Lately, there has been a wave in favour of revival of estate tax in India. The rise in the number of high net-worth individuals (HNIs) and ultra HNIs, the sentiment of bridging the gap between the elite and the underprivileged across the society and to raise resources for social sector programmes tempts politicians and bureaucrats to pitch for reintroduction of estate duty. Many anticipate that the upcoming budget may hold the answer.

India has been subject to estate duty as well as wealth tax in the past. While wealth tax was an annual levy on the wealth of an individual, estate duty was in the nature of transfer-based tax, payable on the transmission of estate or wealth upon the death of an individual. In 1985, the estate duty law was abolished on the grounds of high implementation cost and administrative problems versus meagre estate duty collection. Wealth tax was abolished on similar grounds in 2015. The negative impact of wealth tax on capital formation is well documented.

Approximately 50 countries have estate taxes in place. The highest estate tax rate can be found in developed countries like Japan, France, the US and the UK, with the Japan figure being as high as 55%. Over the last two decades, the global outlook on estate duty has evolved in favour of elimination of these taxes. Since the year 2000, 11 countries and two tax jurisdictions have abolished estate taxes, terming them as a poor source of revenue. Many economists are advocating elimination of estate duty in the US on account of low revenue collections, narrow base and high administrative costs. A 2009 study sponsored by the American Family Business Foundation, titled, Economic Impact of the Estate Tax; Effects of Various Possible Reforms Options, concluded that the damage that transfer tax does to GDP wages and other income is at least twice the tax collection.

Currently, the Indian economy is on course to improve its GDP output and achieve its inflation and deficits targets, and increasing domestic investments has been one of the biggest contributors to its growth story. India being a capital-starved economy, sustained investments from the public and private sector is essential to support the momentum of the business sector. There is a need to keep incentivizing entrepreneurial spirit so that more private investment happens. However, introduction of estate duty will be an impediment to this and will lead to flight of entrepreneurs and their capital to more tax-friendly jurisdictions offshore.

Most countries levy estate duty on global assets owned by their citizens/domiciles but they levy estate duty on non-residents/non-domiciles only on assets located in that country. If India tries to levy estate duty on non-residents on assets located in India, it will result in non-residents moving their assets outside India. Today, India boasts of more than $125 billion deposits by NRIs, but the numbers will plummet drastically if NRIs were made liable to pay estate duty on such deposits. Withdrawal of foreign investment from the Indian capital markets can be a big jolt to the economy. On the other hand, if India exempts non-residents from estate duty, the government will make a mockery of the entire exercise. Such distinction will be discriminatory against residents and lead to large-scale evasion. In the past few years, the government has been showcasing efforts to bring back wealth of HNIs stashed outside India. Estate duty can reverse the efforts of the government with more HNIs fleeing abroad.

In the past few years, many business families have acted to safeguard their assets from possible levy of estate duty through estate planning and private trusts. It is, therefore, all the more doubtful whether estate duty will bring significant revenue. On the other hand, it will hurt many small- and mid-sized entrepreneurs who do not have the wherewithal for planning, for structure which large business houses have.

If the government meddles with this idea of estate duty law, it has to be very careful and considerate about the hurdles in implementation. Any new tax law will need to contemplate exemptions for basic assets like one residential property, threshold limits, and same-generation transfers. Additional deliberations for HUFs (Hindu Undivided Families), phased payments to ease liquidity concerns and taxing of insurance payments are also required.

Given the hard hitting facts, there is little merit in the idea of revival of any wealth-based taxation in India. Estate taxes have never gained popularity with economists in the past. It may scarcely move a needle towards eliminating economic disparity or achieve the goal of revenue generation for the government. Current times call for a robust mechanism of revenue generation and not a trial-error repetition like demonetization. Resistance from the populace and difficult implementation should deter the government to reintroduce estate taxes in India anytime soon.

Ashok Shah is a senior partner at NA Shah Associates LLP and advises large business families on estate and trust planning