Economy

The Case for Reintroducing Inheritance Tax

India should consider reintroducing inheritance tax. Credit: GSTIdea

India should consider reintroducing inheritance tax. Credit: GSTIdea

Soon after assuming office in 2014, Jayant Sinha, the minister of state for finance, said he favoured bringing back the inheritance tax in some form. However, his proposal did not find favour with finance minister Arun Jaitley and other BJP leaders. In fact, there is now a strong case to bring back inheritance tax or estate duty, which was abolished (technically, suspended) in 1985.

Tax rates, whether on income or estate, should never be penal or extortionate. In the United States, both the federal government and most states impose some form of inheritance tax in keeping with the national spirit that one must earn one’s wealth rather than receive it on a platter on the death of one’s parents. Many US states charge an inheritance tax as high as 50%, which, with the federal tax, comes perilously close to the maximum slab rate of 85% in India when the tax was applicable. In fact, one of the big reasons US corporate founders, such as Warren Buffet and Bill Gates, partake in philanthropic activities on such a large scale is the grim prospect of the state eating into their estate after their death.

French economist Thomas Piketty recently bemoaned the humungous disparity in income and wealth distribution in India. One wonders if an inheritance tax will make much difference here given that unlike the US and Netherlands, which also has a meaningful inheritance tax regime, India is notorious for its benami system of holding properties. Properties held in fictitious names or under the names of others have been the bane of the Indian quest for equitable distribution of wealth and tax collections.

It would, therefore, be apt for the government to usher in two laws simultaneously — a meaningful law to tackle the benami menace, and an inheritance law duly sanitised in terms of taming its avaricious outreach.

In any case, estate duty should not be looked at as an important source of revenue for the exchequer given that a ‘death tax’ is the most difficult to predict, especially with life expectancy improving by the year. Inheritance tax is best looked upon as a corrective measure for the malaise of the huge disparity in income and wealth rather than as a source of revenue for the exchequer.

One hopes that the upcoming budget revives estate duty from its comatose state along with a meaningful wealth tax. The wealth tax that existed until last year targeted only six assets. Small wonder then that collections from it were consistently small, reaching a measly 1400 crore rupees before it was done away with.

A progressive system of direct taxes requires the simultaneous existence of income tax, gift tax, wealth tax and estate duty in order to be an effective pincer. The wealth tax should be revived, ignoring the carping criticism that the government is wavering and dithering, and lacks a clear mind. If revived, the wealth tax should not split hairs between productive and non-productive assets, and instead target all assets subject to a decent tax-free limit.

To complete the direct taxes code, we must bring back a gift tax on donors as against the present regime of taxing select gifts in the hands of beneficiaries. In fact, when the four taxes operate in unison, income tax rates can be brought down at least for those earning below five lakh rupees per annum. Direct taxes the world over are posited as a progressive form of taxation as opposed to indirect taxes, which are innately regressive.

It is time India moved to collect direct taxes, overcoming the numerous difficulties and hurdles rather than settling for easy pickings – a hike in service tax to about 16% is being considered, as are compensatory hikes in excise duty on petroleum products, denying the benefits of the fall in oil prices.