Should death be taxed?

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January 14th, 2013 Tarun Chaturvedi

The inheritance tax, which was abolished in India in 1985, now seems to be making a comeback. At least, that is what we understand from the whispers emanating from the corridors of the finance ministry.

A large number of countries are facing fiscal problems and India is no different. Having failed in numerous attempts to raise tax revenues, governments in the UK, US, Germany, Italy and elsewhere are looking at inheritance tax as a measure to claw their way out of recession. India, it seems, may want to follow suit. However, there are large differences in the structure of those economies as compared to India. As a result of these differences, it would be wrong to introduce inheritance tax in India without a proper study and debate on the subject.

The first point that goes against the re-introduction of inheritance tax is the existence of a large proportion of the GDP in the form of a shadow economy (parts of the economy which are not reported for the purposes of GDP computation and also for the purposes of tax payments). According to World Bank estimates made in 2007, the average size of the shadow economy in majority of the OECD countries as a percentage of their GDP was below 15% where as in India it was 26%. This clearly indicates that the OECD countries stand to gain very little even if they widen their tax bases. While in India with such a large amount of GDP going unreported and untaxed, it would make sense to evolve measures to tax the living rather than the dead.

The other point that goes against the re-introduction of the tax is that it goes hand in hand with gift tax. India has long abolished gift tax and has introduced changes in the Income Tax Act, 1961 to tax gifts. If and when the inheritance tax is re-introduced, the current provisions with respect to taxation of gifts will have to be revisited. Inheritance is nothing but a form of gift and the taxation of two cannot be very different.

The third and the final point is that in a country where a taxpayer pays tax during his lifetime on the wealth that has been accumulated (under the Wealth Tax Act) should there be a tax on the wealth again on his death? Or the best will be to increase the amount of wealth tax and ensure strict enforcement. Or else, to give a blanket exemption from inheritance tax to those assets which have suffered the brunt of wealth tax during the life of the owner. Serious issues to ponder on!

To end this on a lighter note, the only silver lining, as a lawyer friend of mine remarked, is that the imposition of the inheritance tax may act as deterrence to the large amount of litigation which the country has witnessed for inheritance some famous some not so famous. For this one we really need to wait and watch.

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2 Responses to “Should death be taxed?”

  1. Sourav Daspatnaik Says:

    The issue of Inheritence Tax making a come back will have a mixed reaction. First the Posiitves_ Government will be able to unleash blocked revenues and this willl go a long way in bridging the fiscal gap which runs around 5.5-6% at Central Level and if states get added, another 4% could be the impact, thus in real terms running a 10% GDP deficit is indeed precarious.
    Now If and when the inheritance tax is re-introduced, the current provisions of Gift tax will need to be also revisited, Thus interpretation of Gift Tax Vs Inheritance Tax will need o be also analysed.
    Indeed double tatxation issues come in -Wealth tax Vs inheritace tax Vs Gift.
    Looks that a truncated variety could come in and thereafter may get refined. The other issues will be on land records where “warisan ” certifcates have differemt or multiple ownership. Given the state of land records in some states, this will be very tough as well.
    In all , the matter is interesting and important and needs careful planning.

  2. CA Bharat Bhatt Says:

    There is no need to inheritance tax at all. It was concept of socialism, in initial stage of Independence. It was system to make rich poor by tax structure and convert inequality to equality. When v have taken path of globalization and free economy, it is not advisable or necessary any way. If it was in past upto 1985, is not justification. There was no service tax and entire tax structure was different.

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