ESTATE DUTY – PAST AND FUTURE[1]

Off late there has been a lot of speculation in the media regarding the possibility of re-introduction of estate duty (or inheritance tax, as it is more commonly referred to). According to some media reports, the government has invited views from experts on this proposal, and is expected to re-introduce the tax in the next budget, however, so far, no official statement has been made by the government on this subject and as such, at present the possibility of reintroduction of estate tax remains a mere hearsay.

Inheritance tax, simply put, is a tax on the property left behind by a person to his heirs, upon his death. There are several countries world over such as, Japan, South Korea, France, UK, USA, Spain, Ireland, Belgium, Germany etc. where inheritance tax is levied. In most of these countries, the tax rate is progressive, with a lower and upper limit. The rate is generally dependent on the value of inheritance (subject to applicable deductions and exemptions). For instance, in France, the tax rate varies between a minimum of 5% to a maximum of 60% with several tax slabs in between. In France if the beneficiaries are children or parents of the deceased, and the value of taxable inheritance (after permitted deduction) is upto 8072€, the tax rate is 5%. Whereas, if the value of taxable inheritance is above 1805677€, the tax rate is 45%. If the beneficiary does not fall within the category of children, parent, brother, sister, nephew, niece, the taxable inheritance (after permissible deduction), is taxed at the rate of 60%. Similarly, in Japan, the tax rate ranges between 10% to 70%; in South Korea, the tax rate is upto 50%; in Spain it varies between 7.65% to 34%. In general, the tax is levied only when the inheritance value is above a specified threshold.  The rate is generally dependent on the value of inheritance. In some countries it is also dependent on the relationship of the beneficiary to the deceased as seen in the above example of France. In Spain, the beneficiary’s pre-existing wealth and allowances is also taken into account.

This tax was first statutorily introduced in India in the year 1953 by the Nehru government by way of The Estate Duty Act, 1953 and the tax remained in force till 1985, with some intervening amendments.

Like all other tax legislations, one of the objectives behind the tax was to augment state revenue. Additionally, the other important objective of the tax was to prevent accumulation and perpetuation of wealth in the hands of a few and reduce the stark economic disparity between the uber-rich and the ultra-poor in the country and try to achieve a more egalitarian distribution of wealth.

As noble as the stated objective behind this tax legislation may have been, the tax came under a lot of criticism from multiple sectors throughout the three decades that it remained in force.

The Estate Duty Act, 1953 was widely perceived to be a complex piece of legislation, primarily owing to the different valuation rules for different kinds of property. The complexities resulted in increased number of litigations. There were numerous litigations relating to determination of principal value of the property.

Further, estate duty and wealth tax, which was introduced close on the heels of estate duty, in the year 1957, were together seen as double tax on the same base and were thus criticized as being onerous.

Collection of tax was low and was reported to constitute a miniscule percentage of the total direct tax collected by the central government during the relevant years. On the other hand, the administration cost incurred by the government remained high, inter alia, on account of the huge number of litigations. Another reason for low collection of tax was the practice of holding benami properties which could not be effectively cracked down in the absence of an efficient legislation to curb the practice. Resultantly, a lot of inherited properties remained illegitimately veiled from the purview of the tax and the collection was consequently low.  The estate duty was finally repealed in 1985.

More than three decades later, there are again discussions of estate duty/ inheritance tax being reintroduced. While the government is yet to make any formal statement on the subject, alerted by the possibility of the tax being re-introduced in the near future, a number of high net worth individuals (‘HNIs’) have already started taking measures aimed at shielding their assets from the rigors of the tax. Creating family trust is one of the methods being considered/ adopted by many, based on the reasoning that properties held by trusts would be outside the purview of the tax. Buying property in the name of company rather than in individual’s name is also a measure being considered. Whether or not such measures will insulate the properties from the tax will get tested with time. A lot would depend on how the tax statute is structured, if and when such tax is introduced.

However, in the midst of the buzz in media on the prospect of re-introduction of the estate duty, a lot of questions do crop up on the desirability and suitability, or the lack thereof, of such a tax in the present day India which is considerably different from what it was three decades back when the tax was last in force.

Considering that the spirit behind inheritance tax is to prevent accumulation and perpetuation of wealth in the hands of few and bring about economic equilibrium, imposition of estate duty may seem desirable, seeing the growing concern about the increasing economic disparity in India. As per a recent paper published by known economists, Lucas Chancel and Thomas Piketty, titled as ‘Indian income inequality, 1922-2014 – From British Raj to Billionaire Raj?’, the share of national income accruing to the top 1% income earners in India is now at its highest level since the Indian Income Tax Act, 1922 came into being. The paper states that top 1% of earners captured less than 21% of total income in the late 1930s, dropping to 6% in the early 1980s and rising to 22% today.

The current central government has been vocal on the issue of growing economic disparity and has introduced several measures such as Pradhan Mantri Suraksha Bima Yojana (accident insurance) Pradhan Mantri Jeevan Jyoti Yojana (life insurance), Atal Pension Yojana, Jan Dhan Yojna which are, understood to be, inter alia, aimed at countering the issue of economic disparity. Looking from this perspective, re-introduction of estate duty, may seem a step in the right direction.

Some of the hurdles which came in the way of successful implementation of estate duty when it was last in force may not be applicable now. Wealth tax has been discontinued with effect from financial year 2015-2016, therefore, the criticism of double tax being levied on the same base may not apply this time. Further, the Benami Transactions (Prohibition) Act, 1988 as amended in 2016, which is being professed to be more effective and stringent than the earlier legislation, may possibly help the government in better administration and collection of tax. If revenue generation is sufficiently augmented by levy of such tax, it may make a case for reduction of other direct/ indirect taxes and lowering of burden on general public.

However, before deciding one way or the other, one needs to be mindful of the other economic factors at play. For instance, one needs to take into account the possible impact of such tax on family run/ dynasty businesses which, as is common knowledge, constitute a huge majority of Indian companies and account for a large percentage of the country’s industrial output and organized private sector employment. Will such tax lead to shifting of big family run businesses/ investments to other friendlier tax regime?  Further, if the tax is levied on market value of the property, as the case was earlier, could there be instances where the business houses/ HNIs are compelled to divest assets to pay estate duty? Similarly, will it not be an added burden on HNIs who are already paying high surcharge on income tax? Will such tax dissuade NRIs from migrating back to India and bringing their money back? If so, will the tax not be counter-productive?

Further, if the estate duty rate is above 10%, HNIs may consider gifting properties to their relatives during their lifetime, as there is no income tax on gift when it is in favor of relatives, as defined under Section 56 of the Income Tax Act, 1961. Beneficiaries may have to pay only stamp duty on circle rates as far as the immovable properties are concerned.

A lot will depend on how the tax is structured, what is the threshold for imposition of the tax, what is the rate at which tax is levied, what kinds of properties are brought under the purview of the tax, what exemptions are granted, how easy or difficult administration and collection of tax is, etc. As of now it is wait and watch.

[1] The author of this article, Vijay K. Sondhi is a Senior Partner at Luthra and Luthra Law Offices, New Delhi, India. (Views and opinions expressed in this article are those of the authors and do not necessarily reflect the views of the firm). Research contribution by Bharat Chugh, Managing Associate, Luthra and Luthra Law Offices.