News Analysis

Why re-introducing inheritance tax may not be easy

Anand Kalyanaraman Vivek Ananth BL Research Bureau | Updated on June 23, 2019 Published on June 23, 2019

Operational hassles and litigation risks could impede the return of this levy

Will inheritance tax make a comeback on July 5 when the full Budget is presented?

Known as estate duty in its earlier avatar, this levy was abolished in 1985. While there is some speculation that the tax could be re-introduced to shore up the government’s revenues, there are some operational roadblocks and risks that could impede its return.

One, inheritance tax — imposed on a person who inherits assets from someone who has died — could face hurdles in administration, similar to those seen with the erstwhile estate duty and wealth tax. The Modi-led NDA government, in its first stint, abolished the wealth tax in 2015, and in its stead increased the tax surcharge on high-income earners.

Among the reasons the estate duty and the wealth tax were done away with was that their mop up did not justify the government’s efforts to collect them. Administrative hassles and litigation meant high costs and low collections.

There is a risk that inheritance tax, if re-introduced, could face similar challenges. The operational challenges get compounded by the lack of comprehensive data on real assets in the country. Without this, there is risk of evasion of inheritance tax.

Neha Malhotra, Executive Director, Nangia Advisors (Andersen Global), says: “The implementation of the law which governed levy of inheritance tax before 1985 was cumbersome and difficult as it involved aggregation of certain properties only for rate purposes, ascertainment of quick succession relief, treatment of gifts, valuation of properties, relief to be given, problems relating to controlled companies, etc.

“This led to long drawn litigations between assessees and the department and, thus, the government abolished the tax.”

Malhotra adds: “Prior to its removal, the estate duty was payable on a slab basis ranging from 10 per cent to 85 per cent of the principal value of the property.”

Loopholes

Then, there are loopholes that could make the implementation of inheritance tax less than effective. These include possible tax-avoidance measures such as using the Hindu Undivided Family (HUF) route to transfer assets within the family. HUFs enjoy a separate tax status from that of the family members who are part of it.

Preeti Khurana, Chief Editor at Cleartax, says, “To avoid inheritance tax, people could tend to form HUFs. In an HUF, individual family members don’t own the assets of the family; the assets belong to the HUF. So, as such, there is no inheritance that takes place. Even as members keep coming and going, the assets continue to be those of the HUF. That’s going to be a challenge if you decide to impose inheritance tax.”

There is a similar risk if the assets are transferred to trusts.

Capital flight risk

Besides, at a time when the economy is not in the best of shape, the government may not want to dis-incentivise capital formation by imposing an inheritance tax. One of the arguments made against inheritance tax is that it could discourage non-resident Indians from bringing their wealth back to India and could lead to outflow of wealth away from India to foreign jurisdictions.

Ajay Agashe, Associate Tax Partner, EY India, says, “Given the slowing GDP growth, it merits consideration whether India has reached that stage where ‘capital’ should be taxed or there should be encouragement to create capital.”

Arguments — for and against

Operational hassles aside, there are persuasive arguments both for and against the imposition of inheritance tax. Those who favour the tax point to the stark and rising wealth inequality in India over the past few years. Inheritance tax could help reduce this disparity and also supplement the government’s revenue.

Those opposing the tax say that without an effective social security system, it is not desirable. They also say that inheritance tax is tantamount to double taxation; that is, it is not fair to tax an asset that has been created out of money on which income tax has already been paid.

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