By Umesh Gala and Dinesh Kanabar,
In the last few years, when the Union budget was around the corner, rumours around the introduction of inheritance tax gained momentum. This year, the subject has landed right in the middle of national elections with all the political spin around it, blurring rational thinking and the motives around it. It, therefore, becomes imperative to look at the subject from the right perspective. Whether inheritance tax is a wise tool to reduce income/wealth inequality and what has been the experience of developed countries is an important question. But it is more important to ask whether it is the right time for a developing country like India, in the thick of a robust economic expansion, to risk such a levy.
A peep into our own history suggests that India had inheritance tax in the form of “estate duty” from 1953. The tax was introduced with an attempt to reduce unequal wealth distribution and increase tax collections. This was the same regime when the combined levy of income tax and wealth tax exceeded the income earned by an individual. The mindset was to levy a very high rate of tax and if anything was left after payment of these taxes, which you want to inherit for future generations, the state would confiscate a bulk of it by levying estate duty. A stiff regressive levy, planning round exemptions, litigation, etc. ensured that the cost of tax administration for such levy was found to be more than the taxes collected. The duty was levied at a maximum marginal rate of 85% when it was abolished in March 1985 during the Rajiv Gandhi government! In addition to the estate duty, India had a wealth tax regime as well as a gift tax regime for a long time. These have also been abolished with a limited tax on gifts that has been introduced under the Income-tax Act.
Also Read A case for higher RBI penalties Looming mineral supply squeeze and global market response: Mineral Supply Chains and the Coming AI Surge Understanding the four Vs of operations management – volume, variety, variation and visibility The burden of legacy
Income tax rates have been moderated, and alternative regimes for personal and corporate tax have been introduced with lower tax rates, lower exemptions and deductions, focus on better compliance, data analytics, etc. As a result, the number of taxpayers continues to rise by the day and there is a significant buoyancy in the direct tax and goods and services tax collections exceeding Budget estimates. India remains a bright spot in the global economic environment and our GDP is growing at the highest level among the large economies. We are the third-largest ecosystem for start-ups with many unicorns and more in the making. The last decade has seen significant focus on infrastructure development and massive strides towards rapid expansion of our GDP aimed at making India a developed nation. As more economic activity is poised to shift to India, the introduction of inheritance tax can act as a significant disincentive to a vibrant entrepreneurial mindset vital for economic activity, job creation, and growth.
Internationally, the Organization for Economic Cooperation and Development (OECD) and G20 ministers have expressed concerns about a distribution mismatch and scarcity of resources in the hands of the poor. Twenty-four out of 36 OECD countries levy tax on the transfer of wealth of the deceased, whereas 10 OECD countries such as Austria, Sweden, New Zealand, and Australia have abolished the levy since 2000. Similarly, developing countries such as Brazil, South Africa, and Republic of Korea also consider inheritance tax a measure to remove the distribution mismatch. The rate of levy also varies across the jurisdictions. The rate of tax applicable in Japan is as high as 55%, compared with the United States of America, the Netherlands, and United Kingdom at around 40%, whereas Algeria taxes at a ratethat can go as low as 5%.
However, internationally, inheritance taxes have failed to achieve the stated objectives and their collections are also below par. Inheritance taxes contribute below 1.5% of the total revenue in OECD countries. The loopholes and the administrative cost involved in implementing inheritance tax outweigh the benefits of economic equality. Developed countries such as the US are at a different stage of their economic journey, backed up by a robust social security framework and with different imperatives compared to India. India needs a framework which boosts investments, entrepreneurship, wealth creation, and a moderate rate of tax promoting compliance. It may be prudent not to get carried away by the imperatives of developed economies and instead focus on our own priorities.
Undoubtedly, economic inequality is a major concern for a developing nation like India. India has a vast population who are below the poverty line and it poses the unavoidable question of addressing inequality in income and wealth. However, this needs to be addressed with varied mechanisms such as wider access to education and skill development, easy access of finance for a wider entrepreneurial class, infrastructure development, removing supply chain bottlenecks, agricultural and land reforms, rural job creation, etc.
In the present circumstance, the economic justification for the introduction of inheritance tax is not compelling enough.
Authors Umesh Gala and Dinesh Kanabar, respectively are partner and CEO at Dhruva Advisors LLP.
Disclaimer: Views expressed are personal and do not reflect the official position or policy of Financial Express Online. Reproducing this content without permission is prohibited.
By Umesh Gala and Dinesh Kanabar,
In the last few years, when the Union budget was around the corner, rumours around the introduction of inheritance tax gained momentum. This year, the subject has landed right in the middle of national elections with all the political spin around it, blurring rational thinking and the motives around it. It, therefore, becomes imperative to look at the subject from the right perspective. Whether inheritance tax is a wise tool to reduce income/wealth inequality and what has been the experience of developed countries is an important question. But it is more important to ask whether it is the right time for a developing country like India, in the thick of a robust economic expansion, to risk such a levy.
A peep into our own history suggests that India had inheritance tax in the form of “estate duty” from 1953. The tax was introduced with an attempt to reduce unequal wealth distribution and increase tax collections. This was the same regime when the combined levy of income tax and wealth tax exceeded the income earned by an individual. The mindset was to levy a very high rate of tax and if anything was left after payment of these taxes, which you want to inherit for future generations, the state would confiscate a bulk of it by levying estate duty. A stiff regressive levy, planning round exemptions, litigation, etc. ensured that the cost of tax administration for such levy was found to be more than the taxes collected. The duty was levied at a maximum marginal rate of 85% when it was abolished in March 1985 during the Rajiv Gandhi government! In addition to the estate duty, India had a wealth tax regime as well as a gift tax regime for a long time. These have also been abolished with a limited tax on gifts that has been introduced under the Income-tax Act.
Income tax rates have been moderated, and alternative regimes for personal and corporate tax have been introduced with lower tax rates, lower exemptions and deductions, focus on better compliance, data analytics, etc. As a result, the number of taxpayers continues to rise by the day and there is a significant buoyancy in the direct tax and goods and services tax collections exceeding Budget estimates. India remains a bright spot in the global economic environment and our GDP is growing at the highest level among the large economies. We are the third-largest ecosystem for start-ups with many unicorns and more in the making. The last decade has seen significant focus on infrastructure development and massive strides towards rapid expansion of our GDP aimed at making India a developed nation. As more economic activity is poised to shift to India, the introduction of inheritance tax can act as a significant disincentive to a vibrant entrepreneurial mindset vital for economic activity, job creation, and growth.
Internationally, the Organization for Economic Cooperation and Development (OECD) and G20 ministers have expressed concerns about a distribution mismatch and scarcity of resources in the hands of the poor. Twenty-four out of 36 OECD countries levy tax on the transfer of wealth of the deceased, whereas 10 OECD countries such as Austria, Sweden, New Zealand, and Australia have abolished the levy since 2000. Similarly, developing countries such as Brazil, South Africa, and Republic of Korea also consider inheritance tax a measure to remove the distribution mismatch. The rate of levy also varies across the jurisdictions. The rate of tax applicable in Japan is as high as 55%, compared with the United States of America, the Netherlands, and United Kingdom at around 40%, whereas Algeria taxes at a ratethat can go as low as 5%.
However, internationally, inheritance taxes have failed to achieve the stated objectives and their collections are also below par. Inheritance taxes contribute below 1.5% of the total revenue in OECD countries. The loopholes and the administrative cost involved in implementing inheritance tax outweigh the benefits of economic equality. Developed countries such as the US are at a different stage of their economic journey, backed up by a robust social security framework and with different imperatives compared to India. India needs a framework which boosts investments, entrepreneurship, wealth creation, and a moderate rate of tax promoting compliance. It may be prudent not to get carried away by the imperatives of developed economies and instead focus on our own priorities.
Undoubtedly, economic inequality is a major concern for a developing nation like India. India has a vast population who are below the poverty line and it poses the unavoidable question of addressing inequality in income and wealth. However, this needs to be addressed with varied mechanisms such as wider access to education and skill development, easy access of finance for a wider entrepreneurial class, infrastructure development, removing supply chain bottlenecks, agricultural and land reforms, rural job creation, etc.
In the present circumstance, the economic justification for the introduction of inheritance tax is not compelling enough.
Authors Umesh Gala and Dinesh Kanabar, respectively are partner and CEO at Dhruva Advisors LLP.
Disclaimer: Views expressed are personal and do not reflect the official position or policy of Financial Express Online. Reproducing this content without permission is prohibited.
Get live Share Market updates, Stock Market Quotes, and the latest India News and business news on Financial Express. Download the Financial Express App for the latest finance news.
The Jan Shatabdi Express, which runs from Una in Himachal Pradesh to Delhi, has resumed its service after a three-day suspension due to the farmers’ protest in Punjab and Haryana. However, three passenger trains starting from Una have been cancelled. The resumption of the Jan Shatabdi Express has brought relief to affected passengers.
login
who are we?
contact us
qosheapp
Toi Staff
Gideon Levy
Belen Fernandez
Rami G Khouri
Mort Laitner
Donald Low
Ali Fathollah-Nejad
Nikkei Editorial
visit website
