1. Column: The case against estate duty

Column: The case against estate duty

Inheritance taxes are loaded against family businesses and will cause flight of capital, both financial and human

Updated: February 24, 2015 11:30 AM

Following the release of a book by a certain Thomas Piketty, we have seen a sharp increase in support for higher estate duties, death duties or inheritance taxes—whatever you call them. Arguments in favour of taxing the inheritance of financial wealth are now being made not just by witless leftists, from whom one should expect such envy-laden ideas, but also by sober analysts who should know better. The case for inheritance taxes is very seductive. Inherited wealth offends the sense of “justice” so dear to socialists; it also offends some defenders of market capitalism who want all wealth to be the result of excellence in a competitive marketplace. In either case, the clamour for estate duties arises from a perspective which cannot be conceded on moral or on efficiency grounds.

Different endowments cannot be wished away. But some endowments are acceptable and others are not. Anoushka Shankar inherits musical talents. No one is suggesting that she be taxed for her talents or their ability to produce a large income. Some people are born with good looks. They become actors or models and get very rich. Should we be taxing good-looking people or athletically endowed people for their inheritances? Why, then, should the children of obese, ugly businessmen be taxed merely because along with obesity and ugliness they inherit wealth? If you do not believe that businessmen are obese and ugly, then you have not watched any Hindi movies. Apart from the inherently immoral idea of taxing only one set of inherited endowments and not others, inheritance taxes will have baneful consequences programming our country to continue to pursue poverty rather than wealth creation.

Consider the case of Amar. Amar owns a lovely heritage home in the heart of a city, which he has inherited (because there were no taxes). Suddenly, the honoured and honourable Parliament of India tells Amar that when he dies, his children will have to pay inheritance taxes as a percentage of the market value of the heritage home. Amar’s children will not have the cash to pay these taxes and keep the home. The home will have to be sold to developers who will pull down the heritage structure. But then, in all probability, someone will file a PIL saying that the structure should not be pulled down. Till the case is decided, the property has virtually no value. But the income tax department will insist on payment of taxes plus interest plus penalties from the date of Amar’s death, based on the market value of adjacent pieces of land which have multi-storied buildings on them. Amar’s children will stand and watch as well-connected local thugs encroach on the heritage building that Amar’s ancestors had so lovingly built. Finally, in frustration, Amar’s children will emigrate. Knowing that these things will happen, in all probability what Amar will do is to sell the building in his lifetime, taking most of the consideration in an overseas bank account. Amar and his children will then emigrate and console themselves with their untaxed wealth and spend their evenings staring at sepia photographs of their ancestral property.

Consider the case of Akbar. Akbar’s family has a privately-owned business which has been doing well for decades. When Akbar dies, the income tax department will send a demand notice to Akbar’s children to pay a percentage of the market value of Akbar’s business. There will be no agreement on the market value. Accountants and lawyers will give contradictory certificates; the fight will go on. Meanwhile, the business will suffer. Employees who have worked for many years will be laid off. The business might even shut down. Akbar’s children will have no money and might be seriously considering applying for jobs under the MGNREGA. But the tax department will continue with the demand based on what they think the market value of the business was, on the day of Akbar’s death. Now it becomes clear as to why socialists and free-market types both like inheritance taxes. The former hate businesses and wealth as a matter of ideological fanaticism. The latter probably feel that India should be entirely dominated by MNCs and that family businesses should all perish. They may even be secretly harbouring a dislike for India’s business castes and communities like the Bohras (Akbar’s community), Marwari Jains, Gujarati Vaishnavas and Nattukottai Chettiars. Before our honoured and honourable Parliament considers inheritance taxes, I urge a Select Committee to look into this ethnic angle and also examine why it is that we do not want to have healthy family businesses like the German Mittelstand (who after 200 years of successful economic activity—activity that has benefited their society at large—are currently being hounded by the income tax commissars of Germany!)

Consider the case of Anthony Gonsalves. He comes back from San Francisco and starts a hi-tech company in Bangalore. Tragically, Anthony dies in an automobile accident when his company is just three years old—by which time it has done well and is worth a few hundred million dollars. The taxman comes after Anthony’s widow and children. They do not have any funds to pay taxes. They sell off the company at a distress price to a foreign private equity firm and the bereaved family decides to move to Singapore. Anthony’s wife is convinced that at least there her children can create companies without being squeezed by a rapacious state.

VP Singh abolished the estate duty because the cost of administering it exceeded the revenues and it had become an acute source of pain and distress for widows and orphans. The current government should be acutely aware that inheritance taxes are loaded against family businesses and will exacerbate the flight of capital—both financial and human. It will increase litigation and make the image of our tax department that of an even larger Frankenstein than it is right now. The likes of Piketty might be secretly wishing to sabotage Indian business. Let us tread with caution.

By Jaithirth Rao

The author is a Mumbai-based entrepreneur

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