Mortal combat – Both you and your realm can be taxed

By ​Suraj Malik

Taxes are inevitable and often referred to as one of the only things in life that is as certain as death. Few countries currently including India in the past have imposed a tax on death itself. Such death tax coined as a tax on the estate (estate tax) or the inheritor (inheritance tax).

A school of thought advocates death taxes with an aim to reduce inequality. The gap between the richest people in our society and everyone else is on the rise and this has severe social ramifications. Estate or inheritance taxes are seen as tools not only to raise revenue but also to redistribute wealth.

The estate tax was abolished in India due to a lower yield compared to the cost of administration and compliance. Currently, there are no taxes on wealth and on receipt of gifts from relatives. Only receipts of gifts exceeding fifty thousand from non-relatives are taxed. There is a tax exemption available for the transfer of asset under a will or inheritance or to a trust for the benefit of relatives.

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In recent years, changes have been introduced providing for a higher surcharge rate for taxpayers earning income more than INR 1 Crore and an additional 10% tax on tax-free dividend incomes exceeding Rs 10 lakh. With progressive taxation, these measures are targeting the rich and are indicative of a potential to re-introduce inheritance or estate tax to achieve a redistribution of income.

The flipside in introducing estate taxes is that it can potentially reduce savings and wealth accumulation and entice aggressive tax avoidance. It is usual to expect that such levy will meet strong opposition of taxpayers because it will be imposed at a time of grief and on assets which the deceased had already paid tax, a kind of double taxation. The estate tax can also compel the inheritor to cause a distress sale of assets to meet the tax payment obligations.

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Thus, it is imperative that any such tax introduced needs to be customized for Indian society. A few recommendations would be for a sufficiently high threshold with exemptions that are meaningful and do not disincentivize wealth creation. A moderate rate will ensure that there is no widespread evasion and a deferred payment will ensure that there are no distress sales by inheritors. Finally, the law should permit legitimate usage of private family trusts for inheritance tax planning.

(The author is the Partner of Transaction Tax, Tax & Regulatory Services)