The pros and cons if inheritance tax makes a comeback in Budget 2019

In the run-up to Finance Minister Nirmala Sitharaman’s maiden Budget speech, there has been a buzz around inheritance tax, earlier referred to as estate duty, making a comeback.
 
“India needs to review the case for re-introducing an inheritance/estate tax with, ideally, relatively high thresholds, so it’s targeted at the very rich,” says Jeffrey Owens, director at Vienna-based WU Global Tax Policy Center. Owens argues that the Indian revenue authorities now have access to information about the assets of citizens held offshore. “The tax could provide a modest amount of additional revenue, both directly and by making it more difficult to evade the personal income tax,” he adds.
 
However, most Indian tax experts feel the timing of this tax, if it were to make a comeback, would be a surprise. India withdrew imposition of estate duty in 1986. Wealth tax, too, was abolished by then finance minister Arun Jaitley in 2015.
 
“The implication of this tax needs to be seen in the current insolvency situation, where many promoters are facing NPA issues and enforcement of personal guarantees,” says Rishabh Shroff, partner, Cyril Amarchand Mangaldas.
 
According to Ketan Dalal, managing partner, Katalyst Advisors, economic inequality is a reality, but equally, there are several reasons why estate duty or inheritance tax should not be introduced in the current environment.
 
“We have had too many changes over the last few years with the introduction of GST, which is still stabilising. More changes are in the offing with likely introduction of the Direct Tax Code,” he says. Dalal argues that such drastic legislation will be a major distraction for promoters who need to be encouraged to make investments and create jobs.
 
Shroff is of the view that the government should give a two- or three-year window before introducing any such tax. This will give high net-worth families an opportunity to structure their estate in a legitimate, estate duty-free manner.
 
“To make it applicable overnight or immediately would be extremely unfair and perhaps unconstitutional,” he adds. Most experts are in favour of setting up a committee to examine the viability of introducing such a tax.
 
Experts say threshold limit for the applicability of such a tax should be fairly high. “Relaxations and exemptions being given in matured tax regimes like the US and the UK should be kept in mind so that Indian families have a level playing field,” says Rajesh Narain Gupta, managing partner of law firm SNG & Partners. The tax law should only have prospective operations, and not retrospective, he adds.
 

Tax experts are, however, divided over the issue of whether family trusts should be exempted from inheritance tax. The UK and the US do not per se exempt trusts from inheritance tax. Experts in India highlight the need to strike a fair balance between succession and estate planning and the objective of inheritance tax.
 
Vivek Gupta, partner and national head – M&A/ PE Tax, KPMG in India, points out that any inheritance tax law will typically contain safeguards to capture asset transfers, especially where trusts are formed with the primary objective of avoiding inheritance tax.  “However, one would reasonably expect that the intent of any such law would not be to impact past transfers, unless mala fide,” he adds.
 
If an inheritance tax is introduced, this has to be supplemented with several changes in the Income Tax Act, say experts. “Transfer of asset in the event of death would be considered as an inheritance of property. Currently, this is not taxable under the Income Tax Act,” says Amarpal S Chadha, tax partner and India Mobility Leader at EY India.
 
This would require a re-calibration of tax rates, calculation of capital gains, apart from additional reporting requirements for the taxpayer, he adds.
 
Experts say this tax would need either an amendment to the Income Tax Act or separate legislation. “There will be a need to re-introduce gift tax type provisions,” says Gupta.
 
Suraj Malik, partner/ transaction tax, tax and regulatory Services at BDO India, feels before introducing inheritance tax, the government should first put in place a robust infrastructure for valuation of assets in a simple and transparent manner.