New Delhi: As the government prepares to present its first budget with an expected slant on welfare spending, finding the money for it may become easier if a proposal debated in the finance ministry in recent weeks finds acceptance—an inheritance tax.
Though hard to administer and a move that may risk alienating the rich, an inheritance or estate tax that does not pinch the well-off will not only help raise resources for the government, but also improve the optics of the Narendra Modi administration’s pro-poor credentials in its second term.
A finance ministry official said a stable government that does not shy away from making bold decisions, especially for the public good, is well placed to experiment with an inheritance tax. “This is the best time for India to bring in an inheritance tax at a very marginal rate on the super-rich," the official said, requesting anonymity. There could, however, be certain deductions offered for donations to beneficiaries such as universities and other educational institutions, the official said, citing a US model for financing higher education.
While officials find a compelling case for an inheritance tax after facing a shortfall in tax collections in FY19, there are equally compelling reasons against it.
One of these is the possibility of high net worth individuals moving their residence to other countries for tax purposes. “Inheritance tax is complex to implement. One challenge is the fact that the person who inherits an estate and is therefore liable to pay tax, may not have the resource to pay it unless he or she sells a part of it. It is easier to say, ‘tax the rich’ but difficult to implement," a second official said on condition of anonymity.
The other challenge is that people will tend to hold their assets under trusts, which are perpetual in nature, to avoid paying an estate tax.
Discussions on an inheritance tax had taken place in the government earlier too, but it was not implemented. That was because the government wanted to avoid a controversial move immediately after other structural changes such as demonetization and the goods and services tax roll-out that had disrupted economic activity, an analyst involved in the past discussions said on condition of anonymity.
Girish Vanvari, founder of advisory firm Transaction Square, said its pre-budget survey of major shareholders of companies and chief executive officers has indicated that India was not yet ready for an inheritance tax. “This will be one of the most significant areas to watch for in the Union budget", set to be presented by finance minister Nirmala Sitharaman on Friday.
In the wake of spiralling social sector spending, the Modi administration has to find new resources of revenue to keep its fiscal deficit under control. Direct tax receipts for the year ended 31 March missed the government’s revised target of ₹12 trillion by more than ₹70,000 crore, according to data available with the controller general of accounts.
The government is expected to incur a spending of about ₹90,000 crore in FY20 on account of giving income support to farmers.