ESTATE DUTY VIS A VIS WEALTH TAX - let wealth tax be a regular levy and be collected as a tax or fees for holding, carrying and improving wealth.

[C.A. DEV KUMAR KOTHARI]

                                                                  

Earlier article:

Article titled “WEALTH TAX – SOME NEW THOUGHTS – link basic exemption to inflation and  provide  limited specified exemptions with certain limits to impose tax on assets above limits” was webhosted on the following link:

WEALTH TAX – SOME NEW THOUGHTS – link basic exemption to inflation and provide limited specified exemptions with certain limits to impose tax on assets above limits.

In that article the author had  expressed views that Wealth tax can be a handy tool to collect tax from wealthy people for benefit of poor and to reduce disparity of  wealth and income to some extent. The author had also suggested that exemption limit of wealth should be linked with inflation and exemption for different assets should also be to certain limit. For example, there is no justification for allowing exemption of entire value of a residential house. For the purpose of wealth tax a person who hold a residential house of Rs. Say ten crore or fifty crore or  Rs. one crore or Rs. One lakh all are  equally placed because all avail similar exemption.

There should be a reasonable limit for exemption for such residential house depending on location  of residential house.

Similarly there should be reasonable exemption for certain assets which are necessary for one to live in a respectable manner and style in the society.  For example, even jewellery, motor car, furniture, are required as essential items for living, therefore there should be some exemption for such items as well.Therefore, there can be a broader exemption limit for all taxable assets and there should be asset or group of asset based specific exemption limit. Total wealth above Rs. Ten crore, may be taxed at a reasonable rate of say three percent.

Wealth tax as really a wealth carrying cost:

Wealth tax should really be considered a cost for holding and carrying wealth. A person who wants to have sizable wealth in form of various un-productive assets or less productive assets, should be willing to pay a cost of holding and carrying such assets. We can also say that the government also help in holding and carrying wealth by providing safety and security through various public means in the society.

Wealth tax can also be considered as a cost of appreciation of assets:

People hold various type of un-productive assets with a major purpose of appreciation in value of such assets can be asked to pay a tax during holding period. Therefore, wealth tax can be considered as a cost against appreciation of assets. Such wealth tax may be allowed as cost of improvement of capital asset while computing capital gains on sale of asset.

Wealth tax will  be a recurring revenue and serve dual purpose:

Wealth tax  will be payable every year and therefore it will be a recurring revenue for government, this will ensure steady cash inflow. The taxpayer will also be comfortable in paying a nominal tax on regular basis. Whereas tax by way of Estate Duty or Inheritance Tax are casual tax. For the government revenue earning may be regular because every year some new cases of levy will arise. However, for tax payer, it will be very difficult to pay such tax at one time of inheritance. Particularly when we find that properties inherited have appreciated in value and the beneficiary has no liquid assets to pay substantial tax. In such cases there will be difficulty in paying  tax like estate duty.

Wealth tax will reduce disparity of income and wealth on regular basis:

Reasonable  wealth tax, say at average rate of  2% of taxable wealth in form of  unproductive wealth items and even on productive wealth items above reasonable limit  of exemption will go a long way in regular stream of revenue and will not hurt wealthy tax payers in an unreasonable manner as can be in case of tax like Estate Duty. Furthermore, Estate duty can cause a major and unbearable blow to any person or family which is not desirable in a reasonable and affordable tax budget of any person and also  in a system which suppose to levy tax in a reasonable manner.

The major problem is how to detect income and wealth:

In administration of  income tax and wealth tax in a meaningful manner major question is how to detect the hidden  income  and wealth of people in power particularly  politicians, bureaucrats, executives in public and private sectors, who have  scope of earning side income or upari income in nature of bribes, Kick-backs, pay-backs, commission etc. and takes such income in cash form. The information gathered about  hidden income and wealth of such people in cases about corruption and assets held beyond known means etc. (as found on related websites) appears to be  just a tip of an iceberg.

 Estate Duty:

From some news report and discussion circles, we find statements  and or views that there is thinking to reintroduce Estate Duty at a much higher rate. In view of above discussion author feels that instead of Estate Duty, wealth tax should be considered as more meaningful and long term tax tool for collection of tax as well as for reducing disparity of income and wealth on regular basis.

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Beyond the tax book taxation estate tax inheritance tax C Rangarajan

Don’t bring back estate duty, but tax incomes above Rs.1 cr

Enforcing a high rate of estate duty would drive away much-needed capital from the country. state duty is a tax on assets left behind by a person upon his death, while inheritance tax is a tax on assets inherited by a person. Many countries have or have had either estate duty or inheritance tax. In India, too, we have had estate duty from 1953 till it was done away with in March 1985. Recent statements of the finance minister seem to indicate that the government is looking at reinstating such tax to raise further tax resources.

From the late 1950s to the early 1980s, estate duty was a part of the overall integrated direct tax system which comprised income tax, wealth tax and gift tax, besides estate duty. The whole objective was to ensure that the social objective of redistribution of income and wealth was achieved through these taxes, so that while income and wealth of a person was taxed, transfer of assets resulting in transfer of income or wealth by gift or legacies was also taxed to prevent such transfers to reduce the tax liability.

Since then, estate duty ceased to be applicable from 1985, gift tax from 1987, wealth tax was reduced to a truncated form (being levied on only 6 types of assets) from 1993, and wealth tax rates were reduced from a maximum rate of 5% to a flat rate of 1%. Income tax rates at the highest slab, which were over 90% in the early 1970s, and at over 50% in the mid-1980s, are now at levels of 30.90%. The whole tax scenario has therefore undergone a sea change in the last 25 to 30 years. Of course, gift tax has made an indirect but limited comeback from 2004, with gifts of money or certain specified assets received from persons other than close relatives being taxed as income.

The whole objective of such tax rationalization was to remove the then tax disincentive to earning income and accumulating wealth to encourage productive endeavours and discourage black money, which would automatically lead to an increase in tax collections. This purpose has been achieved as tax collections have multiplied manifold, in spite of such drastic reduction in tax rates. Is the time therefore now right to undo some of the changes made earlier, by reintroducing estate duty?

Clearly, considerations of boosting tax collections have a big role to play in the rethinking on the part of the government. However, it needs to be kept in mind that one of the reasons for abolition of estate duty was that the cost of collection and administration of estate duty was too high, compared with the actual estate duty collection. This reason would be valid even today. As the experience with fringe benefit tax and currently with wealth tax shows, the amount of time, effort and costs involved in collection of such other taxes is certainly not commensurate with the collection.

Besides, enforcing a very high rate of estate duty would result in driving away much-needed capital from the country. Given the economic slowdown in India as well as worldwide, we need to encourage more economic endeavours, rather than deter businesses from locating in India through an unduly high tax structure. The experience over the past couple of decades clearly indicates that a lower level of taxes does act as a significant incentive to economic activity.

One of the reasons given for levy of estate duty or inheritance tax is that it ensures that the second generation does not enjoy the same level of wealth as the first generation entrepreneur did, since the estate gets reduced by the amount of estate duty. This seems logical, since the first generation entrepreneur builds up his wealth through his efforts, while the second generation obtains the advantage of the efforts of the first generation without any efforts of his own. Here also, however, one needs to keep in mind the Indian context of most businesses being family run businesses, and the impact that a break-up of such businesses, necessitated by high levels of estate duty, may have on the growth of the economy.

In recent times, many countries have abolished estate duty or inheritance tax. These include Singapore in 2008, Russia in 2006, Hong Kong in 2006 and Sweden in 2005. To reintroduce estate duty, when other countries are abolishing it, does not seem to send out the right message to businessmen, who today have the option of various countries in which to locate their businesses.

Given the need for increasing tax collections, it may perhaps be a far better idea to marginally increase the income tax rates, particularly at the highest levels of income, say for income levels above Rs.1 crore. This is what the US has done, raising the tax rates only for those having income in excess of $400,000. This is what France also sought to do. The chairman of the Prime Minister’s Economic Advisory Council, C. Rangarajan, also endorsed this view a couple of days ago. Such a change would affect only a few people and probably fetch the same amount of tax with far less complications and cost. However, it must be kept in mind that pegging the rate too high or making the highest rate applicable at low levels of income could backfire resulting in destroying the culture of voluntary tax compliance, which has been gathering force over the past two decades.

Gautam Nayak is a chartered accountant.

India. inheritance tax James Buchanan inherited wealth inequality economists 

Why India needs a tax on inherited wealth

There are both ethical and economic reasons for an inheritance tax, which has won support from many economists

Pramit Bhattacharya 

Recent comments from two of India’s most influential voices on policy, finance minister P. Chidambaram and Prime Minister’s economic advisory council chairman C. Rangarajan, on taxing the super-rich have sparked a debate on the issue.

Such a tax is finding favour globally because of a growing awareness of the risks of extreme inequality. Inequality is an important incentive for innovation and growth but after a point, it can be economically inefficient and can exacerbate crises such as the one in 2008. Research by International Monetary Fund economists Andrew G. Berg and Jonathan D. Ostry shows that high levels of initial inequality makes an economy less likely to sustain a high growth path. A large part of the rising inequality in recent decades has been due to the phenomenal increase in the wealth of the top percentile—the infamous 1% that the Occupy Wall Street protesters railed against. Since the 1970s, top income shares have exploded in several major economies, including China and India, research by economists Anthony B. Atkinson, Thomas Piketty and Emmanuel Saez shows.

Can a super-rich tax reduce the damaging impact of inequality? Or will it dampen savings and investments by the wealthy, and harm the economy, as business lobbies claim? Much depends on which kind of tax is imposed and how it is designed. Of all the ways to raise taxes on the extremely wealthy, the inheritance tax appears to be the most efficient. There are both ethical and economic reasons for an inheritance tax, which has even won support from hard-headed economists such as Nobel winner James Buchanan. The moral argument for an inheritance tax is that it removes the extreme advantages of wealthy scions and levels the playing field at birth. Utilitarian economic theory, on which much of modern policymaking rests, says that the market mechanism leads to an “optimal” social state only after a redistribution of “initial endowments” (the conditional clause is usually neglected by the proponents of the so-called fundamental welfare theorem).

India is a particularly apt case for imposing an inheritance tax and there are two key reasons for this. First, with nearly two-thirds of its tax revenues accruing from indirect taxes (which are a heavier burden on the poor), India needs to raise more direct taxes. Inheritance or estate taxes can be one of the key options.

Second, there are very few large-sized economies where inheritance has such an overwhelming influence on national life as in India, and an inheritance tax can be part of a broader strategy to change the status quo. Across the top echelons of business, politics, and even Bollywood, inheritors tend to be in a majority. In various fields, one finds a few dynasties controlling large swathes of territory. The culture of inheritance seems to unite the nation: it finds as much acceptance in Kashmir as it does in Kanyakumari. This culture restrains social mobility and is economically damaging. More than half of those born in the families of agricultural labourers end up being agricultural labourers themselves, according to a 2012 Indira Gandhi Institute of Development Research (IGIDR) working paper by economists Sripad Motiram and Ashish Singh.

India had a failed experiment with estate taxes till the mid-1980s before it was scrapped. But India’s version of estate taxes had a number of exemptions which allowed people to game the system. Evidence from other countries seems to suggest that estate taxes can yield substantial revenues, if exemptions are minimized and other policies such as taxation on gifts are tweaked. The empirical evidence on the impact of estate taxes on savings rate is mixed. Economies which raise substantial revenue through estate taxes are among the richest in the world.

Some critics of estate tax have pointed out that India can raise much greater revenue through better tax administration. Others have suggested better utilization of existing public funds. Both are valid criticisms but steps such as better tax administration and improved public delivery systems can complement rather than substitute an estate tax, in reducing inequality and poverty. After all, it is not enough to take away a share from the inheritors of riches. It is imperative that such resources are efficiently used to help the inheritors of poverty climb up the income ladder. An effective public inheritance involving such public goods as quality education and healthcare must complement an inheritance tax if India is to become a land of equal opportunities one day.

In the short run, an inheritance tax is most unlikely. The current government, headed by a dynastic Congress party, has zero moral authority to counter the culture of inheritance. In any case, industry lobbies have been vociferous in their opposition to an inheritance tax (which is not surprising, given their role in perpetuating inheritance), and at a time when investment sentiment is bleak it is unlikely that the government will raise taxes on the very wealthy.

Over the long term though, an inheritance tax can help raise public funds and contribute to a more dynamic economy.