Income Tax 22 Jan,2020
Estate Duty / Inheritance tax – To be or not to be
Siddhartha K. ShahManager, Deloitte Haskins & Sells LLP
Pratik J. ShahSenior Manager, Deloitte Haskins & Sells LLP

Since independence, various direct levies, in addition to income-tax, were imposed to aid in revenue collection (read to bring social equity), only to be abolished later for reasons laid out by the government. Some of them are mentioned in the table given below:

Tax Introduced Abolished
Gift Tax (tax on gifts made) 1958 1998, however, effective 2004, Income-tax was introduced on gifts made to non-relatives
Wealth Tax 1957 2015
Estate Duty 1953 1985

Like before all Budgets, this time too there is a strong buzz that Estate Duty will be brought back. While it is not yet clear whether there is actually a proposal to bring in this levy, it may be worthwhile to remind aspects of the erstwhile Estate Duty law and bring in some insights on the situation in some developed countries. Specifically as the re-imposition of the duty could impact large business families with wider ramifications as the Indian corporate world majorly consists of family-run businesses.

The history

Under the earlier law, death of the property owner triggered the liability on Estate Duty. For a person domiciled in India, the charge was on all his worldwide property except immovable property situated outside India, and for a person not domiciled in India, charge was on his property situated in India.

Property was defined in the broadest possible terms and included all movable and immovable assets, interest in expectancy, interest in co-parcenary property (joint heirship), debt or enforceable right etc. The saleable value of the property as on the date of the death was the value that was subject to Estate Duty as per the prescribed slab rate, the maximum marginal rate being 40 percent. The liability on Estate Duty was cast on the recipient of the estate who was to file a return of estate received based on which the competent authority would complete an assessment. In case an asset was inherited jointly, a joint return was required to be filed.

In certain situations, such as certain gifts, joint holdings, settled property where settlor retained interest in the property, were "deemed to pass on death" and therefore subject to Estate Duty.

The meagre revenue collection and the hassles in administration were the prime reasons for abolition of the Estate Duty. An attempt was made in 1989 to re-introduce a simplified version of the Estate Duty, but that did not see the light of the day.

The present

The world view also appears to be divided as regards utility of estate tax. USA and the UK have a top-line rate of 40 percent whereas in Japan, the peak rate is 55 percent. Estate tax is fairly common in some European nations. On the other side, China, Australia and Russia do not have estate / gift tax on their statutes. New Zealand and Singapore have withdrawn the estate tax whereas Canada has a unique regime where the properties are deemed to be disposed on death and thereby the estate of the deceased is subject to income-tax thereon.

In USA, there is a unified tax system for gift and inheritance. Gifts / Estate passing on to a spouse of a US citizen are not subject to tax irrespective of quantum. Further, basic exemption limit for an individual (currently US$ 11.2 million) can be combined with unutilised exemption limit of the spouse. An annual exemption of up to US$ 15,000 per donee are available from gift tax.

In the UK basic exemption limit for inheritance tax is GBP 325,000. Gifts made within 3 years prior to death are considered as inheritance for the purpose of inheritance tax. From 3 years from the date of gift, the tax rate scales down with every passing year between gift and death and no tax is payable if the donor survives for the period of 7 years from the date of gift.

In India, inheritance, be it under a Will or otherwise, and gift from "relatives" has been income-tax neutral since the abolition of Estate Duty and Gift tax as mentioned before.

The future

Estate Duty has its pros and cons. Though on one side, one may want to argue that this promotes social equity, however this may not be necessarily true. It may not be out of place to mention that this may result into flight of capital as well. While Estate Duty may be a source of revenue collection for the government, but in a way it penalises savings and investment. The law could be difficult to administer and may not generate revenue commensurate with the efforts. In USA and the UK estate tax collection constitutes less than 2 percent of the total tax collection. Though statistics are difficult to predict, it appears that India would have similar collection for quite some time, considering the age group and average life expectancy (of individuals who may be above the threshold that may be prescribed).

The maximum marginal income-tax rate for an individual in India is roughly 42 percent more or less in line with tax rate in USA. It is therefore likely that the rate of Estate Duty could also be close to tax rates in USA, viz. 40 percent. That would also inherently mean that government will also need to provide a fairly reasonable basic exemption limit and certain relaxations as are available in other developed nations.

While it is not clear, it is also possible that estate tax may sneak in as part of income-tax. Currently, any property received under a Will or inheritance is specifically carved out as exemption from being considered as income. Once the said exemption is deleted, inheritance received, Will or otherwise, could automatically become income in the hands of the recipient. Albeit, rules regarding valuation of property received and other procedural aspects will need to be outlined.

Whether it will or not be prudent to introduce Estate Duty is debatable. The following factors, amongst others, suggest that Estate Duty law should not be enacted - the current economic situation (India needs further private investment for growth of the economy and achieve the goal of being a US$ 5 trillion economy), the fact that collections are not expected to be much and the administrative costs, would be much higher.

Since many years, there have been speculations of re-introduction of estate duty, this year being no exception. In the run up to the Budget 2020, there is much discussion around rationalisation of slab rates for individual taxation. Finance Ministry, in that case, may consider re-introduction of estate duty to balance the revenue collection.

One can hope that a draft law / proposal will be tabled before the stakeholders and their inputs will be considered before the levy becomes a reality.

Information for the editor for reference purposes only

Pratik is Senior Manager and Siddhartha is a Manager with Deloitte Haskins & Sells LLP