Inheritance tax in India – Whether this budget can have a surprise?
India’s economic growth and flourishing capital markets have generated exceptional wealth for Indian promoters/ shareholders. As a result, India is generating many unicorns who possess massive wealth. At the same time India is struggling in meeting its fiscal deficit targets and the tax revenue targets.
In order to increase the tax kitty, one of the avenues could be the introduction of inheritance tax/estate duty in India. There were certain murmurs in media and unconfirmed reports that the Government of India may be evaluating the proposal of levy of inheritance tax/estate duty. If we look globally, inheritance tax is very much a reality. Countries like USA, UK, Japan, South Korea, etc have introduced inheritance tax on the value of accumulated savings of the deceased.
Currently, India does not have estate duty or inheritance tax, but it would be pertinent to note that in the past India did have estate duty. Estate duty was introduced in the Year 1953 but was abolished by the Rajiv Gandhi Government in the year 1985. Estate duty was nothing, but a tax levied on the total value of the property held by an individual calculated at the time of death. It was payable only when the property was passed on to the successors. India also had a wealth tax from 1957 to 2015. The same was abolished citing disproportionately high administration and compliance cost in implementing and collecting wealth tax. In addition to this, it was practically impossible to verify personal assets being held by Indian citizens.
India has a deep connection with the UK as most of the laws in India were formed during British rule in India. India continues to follow laws implemented during the British Colonial Rule such as the Indian Evidence Act, 1872, The Transfer of Property Act, 1882, The Indian Penal Code, 1860, etc. The origins of Income-tax Act, 1961 also stems from its predecessor i.e. the Income-tax Act, 1922 which was implemented during the end of the British Colonial Rule. Given that many Indian laws have been inspired by British laws, it would be interesting to see what the inheritance/ estate duty law in the UK is and whether India can look at adopting something similar.
United Kingdom’s Inheritance Tax – Overview
- Inheritance tax is the combination of Estate Duty and Gift Tax which essentially taxes the estate of a deceased person
- Estate includes property, money and possessions
- It is not applicable in cases where the value of the estate does not exceed £3,25,000 and/ or the deceased leaves the remainder of the estate in excess of £3,25,000 to a spouse, civil partner and charity
- It is leviable at the rate of 40% on the value of the estate in excess of £3,25,000
- Typically, the person who is dealing with the estate of the deceased pays inheritance tax to UK Revenue Authorities except in cases where the estate is not enough to pay tax or where the will specifically indicate that the beneficiaries should pay from the estate inherited
- Inheritance tax may also apply in other cases such as gifts made by a person who dies within 7 years of such gifting. However, there are certain exclusions to this rule such as small gifts up to £250 to different persons in a tax year or £3,000 in aggregate in a tax year (in addition to small gifts exclusion) or gifts to bride and groom upon their marriage subject to certain limits, etc.
- Reporting of Estate to the UK Revenue Authorities is a must even if the value of the estate is below the threshold. Further, such reporting should take place in the requisite form within 12 months of the death of the person and inheritance tax, if any, should be paid within six months of the death of the said person.
One of the main objectives for introduction of Estate Duty/Inheritance tax is to prevent accumulation and preservation of wealth in the hands of few people, thus reducing the economic disparity between the rich and the poor. In our view, the current focus of the government should be to increase the tax base as currently only a small percentage of the population is paying taxes in India. If additional taxes like Estate duty/inheritance tax are introduced it may increase the burden of taxes on the honest tax paying community in India whereas the tax evaders may still get away.
Even where the law is introduced, the government should ensure that it applied only to super rich. Currently, 1% of the Indians hold around 73% of the wealth . Some of the measures that the government may introduce for efficient implementation of the inheritance tax are as follows :
- The government should have a higher threshold only capturing the very high net worth individuals
- The government should completely automate the process of levy and collection of inheritance tax – there should be minimal compliance burden
- Appropriate protection should be provided for ill-liquid assets especially shares in a private corporation which is running the business
- Appropriate measures to ensure this law does not become complex and lead to additional litigation.
India being a capital deprived country encourages Nonresident Indians (NRI) to invest in India. Accordingly, it would be interesting to see what kind of regulations are devised for NRI’s having assets in India and whether it may have any impact on investments in India by the NRI community.
In light of the above, it would be interesting to see whether the Government of India goes down this path or sticks to its agenda to increase the tax base to increase the tax collection. While we may have clarity on this on 5 July 2019, when Finance Minister announces the budget but in the background lot of planning has started happening on protecting assets through trust structures. We are heading for interesting times.