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Whip The Cream

Is it time to levy an estate tax on the super-rich to bridge the class gap?

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Whip The Cream
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Case To Stop Mollycoddling The Rich?

  • Estate tax is based on the fair assessment of the value of all assets in which the deceased held a stake at the time of death.
  • Thought to bring about social equity by taking away a part of inherited or unearned income.
  • Government can use the resources generated to fund social programmes.
  • In other countries, estate tax has led to more trusts for philanthropic activities.
  • But estate tax assessment has to be simple, transparent and not too high to ensure better compliance from the super-rich.

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No tax is popular. But an estate tax—also dubbed inheritance tax or death duty—is particularly disliked in many countries. It taxes those with the most to lose, the super-rich. That’s the reason, cynics argue, the oracle of high finance, Warren Buffett, can cite how many wealthy families in the US have so far pledged large chunks of their wealth to philanthropy. It is, after all, a means to spare heirs the burden of the estate tax, which can reach up to 45 per cent in the US for individuals with assets more than $3.5 million.

India has no estate tax. (A tax on transfer of property, financial investments and stakes in companies upon a person’s death was abolished in 1985 as it was not bringing in the expected revenues). But India has plenty of very rich people—a list that is only growing. According to one survey, there are 1.26 lakh high net worth individuals with minimum assets of $1 million (around Rs 5 crore). The latest Forbes list of billionaires has 11 new Indian joinees. A staggering 55 Indians make the cut, worth an average of $4.5 billion—as against China’s $2.5 billion.

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Given the enlightened realisation that income disparities have only increased over the past couple of decades, is there a case for India to re-introduce estate tax in order to achieve greater social equity? Experts, both within government and without, have been voicing such a need, citing the benefits to government revenues and hence welfare-oriented policies. It helps that such a tax would target a very small number of people (who are influential no doubt, but more about that later) who can most afford to pay up.

As a recent essay (Indian social democracy: the resource perspective, by Vijay L. Kelkar and Ajay Shah, February 2011) argues, “There is a case for an estate duty, through which the intensification of wealth concentration across generations can be counteracted...” When contacted, Kelkar, former chairman of the Thirteenth Finance Commission, told Outlook: “The estate duty has to be part of the entire direct tax reform package, which includes the elimination of corporate tax while fully taxing capital gains and dividend tax at the hands of the investors, and applying the EET (exempt-exempt-tax) principle for individual taxpayers.”

For effective implementation, most tax experts advocate setting a reasonably low tax rate, but starting at a very high threshold limit. While Kelkar advocates Rs 50 crore as the threshold limit, others feel even Rs 20 crore would be a good starting point. Similarly, most favour a tax rate between 1 to 2 per cent, though some suggest much higher levels. “Real social inequality comes from ownership of capital and wealth and not because of the work you are doing. Given the disparity in India, which is much more than in the US, the estate duty should be at least 60 per cent,” says professor Arun Kumar, an expert on the black economy.

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At the same time, there are an equal number of voices that seek clarity on taxes. “Either India can go down the route of the Southeast Asian countries and opt for moderate taxation or it can follow in the footsteps of developed countries and opt for higher taxation and taxes like estate duties. The idea of having a lower tax rate and an estate duty doesn’t gel together,” says Dinesh Kanabar, deputy CEO and chairman tax, KPMG. Others warn about loopholes—such as parking funds in charitable trusts or foundations that are controlled by the heirs or gifting to the heirs in various other guises—that would need to be addressed.

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Clearly, people worked around the estate tax in the past and learnt how to manage their tax rather than pay it. A cautious Mahendra Sanghvi, past president of the Chamber of Tax Consultants, feels that while the resource generation aspect is desirable, the earlier avatar of the estate tax did not generate any revenue for the government, while proving a source of harassment for both the assessee and the heirs. The cost of compliance was high, and therefore rarely did the real value of the deceased’s assets come to the fore.

This explains the many misgivings. Says Gaurav Mashruwala, a Mumbai-based financial planner, “Having an estate tax does not ensure the effective administration of the revenue collected, nor does it imply that there will be an equitable redistribution of wealth.”

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Strongly urging the need for formulating a proper roadmap for revisiting and re-introducing estate tax, chief executive of Indian Council for Research on International and Economic Relations (ICRIER) Parthasarathi Shome counters: “In its earlier avatar, the estate tax did not really work because of a multitude of problems...it was very complex, had a very low base, the tax burden was very high and the implementation very haphazard.” With the modernisation of tax administration, Shome is optimistic of witnessing better revenue collection from estate tax than in the past.

Arbind Modi, Planning Commission consultant, feels the case for re-introducing estate tax is very strong “as it can help us move towards a more consumption-oriented tax”. Pointing out that most countries have inheritance tax in some form, Modi says: “It will help us moderate our tax rates (already down to 30 per cent now from 97 per cent in the 1970s) as we earn and consume the income. And ultimately, the tax will fall on the estate duty.”

What about the impact on philanthropy? Pushpa Sundar, former director of the Sampradaan Indian Centre for Philanthropy, feels that while inheritance tax has certainly promoted philanthropy in the US, it may not work the same way in India as “people would then spend it (wealth) more in their lifetime”. In the absence of estate duty, only tax exemptions are “directing funds towards charitable and social development”, she adds.

Given the influence of those who this tax will hurt, expect a frenzied debate. But there’s no denying that in our quest for social equity, death duty could be one of the answers—if well thought out. As a society, we have grown to extol the creation of wealth—it’s time we debate its redistribution.

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