The NaMo Government has been focusing extensively on economic and legal reforms with an intention to create a conducive business environment and bring about economic equality. Given a host of reforms brought in by the Finance Act, 2017, rumours that inheritance tax or estate duty may be reintroduced in our country have again gained momentum. Equality of opportunity goes in tandem with taxation of inheritance. It is believed that heirs of the rich have an unfair advantage over others who are not so privileged. Reduction in perpetual inequality was one of the main reasons for the introduction of Inheritance Tax in India in 1953 and increase in the taxation of the super-rich in the past few years.
Inheritance tax is a levy paid by a person who inherits the estate of the deceased. This tax is viewed as a tool to reduce the economic and consequent social disparity between the rich and the poor. While the high net worth individuals and industrialists are looking at larger restructuring using trust structures to shield their wealth from possible inheritance tax levy, smaller families and people with other requirements are looking at simpler methods such as inter se gifts amongst family members for alignment of their wealth portfolio.
Even such gifting transactions have been under the Government radar for a while now. This is clearly evident from the introduction of section 56(2)(x) in the Finance Act, 2017 that has widened the scope of taxability on receipt of any property (including shares and securities, immoveable property, bullion etc.) either without consideration or for an inadequate consideration, subject to certain exceptions. This provision has brought most of the transactions i.e. both sale for a lower consideration and gifts received by any person under the tax net.
One such exception to this section has always been any property received from a relative. The definition of relative as per the Income Tax Act, 1961 is very wide and is generally to be evaluated from the recipient’s perspective. While gifting transactions amongst relatives are free from the incidence of income tax, the highest transaction cost in such cases is often in the form of stamp duty on the gift deeds. Recently, a massive controversy regarding stamp duty on gift deeds has been underway in Maharashtra. In a hasty decision, the Maharashtra Government first increased stamp duty on gift deeds and conveyance only to revoke the decision later. However, there is no clarity in this regard, and an official communication in this regard is awaited.
Earlier, the rate of stamp duty for property gifted to a family member, namely husband, wife, brother, sister, and lineal ascendant and descendant of the donor was 2% of the market value of the property. Additionally, there was a specific carve out for residential and agricultural properties to be gifted to husband, wife, son, daughter, grandson, grand-daughter, and wife of deceased son on which stamp duty was only Rs. 200. This reduced rate of stamp duty is available only in the State of Maharashtra, and similar provisions do not exist in the other states such as Gujarat or Karnataka.
Interestingly, the reduced rate of Rs. 200 is not applicable to all the transactions of gifts amongst relatives. A finer reading of the said provision leads to amusing conclusions. Residential property gifted by a father to a son is entitled to the benefit of reduced stamp duty. The irony of the situation is that a similar gift from son to father will be chargeable to stamp duty @2% of the market value of the property. Further, if the residential property is gifted by a brother to his sister i.e., amongst siblings, then stamp duty would apply at the rate of 2% of the market value of the gifted property. Another example that can be cited here is a gift by father-in-law to the wife of his deceased son, which would be entitled to the reduced duty of Rs. 200. However, a gift to the wife of a living son would not enjoy this benefit.
However, all of these transactions would be covered under the definition of relatives and enjoy income tax exemption under section 56(2)(x). This seems a lacuna in the stamp duty law, as it does not cover all the instances of inter-se gifts amongst family members. While keeping the reduced rate of stamp duty intact is certainly a welcome move, it will be better still if the state government made its intention clear and brought about a uniform policy enabling all the gifts amongst close relatives to the beneficial rate of lower stamp duty. Given the ongoing trend amongst the families to gift the properties and realign the wealth, similar provisions also need to be introduced in the Stamp Act of other states.
Under the Income tax Act, gifts are not subject to capital gains tax, and the recipient is entitled to the period of holding and cost of acquisition of the donor. The SEBI Takeover Regulations also currently allow inter-se transfer of shares amongst immediate relatives without triggering the open offer requirements.
Generally, the worldwide tax landscape shows that estate duty and gift taxation go in tandem, i.e., a levy of estate duty is inevitably accompanied by taxation of gifts subject to certain carve outs/ exemptions. Since our Government is considering introduction of estate duty/ inheritance tax, it is likely that the gifts would be made a taxable transaction in our country as well in line with the worldwide tax practices.
Considering that transactions of gifting have been under the government scanner for quite some time now, Indian families should swiftly take necessary steps in order to avail the benefits currently available and execute the gifts before the Government delivers another blow on tax free transactions in the form of reintroduction of estate duty in our country.
(The views expressed in this article are personal. The article includes inputs from Nidhi Mehta, Associate Director, M&A Tax, PwC India, and Aaditi Kulkarni, Associate, M&A Tax, PwC India.)