Vivek Gupta & Kanav Kothari
Estate Duty is not a new concept for India. In fact, India had introduced Estate Duty Act, 1953 (EDA) to levy duty ranging between 5% to 40% on the estate passed upon death of a person, subject to certain thresholds and exemptions. The EDA was later repealed in 1985 on count that administration cost to recover Estate Duty outweighed the tax collections.
WHAT IS ESTATE DUTY/ INHERITANCE TAX
The property in possession of a person which passes onto his successors upon his death can be termed as Estate of such deceased person. Estate duty is tax on such Estate being passed on or beneficiary receiving the Estate, depending on how law is framed. Normally, the liability of Estate duty is restricted to the value of Estate.
Inheritance tax works on similar principle as Estate Duty and accordingly both the terms are often used interchangeably. However, in the USA these are two separate taxes, Estate duty is federal (centre) tax and inheritance tax is state specific tax applicable in certain states of US.
Furthermore, the collection mechanism and payment liability vary in case of Estate Tax vis-a-vis Inheritance Tax. Upon death of the person, his estate normally vests onto the executor (normally named in Will), who is responsible to pay-off all the dues, liabilities, expenses of deceased person. If needed, executor has the power to dispose portion of asset to discharge the liabilities and expense of deceased person. Liability to pay Estate Duty is on such Executor who needs to pay off applicable Estate duty before distributing remainder assets to intended beneficiaries. On the contrary Inheritance tax levied by specific states in the US are to be discharged by beneficiaries (bequest holders) and in most cases there is 100% exemption for state level inheritance tax, if immediate relatives (Class A relative) receive property through inheritance in US.
|Countries||Type of Tax||Max Rate||Applicable Thresholds||HDI Ranking|
|France||Inheritance tax||45%||Yes (Euro 0.1 Mn)||24|
|Germany||Inheritance tax||30%||Yes (Euro 0.5 Mn)||5|
|Japan||Inheritance tax||55%||Yes (Yen 36 Mn)||19|
|United Kingdom||Estate Tax||40%||Yes (GBP 0.325 Mn)||14|
|United States||Estate tax + Inheritance tax||40%||Yes (USD 11.2 Mn)||13|
|Brazil||Estate Tax||8%||Yes (State specific)||79|
|China||No Estate Duty or Inheritance tax||86|
|Mexico||No Estate Duty or Inheritance tax||74|
|Russia||No Estate Duty or Inheritance tax since 2006||49|
The facts in above table clearly demonstrate that developed countries with High GDP per capita and good social security infrastructure providing access to world class healthcare, transport and education can afford to levy Inheritance tax at higher rates on Estate Duty. However, for developing country, where capital creation is of paramount importance, inheritance tax, if at all should be levied, should be at sub 10% rate.
NEED FOR ESTATE DUTY/ INHERITANCE TAX IN INDIA
Estate duty is also referred as pro-poor tax or Robinhood tax as it main objective is to reduce income inequality, wherein it recovers the tax from rich and the revenue collected is intended to be used for upliftment of poor society by spending on developing necessary infrastructure. As per recent study[i], India’s richest 10% population hold 77.4% of countries total wealth and accordingly the need for tax like Estate Duty cannot be undermined.
However, considering the small tax base in India, where ~ 4% of Indian population pays income-tax, imposing additional taxes on them as Estate tax or Inheritance tax would create additional burden on the same tax payer base, it may disincentivise High Net-worth Individual (HNIs) from wealth creation for future generation, which is inherently part of Indian culture and break the ethos. To put this into perspective, lets look at an example of HNI engaged in family business earning profit of INR 1000 Crores and distributing entire profit after tax as dividend to himself and evaluate effective tax impact in with and without estate tax scenario.
|Particular||Scenario 1 – Existing||Scenario 2 – Post Estate tax re-introduced @ say 30%|
|Profit Before tax in Business||1,000.00 Crs||1,000.00 Crs|
|Tax @ 34.94%||(349.44) Crs||(349.44) Crs|
|Profit After Taxation||650.56 Crs||650.56 Crs|
|DDT on Dividend of 539.64 Crores (Effective DDT @ 20.55%)||(110.92) Crs||(110.92) Crs|
|Dividend received by Individual||539.64 Crs||539.64 Crs|
|Additional tax on dividend @ 11.96%||(64.54) Crs||(64.54) Crs|
|Net Corpus created||475.10 Crs||475.10 Crs|
|Estate Tax @ 30%||NA||(285.06) Crs|
|Received by HNI family||475.10 Crs||190.04 Crs|
|Effective tax on earnings||52.49%||80.99%|
Furthermore, Indians normally do not keep investment in liquid assets as they yield low returns. Therefore, to discharge Estate duty liability, Executor may have to sell/liquidate the illiquid asset like real estate at distress valuation. In such an event, while there may be erosion of capital, transaction at distress value would ideally be again tested for deemed income provision of section 50C/50CA and for purchaser under 56(2)(x) of IT Act, thereby making resulting in further taxation. In order to safeguard this, HNIs take term insurance of insured value matching the potential estate duty liability.
ROLE OF PRIVATE TRUST
Many Indian families have settled a family Trust in the recent past. The main objective of such Family Trust normally is protect the family business and assets from potential family disputes, and to simultaneously ring fence family from potential business risk.
As on date, the Indian tax laws permit tax neutral transfer of property in Trust created for relative of Settlor under section 47(iii) read with section 56(2)(x) of IT Act. If India takes inspiration from model estate duty law introduced in United Kingdom, there may be a possibility that existing Trust structures created prior to introduction of law are grandfathered out of purview of Estate Duty. However to plug this, the UK Govt. has imposed a concept of 10-year anniversary inheritance tax for such Trusts (a concept similar to erstwhile Indian wealth tax) to impose duty at nominal rate of 6% on corpus of Trust on every 10th year anniversary.
India ranks 130 in latest published HDI rankings and is fastest growing developing country in the World. In order to improve quality of life of Indians, the Government should keep the momentum forward and accordingly encourage capital and wealth creation by Indians. Simultaneously, the Government is working on creating a robust database of ownership of both movable and immovable property and we except that major steps in partnership with state governments would be actioned for Land reforms/ land record digitization.
Government should take measures to reduce income inequality in India, the
imposition of Estate Duty may disrupt India’s growth story and accordingly
Government may consider other avenues to achieve this. Nonetheless, Estate duty
if at all is to be re-introduced, would need to be carefully drafted and
implemented such that it simple to administer and the rate of estate tax should
be reasonable to ensure that India continues to be fastest growing economy in
the World. All eyes on Budget on 5th July 2019 for updates on this.
 Threshold apply slab-wise and dependent on relationship with recipient and in some cases asset type.
The Human Development Index (HDI) published on http://hdr.undp.org
is a geometric mean of normalized indices in three key dimensions of (1) human
development: a long and healthy life, (2) access to knowledge and (3) a decent
standard of living (GDP per capita). – United Nations Development Programme
[i] Credit Suisse Global Wealth Databook 2018