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Budget 2019: Speculation grows on inheritance tax return

Talks on reintroduction of estate duty started making rounds immediately after the Modi government came back to power

By Dinesh Agarwal and Mokshada Gohil
  • Published 3.07.19, 12:58 AM
  • Updated 3.07.19, 12:58 AM
  • 2 mins read
Finance minister Nirmala Sitharaman. She will be presenting her first budget (Wikipedia)

A levy of inheritance tax, or estate duty, as it is popularly known in India, has been the subject matter of debate since long. While the Estate Duty Act, 1953 was repealed way back in 1985, its reintroduction has been haunting HNIs and huge wealth owners, periodically.

Talks on the reintroduction of estate duty started making rounds immediately after the Modi government came back to power with a thumping majority. Taxation of estates has been a controversial issue in the tax policy framework. One section views it as a policy guaranteeing equality of opportunities, while others regard it as adversely impacting wealth accumulation. Having said that, the death levy is a global concept. Advanced countries such as the US, UK etc have established laws levying tax / duty on the estate of deceased.

If one were to look at countries having estate duty, it may be observed that those countries provide for robust social security to the citizen. Therefore, what merits consideration is whether India has reached that stage where “capital” should be taxed or instead there should be encouragement to create capital owing to slowing GDP.

Another debatable aspect is whether such levy would encourage “philanthropy” or discourage the trend of voluntary giving back to society. For a fact, many wealthy Indian individuals are actively donating substantial wealth to charity and betterment of society at large during their lifetimes itself.

It will also be interesting to look at the key trends globally on this subject. While many countries have estate duty / inheritance tax laws in place, countries such as Austria, Hong Kong, Norway, Russia, Singapore and Sweden have opted to abolish inheritance or estate taxes over the last two decades. Even the US law was amended to provide sweetener to the rich by doubling the estate and gift tax exemptions. Notably, if the legislature were to re-enact the estate duty law, it will be accompanying with a gift tax levy as well.

In India, estate planning has been on the agenda for many HNIs / wealthy promoters. That, however, may not necessarily be only in anticipation of estate duty law being reintroduced. There are various other commercial reasons why estate planning / succession planning exercise through the trust mechanism is undertaken. For example, perpetuating and preserving the family wealth for generations, ring-fencing the personal assets from business risks or matrimonial risks or other commercial risks In fact, such planning also facilitates mitigating arduous administrative hassles for the inheritor of the property in India, especially if the inheritor is a non-resident.

Trusts (specific / discretionary) are commonly used structures in this context. Trust structure offers lot of flexibility in terms of segregation of economic interest and control, sustaining business continuity, ring fencing from various risk mentioned earlier, succession of wealth through multiple generations and do philanthropy. Whichever estate planning structure one is looking at, Will (testamentary disposition) is also equally important and cannot be undermined.

There is no “right time” to do succession / estate planning. Typically, depending on the family dynamics, the patriarch should chalk a succession plan, sooner rather than later, while ensuring adequate financial security for self.

Dinesh Agarwal is a tax partner and Mokshada Gohil is a director with EY India