Sandeep Nerlekar, MD & CEO, Terentia

Sandeep NerlekarEstate duty, inheritance taxes, or a combination thereof, are prevalent in quite a few developed nations, notably USA, UK, Switzerland, Germany and France. However, there is an equally long list of countries which do not levy estate or inheritance taxes, including nations like Australia, Singapore, Canada, Russia and Sweden, which have abolished these taxes after having experimented with them.

India’s stint with estate duty started in 1953, with the Finance Act, 1953 introducing the levy of estate duty and ended with its abolishment in 1985 by Mr. V.P. Singh.

Estate duty was levied under the Estate Duty Act, 1953 upon the value of the assets transferred by the deceased at varying rates, which went as high as 85%. Estate duty not only encompassed the assets at the time of the death but also the assets transferred in contemplation of death up to two years prior to the death of the individual.

Normally the gift tax and estate duty exemption limits are clubbed and the tax rate is same.  The basic goal of imposing estate duty is to bring in equality of income. I would term estate tax as Robinhood tax. Tax the rich and distribute it to the poor. Question is whether and how it will be done. I would not be surprised if it is introduced, as it could be a good propaganda from the point of view of garnering votes around elections. As an agenda, the political party can always advocate amongst the poor (actual Voter) how their life would better and use this as an additional agenda.

 If one has to take a reference point of Forbes 2016 top 100 rich Indians and add their total wealth then that would be valued at INR 28, 00,000 crores. If you take a 30% as estate duty then it would translate to approximately INR 8, 40,000 crores. What all can you do with these funds

  • The Defence sector got an allocation of INR 2,74,000 crores
  • The total deficit is INR 5,35,000 crores

So technically India would be debt free even if 100 richest Indians have to pay 30% tax as estate duty.

In USA the exemption limit is USD 5.45 million, an equivalent of approximately INR 35 crores. If India considers the exemption limit at INR 10 or 15 crores, then a significant sum can be added to the exchequers kitty. This will also leave a significant 70% to the families and their heirs. So, if a part of your wealth can be contributed towards building the nation then we won’t be required to do any additional charity. May be this could help the government to bring down the direct and indirect tax.

However, the Indian experience with estate taxation was not as fruitful as the legislators behind its introduction would have liked. Complexities in the estate duty legislation, difficulties in valuation of the estates, administrative issues coupled with heavy litigation which has been incidentally common problem across the taxing statutes in India, made the entire exercise of levying and collecting estate duty an expensive affair for the government with the costs of collection exceeding the revenues generated.

This ultimately forced the government to abolish the estate duty in India with effect from March 16, 1985 although the litigation pertaining to old estate tax duties continued for a long time after its abolition. I am sure there is a good learning from what happened then and today. Also, in the digital age the information is easily available so managing it now won’t be too difficult.

There is a huge gap between poor and rich and estate tax can bring equality in distribution of income and wealth. This could be a significant step in that direction.

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March 2021