ESTATE TAX- AN OVERVIEW

By Sushmita Dey-

Introduction

Estate, in general, is what a person owns be it money or properties at any point in time, especially at the time of his death. When an individual dies his net worth is evaluated before it is passed on to his successors. If the total value of his properties exceeds the exclusion limit as put down by the Law of Land then a tax is levied on the property. That tax is known as the estate tax. Hence, the tax which is levied on the property of an individual at the time of his demise is what we call estate tax. In India, the exclusion limit was decided by the Estate Duty Act, 1953.

Estate Duty Act, 1953

The Estate Duty was introduced in the year 1953. The calculation of the tax is set off on the death of an individual if his assets value more than the limit prescribed by the law. The estate duty was introduced with the objective to –

a) Generate more revenue for the state

b) To create equilibrium in the society, through proper distribution of the wealth

c) To bridge the vast economic gap between the rich and poor

The Act provided that the tax shall be paid by the heirs of the deceased person, i.e. the individuals who will inherit the property after the death. The highest slab of the estate tax was 85% on assets worth more than 20 lakhs. However, if a spouse inherits property on the death of their spouse no tax is charged on such property, but it catches up after that property is further inherited. Also, if the property is passed on to an individual two years prior to the death of a person then no tax is required to be paid. Likewise, if the person transferring the property dies within two years of such transfer and he has paid the gift tax then no estate duty has to be paid on such property.

But even after all its objectives and provisions mentioned in the Act, the tenure in which the act was in force was small. Estate Duty was abolished in 1985. The act faced a lot of criticism at the time when it was in force. The revenue or the benefits collected as a result of the application of the duty was less as compared to the cost of administration employed by the government. Also, the government had to deal with tons of litigation, which were complex and different for different kinds of property. The tax collected formed a really small portion of the direct tax collected by the central government, as many illegal properties remain hidden without proper documentation. Hence, all these reasons brought an end to two decades of implications of Estate Duty in India.

Stance of Estate Tax in the International Front

Countries like the USA, UK, Canada, France, etc also impose inheritance tax or estate tax on the transfer of property owned by an individual after his death. Their purpose of levying the tax is the same as Estate Duty Act, to add to the revenue collected and reduce any kind of social disparity in the country irrespective of the background they come from.

1) United States of America - The current Estate Tax in the USA was enacted on 8th September 1916 under Section 201 of the Revenue Act, 1916. The USA imposes an Estate Tax on the property held by its citizen at any place in the world at the time of his death. Hence, the citizen has to pay tax not only for properties that are within the boundary of the USA but also for properties that are outside the USA. Besides federal Estate Tax, State level Estate Tax is also imposed by several states. But, any property left behind by a spouse or property recognized as charity is not subject to any tax. The highest rate of the estate tax in the USA is estimated at 40%, with the gift tax exemption limit being around $11.58 million per individual in 2020.

2) United Kingdom – Inheritance Tax in the UK was introduced after replacing capital transfer tax from 18th March 1986. In the UK, inheritance tax is payable on the value of the properties held by the individual at the time of his death and to certain gifts made by him when he was alive. The standard Inheritance Tax payable at present is 40% with an exemption limit of £325,000. But the rate of Inheritance Tax reduces in the case of gifts that were passed on when the individual was alive. No shall is payable if a spouse has inherited the property or the property has been given in charity or for the community purpose.

3) Canada - In Canada no Inheritance Tax is imposed on the properties of a deceased person. His properties are either inherited by his surviving spouse on death or it is assumed that the properties were sold by him prior to his death at market value.

Reintroduction of Estate Tax in India

At present, there is no Estate Tax in force in India. Owing to its failure to fulfill the objective for which it was introduced, the Estate Duty Act was removed in 1985. However, in the past few years, there have been some speculations that the estate tax will be reintroduced in India. Though there has not been any official announcement about the same. The recent budget did not mention anything about the estate tax, but there is a high chance that it will be imposed again in the near future with some reforms so that it is successful this time around.

According to the studies, it has been gathered that only 1% of Indian society earns the highest income and forms the wealthiest part of the society, thus creating a huge gap between the rich and the poor. Wealth continues to be stashed away with the richer section of the society and the poorer section of the society continues to suffer. In order to deal with the social and economic disparity, the reintroduction of estate duty may seem viable. But, in case it is reintroduced many points need to be properly considered. Such as-

a) India is a developing country and there is still time for a strong social security system for being implemented. So the individuals try to save as much as they can to secure their future. So imposing of estate duty will not be welcomed with open arms by them. There is a chance that they will strongly oppose such implementation. Imposing estate tax or inheritance tax is a success in developed countries like the USA, UK, France, etc. because they are well equipped with social security frameworks.

b) Taxpayers are already paying taxes such as income tax, capital gain tax. Imposing one more tax will not be fair to them. They will be overburdened.

c) The government may decide to reimpose estate duty to reduce the gap between the rich and the poor. As mentioned before the richest 1% of the country owns 51% of the country's wealth. The introduction of the tax may serve as the right way to distribute the wealth collected from the rich people. But there is a chance that those people may relocate out of the country or set up their business in other countries in order to avoid paying tax.

d) It is a natural thing that no individual likes to pay twice for the same thing. Likewise, if an individual is made to pay tax twice on the same property he is sure to oppose that. So, while taxing, circumstances must be kept in mind and proper exemptions have to be made, so as not to create any ruckus.

No formal announcement or proposal has been made declaring that estate tax will be reintroduced in the future, but speculations can be heard about the same. The introduction will surely be accepted by the sections of the society who were neglected for a long time. For them, reintroduction will help to distribute the wealth equally in the society and the existence of economic gap will be done with.

Conclusion

Estate Duty has the potential to either break or makes the economy of the country. Reintroduction may either be a failure like the last time or it may this time become successful to reduce the economic and social difference in the society by proper distribution of wealth. Tax structure, the exemption limit, the exemption properties should be thoroughly considered. It must be kept in mind while formulating the taxation that like before, the government does not get stuck in complicated litigation. It should be structured in such a way that the revenue collected is more than the administration cost and time employed by the government. The previous law, Estate Duty Act, 1953, must be properly analyzed to detect the loopholes and make a reformed one this time that will fulfill all the required objectives. Before introduction, it must be assured that the taxation system does not create problems in the country rather than solving the existing ones.

References

1) Metasis Legal, Estate Taxes : Should You be Concerned?, Mondaq, 14th September, 2017, https://www.mondaq.com/india/inheritance-tax/628674/estate-taxes-should-you-be-concerned

2) Divi Dutta and Himanshu Malhotra, Estate Duty Act – A Critical Analysis Of The Journey So Far, Mondaq, 6th June, 2018, https://www.mondaq.com/india/inheritance-tax/708128/estate-duty-act-a-critical-analysis-of-the-journey-so-far

3) http://www.bareactslive.com/ACA/act3599.htm#1

4) Diganth Raj Sehgal, Scope of Inheritance Tax in India, iPleaders, 14th April, 2021, https://blog.ipleaders.in/scope-inheritance-tax-india/

5) Sunita Mishra, Govt Mulls Reintroduction Of Estate Duty; All You Need To Know About It, Proptiger, 23rd October, 2017, https://www.proptiger.com/guide/post/govt-mulls-reintroduction-of-estate-duty-all-you-need-to-know-about-it

6) https://en.wikipedia.org/wiki/Estate_tax_in_the_United_States

7) https://en.wikipedia.org/wiki/Gift_tax_in_the_United_States

8) https://en.wikipedia.org/wiki/Inheritance_Tax_in_the_United_Kingdom

9) https://www.gov.uk/inheritance-tax

10) Canada Inheritance Tax Laws & Information, TurboTax, 22nd September, 2020, https://turbotax.intuit.ca/tips/canada-inheritance-tax-laws-information-463

11) Is it Viable to Reintroduce Estate Tax in the Upcoming Budget?, Mint, 1st July, 2019, https://www.livemint.com/money/personal-finance/union-budget-2019-is-it-viable-to-reintroduce-estate-tax-in-the-upcoming-budget-1562000837590.html




Author- Sushmita Dey

Semester V

J.B. Law College, Guwahati, Assam



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