It is admirable that many Indians are in the Forbes list of richest persons in the world. It is equally gratifying that an Indian citizen has built a mansion apartment at a cost of around 5,000 crore as residence, equipped with gardens, swimming pools, helipads and a host of other amenities not commonly perceived. Predictably, the project has drawn mixed reaction. Instances of ostentious spending are many in a country where nearly 30% of the population lives below the poverty line.

Much of such affluence can be attributed to faulty tax policies persued over the past several years where dividend income is totally exempt and wealth taxation has been reduced to a farce through the introduction of the concept of productive and non-productive assets. As a result, the wealth tax gets the government a mere 420 crore in a year although the country is home to quite a few of the world's richest individuals and some very prosperous companies. Such instances demonstrate the need to have an effective law for wealth taxation.

Historical account of inheritance tax: Wealth taxation has two dimensions: an annual tax on wealth, and when it gets passed on by way of gift or on inheritance. The weakness in annual taxation of wealth in the existing law has been stated earlier. Gifts, though exempt from tax for years, are now taxable as income since 2005 at income-tax rates with an exemption limit.

This article considers the case for reintroducing inheritance tax/estate duty, which the country had for nearly 32 years from 1953 till it was scrapped in 1985 by the then-finance minister Late V P Singh. "The estate duty has not achieved the twin objectives to reduce the unequal distribution of wealth and assist the states in financing their development schemes. While the yield from estate duty is only about 20 crore, the cost of administration is relatively high," he had said in his Budget speech. Hence, the estate duty was abolished from March 16, 1985. This tax had to be scrapped not because of a conceptual flaw or deficiency but because of its wrong designing and weak administration.

Another attempt was made in 1989 to tax property passing on death by Wealth (Inheritance) Duty Bill, 1989. This was more simple, pragmatic and easy-to-administer enactment. The rate of tax was moderate, highest being 10%, where the property passing on death exceeded 20 lakh. But it lapsed following the dissolution of Parliament, and has not been discussed since then.

Why inheritance tax?:

Wealth-transfer tax complements income tax. An income tax by itself does not tax wealth - only accretions to it. In various countries, wealth is being taxed when it is transferred by way of gifts or bequeaths as a surrogate to income tax. England, France, Germany, US and Greece tax properties passing on death at rates of about 40%. Economic benefits of inheritance tax: Inheritance tax has economic benefits. An individual, who inherits property, has less incentive to work and accumulate assets on his or her own. Taxing inherited wealth pushes up incentive to work. Also, by inheritance, wealth can pass into wrong hands and may get squandered away. It is better that the state gets a share of such wealth for nation-building. Administrative cost of such tax in comparison to revenue gained is comparatively low vis-à-vis income tax because the former is to be collected only once on death.

Inheritance tax has many benefits. It is a revenue-raiser, a means to redistribute wealth, supplements income tax by compensating for its deficiencies in reflecting taxable capacity, can help in lowering income-tax rates by an increase in collection of taxes through this tax on principle of ability to pay, and gives greater equality of opportunities.

The Taxation Review Committee, 1975, of the US in paragraph 24.4 of its report has argued that death taxes serve to "support the progressivity of the tax structure by the indirect means of progressive levy on wealth once a generation" and that they remove the 'undesirable social consequences' of the 'growth of large inherited fortunes'. With prosperity growing in India - Mumbai alone is reported to have more than one million wealthy people - it is time to think of an inheritance tax. After all, the Indian Constitution proclaims it to be a 'sovereign socialistic republic' and Article 39 provides, inter-alia, that (i) the ownership and control of the material resources of the community are so distributed as best to sub-serve the common good, and (ii) the operation of economic system does not result in the concentration of wealth and means of production to the common detriment. An inheritance tax will further these objectives.

To start with, the exemption limit can be fixed at a higher figure, say, 25-30 crore, with the rates rising progressively to a maximum of 30% for amounts over 100 crore.

Source: The Economic Times