The History Of Inheritance Tax in India

With rising fiscal deficit, fiscal consolidation is suddenly front page news. The government hasn’t done well in its attempts to raise revenues both tax and  non tax.The sense of alarm has brought back discredited ideas centre-stage.One of these ideas is a tax on inheritance,a favourite hobby horse of the Leftists.No matter that it was overextending ourselves on repackaged Garibi Hatao welfare measures with a proven record of ineffectiveness that brought us to the fiscal mess in the first place.Inheritance tax is being touted in the UK,US,Germany,Italy etc as a measure to claw their way out of recession.Small wonder that there is a clamour by the intellectually bankrupt for its reintroduction in India.

Inheritance tax is a levy paid by a person who inherits money or property, or a tax on the estate (total value of the money and property) of a person who has died. When one dies, the government assesses the worth of the estate of the deceased, which may include cash in the bank, investments and any other property or business owned by the deceased. If the value of the estate exceeds the inheritance threshold set by the government, the deceased (technically, his estate) will pay tax on the same at the rate fixed by the government of the country.

India is not new to this tax. Inheritance tax, or estate duty, was levied between 1953 and 1985. All assets below a threshold limit of Rupees 1 lakh were exempt while determining the taxable value of the estate. For Hindu Undivided Family (HUF) property, this threshold was Rupees 50,000.The highest slab rate in 1985 was 85% on an estate exceeding R20 lakh. Property, if passed to heirs two years before the death, was not taxed. The tax was payable only by legal heirs and if a person inherited property on the death of a spouse, no tax had to be paid. But, this was abolished in 1985 citing its inability in achieving its objectives of reducing unequal distribution of wealth and assisting the states in financing their development plans. The yield from the inheritance tax was much lower than its cost of administration.

India’s millionaires (in dollar terms, which is around R5.5 crores or higher) constitute only around 0.01% of the country’s population. So how much tax can be collected from such a small base to benefit society at large?There are 121 crore people in India.If the whole of Mukesh Ambani’s personal fortune of 21B USD was to be distributed amongst the population we would each be a little less than 1000 rupees richer.How much of any head start will the 1000 rupees abolish?

Our prior experience of inheritance tax has shown that people in India have resisted it and worked around it by gifting their assets, settling property in trusts, etc.There were litigations galore and the government wasted time,money and effort,better used elsewhere, chasing pittances.And there was a great deal of harassment for both the heirs.

Here are some cases where a proposed reintroduction of an inheritance tax is likely to cause extreme hardship:An ordinary individual inheriting a residential house in a prime metro location. On the basis of market value of such property he/she could get covered under the tax net. To be able to pay inheritance tax, the heir may have to sell the house. Also, take a case of a promoter owning a 50% stake in his business entity. While on a market cap basis, he would qualify to be a high net worth individual, his heir may have to dilute the holding to pay the taxes, leaving him without control in the business. The inheritance of assets like intangibles, interest in the partnership firm or palatial properties (which may not have real buyers) could lead to similar hardships. Personal assets like jewellery or art effects tend to have emotional values and people are unlikely to like selling them to pay taxes.

Where people don’t like a tax they are going to look for loopholes:Do we want the growth of an industry selling tax shelters?Or the growth of a bureaucracy meant to collect such taxes?Might the nation’s manpower not be put to better use?

It is easy to stroke wealth envy.Its easy to demonize the rich.But does compulsory redistribution of wealth really work?Do we all really become richer or do we just manage to distribute poverty?Just how much fun can we have in  leveling the tall poppies and gloating at their downfall?Is living in want and misery in a uniformly poor world so much better than living with inequality in a more prosperous world?Why is it so hard to realize that the Wealth Game is not a Zero Sum Game?One person becoming wealthy doesn’t automatically condemn another to becoming poor.