Benjamin Franklin famously (and allegedly) said, “The only 2 certainties in life are death and taxes.” Considering that the specter of inheritance tax (or estate duty) continues to loom over us, taxes on death may soon become the third.
Inheritance tax may be reintroduced in India by Government in near future to boost tax revenue as Tax to GDP Ratio is low in India as compared to many developing and developed economies. This was abolished by Government in 1985. Very recently, some members of the Indian Revenue Service (IRS) Association have suggested inheritance tax as ways for the government to mobilise needed revenue in time of crisis like Covid-19
Basics
Estate duty was a form of tax which was levied on the total value of the property held by an individual calculated at the time of his / her demise. It was payable at the time when the deceased individual's property was passed on to the successors. Estate duty was payable only if the total value of the inherited portion of the property exceeded the exclusion limit prescribed under the Estate Duty Act, 1953. In India, estate duty was set at a rate as high as 85%. However, in 1985, estate duty law was abolished in India mainly due to administrative reasons. While India does not currently provide for a levy of estate duty, in the recent past, a few reports by the Government have suggested/triggered a widespread speculation that estate duty may be reintroduced in India. Speculations are rife in the market that the Government may reintroduce the levy of estate duty as it would serve as a stable source of revenue for the Government and may give a boost to India's economy.
IMPOSITION AND ABOLITION OF ESTATE DUTY IN INDIA
In India, in terms of the Act, the property deemed to pass on death included property which the deceased individual at the time of his / her death was competent to dispose of, and property in which the deceased individual or any other person had an interest ceasing on the former's death. Further, (a) if the deceased individual was domiciled in India at the time of his death, the duty was leviable on all immovable property situated in India, and on all movable property (situated in India or outside) which passed on upon his death; and (b) if the deceased individual was domiciled outside India, the duty is leviable on all immovable property situated in India, all movable property situated in India and movable property situated outside India, if it is settled property and the settler was domiciled in India at the time the settlement took effect.
While calculating the total value of the property of the deceased individual, the market value as at the time of the death was taken into consideration. Certain deductions were permissible from the value so determined, subject to certain limitations, on account of reasonable funeral expenses and for debts and encumbrances.
The Act contained various provisions to counteract attempts at legal avoidance. One set of provisions was that the gifts made by an individual 'in contemplation of death' (donatio mortis causa) as defined in the Indian Succession Act, 1945, were treated as passing on death of such individual.
The Act 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 relating to determination of principal value of the property. Further, estate duty and wealth tax were together seen as double tax on the same base and were thus criticized as being onerous. Collection of tax was meager and it 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 due to large number of litigations. Practice of holding benami properties was prominent and it was important to put in place an efficient legislation in order to curb the practice. A lot of inherited properties remained illegitimately concealed from the purview of tax and therefore the rate of tax collection was low.
Estate duty law was abolished in 1985. One of the most important factors which led to its pitfall was the high cost and time involved in the administration of collection of estate duty compared to the actual estate duty collected. Apart from the high administrative costs involved in implementation, imposition of the estate duty was alleged to have caused disruption to the financial economy of Indian families.
International Trends in Inheritance Taxes
It is interesting to note countries like the United States of America, United Kingdom, Canada and France also impose a tax on inheritance. In these jurisdictions, the basic rationale behind imposition of a tax on inheritance is to reduce social inequality and to facilitate economic redistribution of wealth (in addition to the tax being an additional source of revenue for the government. It was believed that the title of the State to a share of the accumulated property of the deceased is anterior to that of the interest to be taken by those who are to share it. Inheritance tax is also viewed as a tool to decrease inflation in residential property as some property may be sold to pay the tax, thereby bringing more property into the market which would align the supply of property with the increasing demand. In the USA, inheritance tax is seen as a means to prevent accumulation of wealth in a few hands and to provide equal opportunities to the citizens irrespective of their social or economic backgrounds. In general, the estate tax is levied only when the inheritance value is above the 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 with the deceased.
United States of America
In terms with the law of inheritance taxation in USA, estate tax is applicable to the value of the estate, held by an individual at any place in the world, which is transferred upon his / her death. Therefore, a citizen of USA is liable to pay estate tax on his / her entire estate irrespective of the estate being in USA or outside USA. The rate of estate taxes in USA capped at 40%, with the estate and gift tax exemption threshold being $11.58 million per person for 2020. The exemption gets doubled for married couples filing joint tax returns. Besides the estate tax (a federal tax) several states have a state-level estate tax over and above the federal limit.
United Kingdom
The taxation of individuals in the UK is determined by their domicile status or by their residential status. The tax is levied on the worldwide estate of the deceased who was domiciled in the UK. UK has a uniform regime of estate and gift tax called inheritance tax. It is applied on the value of an individual's estate when he or she dies (in which case he or she is deemed to make a transfer of the whole estate immediately before such time) and to certain transfers or gifts made during the lifetime of an individual. Presently, the standard rate of the inheritance tax is set at 40%, with an exemption threshold of £ 325,000. If the estate is given to the children or grandchildren, the threshold increases to £ 500,000.
Canada
Canada does not have an estate tax; the taxation of individuals in Canada is determined by residence. In Canada, after the death of a person, their estate is considered to have been transferred to their spouse and if the spouse is not there, the deceased is considered to have sold their estate at fair market price immediately before his death. This results in recognitions of some amount of gain/loss which is included in computing income in the year of death. These gains are further taxed at the applicable capital gains tax. Non-residents may also be liable for tax at the time of death if they own taxable Canadian property.
In Japan, the estate tax rate range 10% to 70%; in South Korea, the estate tax rate is up to 50%; in Spain 65% to 34%.
Likelihood of reintroduction of Estate Duty or Inheritance Tax in India
Speculations are rife in the market that the Government may reintroduce estate duty in the coming years. In 2014, the minister of state for finance expressed that he was in favour of bringing back the inheritance tax in some form. Further, there have been recent reports in 2017 which suggest that the government intends to bring back the inheritance tax. Some members of the Indian Revenue Service (IRS) Association have suggested in April 2020 inheritance tax as ways for the government to mobilise needed revenue in this time of crisis.
Why would Government reintroduce Inheritance Tax?
According to a recent report, top 10% of the Indian population holds 77% of the total national wealth & 73% of the wealth generated in 2017 went to the richest 1%. Given that the global average is 50%, there is a growing concern about the increasing economic disparity in India. Considering that the intention behind reintroducing estate duty will be to avoid accumulation of wealth in the hands of few and to bring about economic equilibrium, imposition of estate duty may seem desirable. A fair share of Indian businesses is run by business families and therefore reintroduction of estate duty will impede economic growth of the country. This is because, in wake of a tax on inheritance, Indian promoters may give up their residential status or business operations may move overseas as tax planning measures. It may also be argued that when the deceased has already paid income tax and (in many cases) wealth tax each year for possessing the assets, it is harsh to levy inheritance tax on the same assets as this in a way amounts to double taxation.
The kind of law Government may introduce is unknown, however, taking a clue from the Estate Duty Act, 1953, recently we have witnessed a struggle amongst taxpayers to transfer, settle or gift their assets to their intended successors during their life time in order to avoid the payment of estate duty on their death. Further, a number of 'HNIs & Ultra HNIs have started taking measures (like family trusts, benami transactions, gifts) to shield their assets from being covered under the tax bracket.
Tax Super Rich, a Global movement
India is a land of many paradoxes. While India is still home to 180 million poor people, the country has the world’s fastest-growing population of millionaires. According to a report by Credit Suisse Research Institute, there are 7, 59,000 dollar millionaires in India. The report further notes that dollar millionaires in India could number 1.2 million in 2024. According to Hurun Global Rich List 2020, India occupies the third position globally (after China and the US) with 137 dollar billionaires.
As per the policy paper of IRS Officers Association, “In times like these, the so-called “super-rich” have a higher obligation towards ensuring the larger public good. This is for multiple reasons – they enjoy a higher capacity to pay with significantly higher levels of disposable incomes compared with the rest, they have a higher stake in ensuring the economy springs back into action, and their current levels of wealth itself is a product of the social contract between the state and its citizens. Most high-income earners still have the luxury of working from home, and the wealthy can fall back upon their wealth to cope with the temporary shock. In view of several European economists, taxing the wealthy would be the most ‘progressive fiscal tool’, as wealth is far more concentrated than income and consumption.”
CONCLUSION: Estate duty law is a domain with great prospects of either building and restructuring the tax regime in an economy or leading to creation of widespread problem and disparity to the people at large. Therefore, a lot depends 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 & how to administer the new tax in a globalized interconnected economy. While the impact of reintroduction of estate duty may be profitable for the Government, it may prove unfavorable for a large number of families as it may severely affect their asset base and act as a burden for the legal heirs who might have to forcibly sell the bequeathed assets to discharge the liability with respect to inheritance tax.
Nonetheless, given that most HNIs have already tried to safeguard their wealth from the imposition of estate duty, it has to be seen whether (i) estate duty/inheritance tax will actually be imposed by the Government at all; (ii) if yes, whether the Government will base its new law on the former Estate Duty Act, 1953 or adapt from western economies; and (iii) whether the new law will take effect retrospectively or prospectively as regards certain planning done by HNIs, since a large amount of Indian wealth has already been / will already be settled into private trusts.