An inheritance tax or Estate tax or Death duty is a tax paid by a person who inherits the assets of the deceased. It is a tax on the assets which a person receives after the demise of the transferor. In international tax law, there is disparateness between an estate tax and an inheritance tax: an estate tax is levied on the assets of the deceased, while an inheritance tax is levied on the assets received by the heirs. Estate tax was there in India from 1953-1985.The reason for its abolition was that administrative cost was more than the tax collection. Government intends to reintroduce the estate duty for the following reasons.
INHERENT TAX A BOON FOR THE GOVERNMENT
1. Government is expecting that the revenues collected through this would be more than the administrative cost.
2. There would be a direct correlation between the tax collected and wealth generated.
3. Property or wealth inherited is a casual income i.e one acquires wealth/estate without any efforts or incurring any cost. Thus such acquisitions should be taxed.
4. Now people can easily afford to pay such taxes.
5. Inherent tax would reduce the income disparity and would serve as a equalizer for the Indian society.
6. Introduction of such tax would bring the heirs at par.
The proposed reintroduction stems from the fact of accumulation of wealth in a few hands, inter-generational equity (for the heir it serves as capital) and a possible increase in contribution to the national exchequer.
Earlier the estate duty was payable by the executors of the estate of a deceased. The maximum slab rate on an estate exceeding Rs 20 lakh was an exorbitant 85 percent
REASONS FOR ABOLISHMENT
1. Complexity of the act owing to application of different valuation rules for different kinds of property, leading to several tax demands.
2. Moreover, the duty was perceived to be a form of double taxation on the same property – wealth tax before death and estate duty after death.
Along with the introduction of inheritance tax, the gift tax would have to be reintroduced simultaneously or else it would be easy to avoid inheritance tax by giving away property as gifts.
Currently, there is no separate Gift Tax Act. However, there is a provision under section 56(2) of the Income-tax Act wherein certain specified gifts are chargeable to tax. However, section 56(2) exempts from tax gifts received under will or by way of inheritance and in contemplation of death.
Inheritance tax may be reintroduced as an amendment to the existing provisions of section 56(2) of the Income-tax Act, by withdrawing the exemptions on gifts under will, inheritance and in contemplation of death.
Inheritance tax, if introduced, would require the heir to the deceased to pay on the property bequeathed to him at a rate probably ranging from 30-40 percent, subject to certain exemptions.
A tax imposed on those who inherit assets from a deceased person. The tax rate for inheritance taxes depends on the value of the property received by the heir or beneficiary and his/her relationship to the decedent.
NO TAX ON INHERITANCE
According to the present Indian income-tax law, no tax is applicable on inheriting property in India. However, tax is applicable when one sells it i.e capital-gains tax is applicable. If the inheritor is an NRI, the seller of the property is required to withhold the tax amount “Tax at Source”. However this can be avoided if the purchaser of the property makes an application u/s 195 (2) or the seller (the NRI inheritor) submits an application u/s 197. Proceeds from the sale of the property are credited to the NRO A/c, which can be repatriated.
If an individual inherits any financial assets in India, no tax has to be paid on them. However, if these assets lead to generation of income/gains, tax has to be paid accordingly.
According to Indian tax Laws, no tax is applicable on the value of inherited property. However, wealth tax would be applicable if one possesses more than one property and the value of the same is more than Rs 30 lakh. In such a case, wealth tax at the rate of 1 per cent is applicable on the value of assets exceeding Rs 30 lakh.
If a person has inherited a property and resides in it and has only one house, rental income will not applicable as this house will be considered as self-occupied property. However, where an inheritor has more than one property, the second will be deemed let out and rental income will be considered on it. The rental income will be added to the income in the hands of the owner and will be charged according to the income-tax slab.
CONCERNS DUE TO PROPOSAL OF REINTRODUCTION OF INHERITANCE TAX
1. It would ultimately amount to multiple taxation.
2. It may so happen that they may be paying inheritance tax in India and they might have to pay in other jurisdictions too thus amounting to double taxation.
3. For wealth tax there were different rules. For gift tax there were different rules for valuation. If there are multiple valuation rules and always there could be difference of opinion, resulting into litigation.
4. It is complex to implement.
A DEBATE-ON INTRODUCTION OF INHERITANCE TAX
AGAINST THE MOTION
1. It is less cumbersome to collect tax revenue from due to the Voluntary compliance scheme which has been introduced. If the Government decides to levy Inheritance Tax, then the culture of the tax payers which has been changed will take a u-turn and the exercise of the Government in educating the tax payers for better compliance and achieving the desired results as a result of tax rate deduction would all be washed away. Rather the law makers should further simplify the tax laws of the country to make it more tax payer friendly so that better revenue is derived by the Government by way of income-tax collection.
2. Due to non-applicability of the Inheritance Tax, Non-Resident Indians would be enticed to bring their funds in India in their old age because most of them migrate. Non-applicability of Inheritance Tax in India would be an inspiration for Non-Resident Indians to revert back to their home country with all their money in hand and save their Inheritance Tax which otherwise was applicable in many other countries. If the Government were to think about imposing of Inheritance Tax, then immediately there would be a shift in the mindset of the tax payers of the country and it is expected that black money and tax evasion transactions would soar.
3. Inheritance Tax world over is paid by the person who inherits certain assets on the death of another person. Due to Inheritance Tax, gifts are being made by tax payers before their demise so that these assets are tax free and since transfer of assets in contemplation of death are not chargeable to tax. In India if Inheritance Tax is introduced, then tax payers would indulge in these activities namely of gifting the asset while they are alive thereby nullifying the impact of Inheritance Tax. But if Inheritance Tax is expected to come, then such tax payers will do everything to break the law and would distribute their assets during their life time whereby the impact of tax collection would be visible right now and the purpose of introduction of Inheritance Tax would be defeated. Hence, the Government should not at all think about introduction of Inheritance Tax and it may be introduced later on depending on the situation.
FAVOUR OF THE MOTION
1. Once upon a time in India we had “Estate Duty” which was payable after the death of the person on his assets and the maximum rate of Estate Duty was 85 percent. So as to do away of the Estate Duty the tax payers kept the money under their control and would pay taxes on the same because there was no fear of the Estate Duty liability being affected on them at the time of their death. If today a fear is brought in the minds of the tax payers about the likelihood introduction of the Inheritance Tax, in that situation zillion tax payers of India would try to resort to illegal way of keeping their assets and money so that they are not liable to payment of Inheritance Tax if introduced in the country. Hence, the Government should make a categorical announcement. i.e Tax should be introduced only for persons having wealth exceeding Rs.100 crores so that majority of the tax payers of India are not affected at all.
2. Since in many countries Inheritance Tax is in operation so non-Resident Indians who are based in those countries are trying to come back to India after selling all their assets abroad just to save Inheritance Tax. For example in U.K the families are liable to 40 per cent Inheritance Tax Bill on whatever they inherit above pound 3,25,000. Although the allowance is double for married couples they are supposed to settle the tax bill before they can inherit any assets. In India the regime of Zero Inheritance Tax the economy is flourishing and tax payers are now resorting to healthy practices of tax payment and are not interested to carry on nefarious activities and tax evading activities but in case Inheritance Tax comes into picture, again we might have the atmosphere of a higher rise.