Of death and taxes

A conversation about the repercussions of inheritance taxes.



As I lazed around one late afternoon in Delhi's intense summer, the doorbell rang. My maid opened the door and the sweet voice of Mrs Basu reached my ears. I hastily hid the movie magazine I was reading and picked up the latest copy of the Wall Street Journal. Mrs Basu had a great regard for me as an “intellectual” and I did not want to break the truth to her just yet.

“Mr Seengh,” she said in her lilting Bengali accent, “how nice to see you.” Then her eyes caught the WSJ and she said, “Eeesh, I am so sorry to have disturbed you.” “Not at all,” I said, I have been reading it for the whole day and you indeed provide me with a welcome break.”

“You are so generous,” she said. “You see, Mr. Basu is again travelling and I wanted some urgent advice.” Saying so, she opened the newspaper she was carrying and pointed to a news item that talked about the Government considering the possibility of introducing inheritance tax as a means of raising more revenues.

She continued, “You know, my father has a lot of ancestral property that he has willed to me. Similarly, we wanted to settle our assets in such a manner that it gets distributed evenly to our children. Is the Government now thinking of imposing tax on inheritance?”

“There is no need to panic,” I said. “What has been said in the newspaper is just a thought and a lot more needs to be done before it becomes reality. There is no doubt that the Government is looking at ways to garner more revenues and it will continue to explore fresh sources. Strangely, nobody talks about taxing agricultural income and even the richest farmers do not pay tax.”

“India has taxed inheritance in the past by way of Estate Duty Act, 1953. This Act remained in force till 1985 when it was removed by Mr V.P.Singh, the then Finance Minister. In his budget speech for 1985-86, he alluded to the fact that the total tax collected by the Estate Duty Act was no more than Rs 20 crores and it had failed in both its objectives – neither did it reduce unequal distribution of wealth nor did it assist the states in financing their development schemes. He also felt that Wealth Tax and Estate Tax should not co-exist as both, in some way, were taxes on a person's wealth and property. As a result, as we stand today, we have wealth tax but no estate taxes.”

“My goodness, you know so much Mr Seengh. I am so impressed!” said Mrs Basu. I tried to look modest as I offered tulsi chai to her.

Emboldened by her remark, I continued, “Many developed countries have had some form of “death duty” as it is often called since it gets triggered upon a person's death. In some countries it is called “estate taxes” where the tax is levied on the estate of the deceased or “inheritance taxes” where it is levied on the beneficiaries though the distinctions have got blurred over time. Japan, US, UK, France have very high rates of estate taxes with Japan tax rates going as high as 70per cent. Australia, Malaysia and some other countries do not have estate taxes. The presence of these taxes have spawned a very lucrative practice of estate tax planning that the rich and famous pay enormous sums of money for.”

“That will be so good for tax advisers like you,” Mrs. Basu said, “but do you think this tax is advisable in the Indian context?”

I replied, “These taxes are not very popular in the countries where they are levied. However, since they aim to tax the very wealthy by keeping the exemption limit to a very high level, the opposition against these taxes have been muted. Many wealthy people have sought to shift their domiciles and nationality just to avoid these taxes but countries have followed with tighter laws as countermeasures.”

“When Estate Duty was in force in India, it gave rise to many evasionary tactics. The most rampant was ‘benaami holdings' - wealth and estate being broken into smaller pieces and being held by proxy owners while the real owners continued to enjoy the benefits. It also led to concealment of assets and income and probably sowed the seeds for the thriving parallel economy we see now.

Since estate taxes take away a large chunk of one's wealth, it is often seen as a disincentive for wealth, capital formation and entrepreneurship. Would you really save and scrounge to buy a house and other assets if the Government were to take half of it away on your death?

There is no doubt that India has a large number of wealthy people and those numbers are growing each year. However, there is also no doubt that the data gathering and enforcement mechanism is very weak and full of holes. Enacting a taxing law is the easiest part. The tough part is enforcing it and punishing evaders. As it is, we have not done a good job with our good old Income Tax, what great work we can do with Estate Tax? On the other hand, if we really beefed our current enforcement, rooted out corruption in the ranks and started punishing the offenders; our tax kitty would swell of its own without having to think of death duties etc.”

“Mr Seengh, your mind is as clear as Rabindra Nath Tagore!” Said Mrs Basu.

I sipped my tea in contentment for there could be no greater compliment from Mrs Basu than that.

(The author is a Tax Partner with Ernst & Young. Views expressed are personal.)

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