Estate duty — bringing a dead tax to life?

Hiten Kotak |Nilesh Mody | Updated on: Dec 30, 2012

BL29_ACC_SECOND | Photo Credit: K_Ananthan.;K_Ananthan_

The re-introduction of inheritance tax should not lead to double taxation over gift tax, subject to the provision of credit.

Estate duty or ‘death tax’ was introduced in 1953, and later abolished in 1985, under the aegis of then finance minister, V. P. Singh, to the collective relief of assessees. However, this relief may be short-lived as the current finance minister, P. Chidambaram, recently expressed that he is considering a reintroduction of the tax. With this move, the minister hopes to reduce intra-generational inequality, promote inter-generational equity, and increase revenue.

Estate duty, imposed when someone dies, was a tax on the value of assets transferred upon the person’s demise. The duty rate was as high as 85 per cent. It was abolished because the yield from the duty was much lower vis-à-vis its cost of administration.

Similar to estate duty, we have gift tax, which was first introduced in 1958. The asserted purposes of this tax were to protect estate duty and recoup some of the income tax revenue lost due to transfers of income-producing property by donors in high income tax brackets to donees in lower brackets.

The Government, considering the meagre revenue generated, and the difficulty in administering gift tax, scrapped it in 1998.

Gift tax has been reintroduced by adding a clause for such receipts in the Income-tax Act by the Finance Act, 2004. Cash gifts, which exceed Rs 50,000 and receipts-in-kind, being an immovable property or any other specified property, the value of which exceeds Rs. 50,000 in aggregate, are taxable in the hands of the receiver, if received without or for inadequate consideration.

As of today, there is no inheritance tax, and a person is not charged any kind of tax (including income tax) when he receives an amount or property through a will or natural inheritance.

Assuming the present law for gifts as under the Income-tax Act, and if the erstwhile law of estate duty comes into play, there won’t be any double taxation since they are mutually exclusive. Section 56 clearly exempts gifts under will or by way of inheritance and in contemplation of death from its tax bracket. Estate duty is levied on the estate of the deceased that is transferred, and is payable by the executors.

Furthermore, in order to avoid double taxation, the provisions of estate duty provided that if a person dies within two years of transferring his/ her property, and gift tax had been paid on the transfer, credit will be provided for the gift tax paid against the estate duty.

However, the shift of the tax payable on gifts under the current income tax provisions is on the recipient of the gift, while the erstwhile gift tax was payable by the donor. In the event of the donor’s death within two years of giving a gift, if the credit of the gift tax paid by the recipient is not allowed under the new inheritance tax law, this would lead to double taxation.

The re-introduction of inheritance tax should not lead to double taxation over and above gift tax, subject to the provision of credit.

However, it is also not a one-stop solution to economic inequality, the blows of which even the prevalent progressive taxation has done little to lessen. What we need is not an additional tax burden, but an entirely new economic policy.

Hiten Kotak is Partner and Nilesh Mody is Director, KPMG in India

Published on December 30, 2012
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