The present Government is often attacked as a “Suit-Boot ki sarkar” —a government that favours rich. Apparently, it is determined to silence its critics.

It is considering the implementation of a tax that has hounded the country’s super-rich until about 30 years ago. It intends to make them pay 5-10% tax on their inherited wealth.

When India was a mixed economy, there existed a tax—inheritance tax. Between 1953 and 1985, the Government tried to alleviate poverty and deliver “social justice” by making the rich pay tax on their wealth and inheritance. But, like many other tax regimes, this too was discontinued; primarily for its poor performance. The administration costs were higher than the effective tax collections. Historically, Indians—like their foreign counterparts—have been averse to paying any tax on inheritance. So they have exploited loopholes to make a mockery of the system. Forming a family trust and traversing assets to the trust is the most sophisticated way.

What’s the current practice?

At present, inherited assets aren’t taxed. But, incomes arising out of them are. For example, a person inheriting a flat won’t have to pay any tax, but if he earns any rental income from that property, that will be taxable. Moreover, the capital gains arising out of the sale of the ancestral property is also taxable. For the purpose of indexation benefits, the date when your ancestors acquired the property will be considered and not the day of inheritance. In short, the current laws offer a level-playing field to the Government as well as taxpayers.

But, unlike that, the inheritance tax offers the Government an opportunity to make a windfall from the death of a person. Yes! You read it right. For example, a person who lives in a metro inherits a mansion from his father who built it about 35 years ago. Assuming this property as per the rules is valued at Rs 100 crore; a person inheriting it might have to shell out Rs 10 crore to pay inheritance tax. If he lacks the funds to pay the tax, in the worst case, he might have to sell a property to comply with the rules. And this isn’t a one-off example.

Many Indian listed companies are chiefly family-owned. And, a percent of personal ownership can be worth a few hundred crores. At market value, this wealth is notional, but inheritance tax on it will be real, how to deal with such situations?

Thus, the Government will have to define who is super-rich clearly. As per some media reports, there are 671 individuals whose combined wealth values at Rs 1,000 crore on July 31, 2017. Again, the Government must reassess the effectiveness of inheritance tax. The previous governments, too, looked at reviving the inheritance tax , but didn’t succeed much.

At present, the Government isn’t left with many options to fund infrastructure projects and jumpstart the sagging capex cycle. Therefore, more than anything else, its plans to impose a tax on inherited estate looks like a final effort to shore up revenues. Nonetheless, it should bear in mind that apart from India, some other eminent countries of the world discontinued estate tax because it did not serve the purpose. They include Australia, New Zealand, Norway, and Hong Kong to name a few.

On the other hand, a few other countries such as the U.S., U.K., Spain, and Belgium still have in place the estate tax. But, looking at the wealth disparity between the rich and poor of these respective countries; it doesn’t seem taxes of this kind work effectively. The exception to this is the Netherlands, where inequality indicators aren’t very strong. However, there’s no evidence that the estate tax has contributed immensely to the lower inequality between the rich and poor. In fact, the country derives its strengths from a well-thought well thought out growth model.

When the present Government came to power, it had promised to implement taxpayer friendly policies. However, looking at the current state of affairs it seems the taxman is going to hound people for a long time. If wealthy Indians do not find their wealth safe here, they might try to pull it out from India and flock to tax-friendly foreign destinations. In such a scenario, stopping the exodus of foreign capital may become difficult for the Government.

What should you do whether or not you are a super-rich?

• If you haven’t created a personalised financial plan , get it done as soon as possible.
• Estate planning is an essential element of a financial plan, so please don’t ignore it. Estate planning allows you to pass on certain belongings to specific individuals. Sound estate planning can help you minimise the impact of taxation.
• Don’t forget to write a will, as it avoids intricacies and disagreements within the family in the future.

For more details, don’t forget to get in contact with a Certified Financial Guardian located near you.

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