Nov 22, 2014

Rise above the din to tax inheritance


The philosophy behind inheritance taxes is that wealth should be created and earned, rather than inherited

It is that time of the year when the nation goes into overdrive of chatter over taxation issues. The announcement of fiscal policy along with the Budget is due in a few weeks. The flavour of the month is the potential introduction of inheritance tax. Tax consultants and “estate planning specialists” are busy selling services to help beat such a tax that may get introduced.

All the finance minister has done is to state in public (he did so even as a home minister bearing the brunt of serious economic disparity) that it is time to think of inheritance tax in the context of the growing social inequity and injustice in India. More recently, he is reported to have been more guarded. After all, this is a subject emotive to the constituency that celebrates and measures economic growth by the movements in stock indices. “I am still hesitant to talk about inter-generational equity and therefore inheritance tax,” media reports quote him as having said.

However, not surprisingly, the mainstream English media, particularly business newspapers, are suddenly replete with reports and comments about why the Indian rich should not be taxed more and how inheritance tax is a bad idea. Most of these writings talk about how “estate duty” that India had between 1953 and 1985 was a failure. They also focus on how inheritance tax would be a double-tax in that it would tax the assets earned by way of inheritance, although such wealth would have already been subjected to tax when it was generated in the first instance.

Most commentators also argue that India should focus on expanding the tax-paying base instead of taxing the super-rich. Others suggest that what India needs is the introduction of the general sales tax and reform in in direct taxes — seeming to suggest that taxing inheritance and implementing these other reform measures are mutually exclusive alternatives.

The truth, as always, lies somewhere in the middle. It does not need painstaking and very nuanced research to acknowledge the enormous and yet widening disparity of income and economic strength in Indian society. Our dollar billionaires are at an all-time high, and yet, the number of Indians who earn less than a dollar per day is higher than populations of several nations. Economic disparity is leading to social unrest — large parts of socially backward states with pathetic human development indicia are witnessing trends or armed revolution, and a breakdown in law and order.

Tax revenues in India represent only 15.5 per cent of the GDP while direct taxes account for only 37.7 per cent of the total tax revenues. The nation barely collects Rs 15 for every Rs 100 of national income — a really low tax revenue. Indirect taxes, which burden all members of society at the same rate regardless of capacity to bear the burden, account for an abnormally high component of tax revenues. Direct taxes, which, as taxes on income and wealth have the capacity to differentiate between the rich and the poor, contribute to only a small component of tax revenues.

A paper published by non-government organisations Oxfam India and the Centre for Budget and Governance Accountability, argues that these statistics position India as one of the most regressive nations in the G-20, and even among the BRICS countries. At least 12 nations stand way above India in the component of direct taxes to total revenue. Direct taxes paid by individuals in India contribute only 12.23 per cent of the taxes against 24.45 per cent paid by corporates — what makes it worse is that buoyancy of corporate profits bears no co-relation with the size of taxes paid by corporates.

Access to capital is indeed a differentiator in the ability to compete. Capital that is freely inherited for generations, enables individuals who have had no stake in earning a farthing, getting to deploy that un-earned wealth in competing with more deserving but less fortunate competitors. Indeed, free inheritance across generations without any obligation to share such un-deserved income (the income flowing only on grounds of genetic descent) with society can kill enterprise and competition.

When India threw the baby with the bathwater in 1985, abolishing estate duty, she was in a pathetic state of governance. Recall that India was high on jargon and low on performance then. We had shortages for everything. One had to wait for decades for a car booking to translate into a delivery. One had to book “trunk calls” to call anyone outside one’s city. We allegedly had technocrats who pushed for computerising India in public life, but a computer was a luxury item subject to high import duties. In short, nothing about the India of the period in which we had “estate duty” is comparable with today’s Indian society, which reeks of social inequality.

The philosophy behind inheritance taxes is that wealth should be created and earned, rather than inherited. Making each man work hard to generate wealth, enjoy the fruits of it, and spend on himself and society is central to the workings of markets and to the spirit of enterprise. An inheritance tax at a moderate rate, taking care to ensure that it kicks in only above high thresholds of inheritance — it is also important to remember that the middle class has started getting economic opportunities only in the past 20 years — can work towards bridging the gap between those who have the fire in their bellies without money in their wallets, and those who have no fire in their bellies to justify the money in their wallets.

Story Credit: Somasekhar Sundaresan, Board Memebr of Oxafm India and partner of JSA, Advocates & Solicitors

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