneurial spirit so that more private investment happens, leading to employment and allied opportunities. In this regard, the government has rightfully provided incentives by exempting long-term equity investments from income tax and allowing a slew of exemptions for investment in certain sectors. There are several countries such as Singapore, Hong Kong, Australia and the GCC (Gulf Cooperation Council) countries where either inheritance tax does not exist or has been repealed. Introduction of inheritance tax should not result in a flight of talent and capital out of our country. If at all such a tax is introduced, it would require a careful deliberation on the structure for it to be effective and not intrusive. It should provide a basic exemption limit above which such a tax should be levied, exempting the main residential house of the person, bequeathing to surviving spouse and minor children amongst others.
