Estate duty has been advocated globally as a tool to balance tax trends and prevent the perpetuation of wealth. In a nutshell, the next generation, whether of Mr Rich or not, is encouraged to contribute its share of efforts in accumulating wealth for the economy as a whole. The current fiscal environment and the potential collections from estate duty may have forced the the finance minister to consider the levy of estate duty amongst other levies like a super-rich tax.
In a situation where the the government reintroduces the estate duty in the current generation, the policymakers are expected to produce a mix of certain provisions from the repealed Estate Duty Act, 1953, and the tested provisions of the matured estate duty laws of some other countries.
The erstwhile Estate Duty Act, 1953, taxed the inheritance of the property of the deceased, which included all kinds of movable or immovable property including jewellery, bullion, paintings, sculptures or even cash and bank balance, exceeding the threshold of R1 lakh. Property also included the deceaseds interest in the joint family property of a Hindu undivided family (HUF) and income accruing to the deceased in a controlled private company for three years before the deceaseds death. However, the Estate Duty Act, 1953, specifically exempted, amongst others, certain debts incurred by the deceased before his death, one house used by the deceased for residence up to the value of R1 lakh and reasonable funeral expenses for the deceased up to R1,000 only.
Estate duty is a globally-accepted source of revenue for many economies around the world. Countries like Belgium, France, Germany, Ireland, the Netherlands, Switzerland, the United Kingdom, the United States, etc, have developed laws taxing the inheritance of wealth.
The US first levied the estate duty in 1916 when its billionaire John D Rockefellers estate paid 70% estate duty. Since then, the estate duty law has only improved till 2013 wherein the US levies a substantial estate duty of 55% with minimum deductions. While the tax base of estate duty in the US looks somewhat similar to that of the erstwhile Indian estate duty law, the US levies multiple taxes like gift tax, real estate transfer tax and generation-skipping transfer tax. Switzerland also levies the inheritance tax coupled with gift tax, real estate profit tax and net wealth tax. Depending on the cantons, the rate of inheritance tax may range from 0% to 55% for 2012.
Countries like Germany, the Netherlands, Belgium and France are in the same league of nations levying the estate duty at an average rate of nearly 30% to 40%. Estate duty law in each of the nations has a unique set of complexities and one may necessarily work with an expert to decode the specific law.
Mr Rich certainly has the task of decoding the Indian version of the proposed estate duty law; he also needs to be cautious about the possible consequences under the Income-Tax Act, 1961.
Succession planning may well be of emotional significance for Indias Mr Rich, yet distributing the wealth amongst the family members along with preserving the emotional bond is surely of utmost significance. While Mr Rich surely has a reason to worry, it may well be a good time for him to share a coffee with an expert.
The author is executive director, M&A tax practice, PwC India. This article has been co-authored by Abhijeet Shah, associate, M&A tax practice, PwC India