In recent times, a number of Indian promoters have generated substantial wealth by selling their stakes or a part of it. The booming capital markets have also contributed to significant wealth creation. This has resulted in a class of Indians that is suddenly growing richer, whereas the mass remains where it is currently, resulting in increased inequalities in income and wealth. An estate duty or an inheritance tax seeks to reduce inter-generational inequality. In other words, it seeks to reduce the advantage that children of the rich start out with versus the children of the not-so-rich. Looking at the future where unprecedented wealth creation at present might increase inter-generational inequality, the government is considering reintroducing inheritance tax into the Indian tax system.
Estate duty, the name by which such a tax was known when it existed, was a part of the system till 1985. Estate duty was payable by the executors of the estate of a deceased under the Estate Duty Act, 1953, till June 16, 1985, after which it was abolished.
In its earlier avatar, estate duty was a very complex piece of legislation. Duty was levied on an 'accountable person', ie a person having a right of disposition over property of the deceased, in respect of the property passing on to that person through various different types of settlements and dispositions. Property passing two years prior to death was not taxed, but any disposition within two years of death potentially was liable to estate duty. The legislation was very complex with different valuation rules for different kinds of property. The estate duty was payable on a slab basis. The levy started at a threshold of . 1 lakh with a rate of 7.5% and the maximum rate was 40% of the principal value of the estate in excess of . 20 lakh. Due to its complex structure, the legislation predictably got embroiled in an inevitable litigation tangle and the litigation continued long after the duty's abolition. Due to insignificant collections from estate duty (only about . 20 crore), and the complex web of litigation around it resulting in a very high collection cost, the government decided to do away with its levy in 1985. Consequently, estate duty was not payable in respect of the estate of a person who expired after March 16, 1985. Incidentally, most developed countries have some form of inheritance tax. Interestingly, however, many high-growth countries like China, Malaysia, Russia, etc, (these are India's closest competitors today) do not levy inheritance tax.
In a country like India, where along with the assets of a deceased, the inheritors morally also inherit all his obligations, there could be a serious case against the reintroduction of inheritance tax. Of course, such a tax, if at all it becomes a reality, would hopefully be levied after a high threshold and at a moderate rate. It, however, is quite possible that inheritance tax encourages wealth creation offshore through establishment of complex structures, trusts being just one of them. India, at this point in time, needs all the capital it can get to fuel its quest to become one of the players to reckon with in the global economic order.
On the other hand, where concerted efforts are being made to attract foreign capital to invest in the country, the levy of inheritance tax, which could lead to potential flight of capital offshore, may be seriously questioned as being counter- productive. Also, in the upcoming Direct Taxes Code Bill 2010, the wealth tax net is proposed to be spread wider, which arguably should achieve at least part of the objective behind the levy of an inheritance tax (one already has a quasi 'gift tax' in the form of the recipient paying income-tax on property received for no or inadequate consideration from non-relatives). Property passing to heirs on succession is subject to stamp duty and also probate/succession fees and tax thereon being collected not by the Centre, but by the states.
Finally, one is really not sure if the country is ready to face the consequences of the levy of an additional complex tax where challenges both on valuation and administration could very well occur again.
