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Inheritance Tax row - A golden opportunity to end 32-years long Policy Paralysis on DTC

MAY 06, 2024

By Naresh Minocha, Consulting Editor

BHARATIYA Janata Party (BJP's) fusillade against inheritance tax (IHT) has four underlying messages. First, the obvious one: electoral rallies are the best platform to take the public for a ride with emotions-fueled rhetoric.

Second and most important message is: IHT has created a silver lining for direct tax code (DTC) to get traction in raging electoral campaign. This is because DTC & IHT/wealth tax are connected.

DTC is indeed a glittering instance of policy paralysis that six regimes failed to end since 1992. The Congress party, fighting on the back foot with back to the wall, has failed to capitalize on this issue. Lapsed DTC Bill, 2010 provided for taxation of wealth of rich and super-rich including their overseas assets.

The wealth can be taxed during the life of rich persons as wealth tax, a concept that got booster shot during the Covid pandemic. The second way to tax wealth is to impose estate duty on real estate after the demise of its rich owner. The third way to tax wealth is IHT that covers all net assets including equity shares & jewellery left by a deceased person.

The Gift tax serves as a tool to prevent evasion of both IHT and Wealth tax, apart from being anti-money laundering mechanism. All these taxes help capture income which often gets avoided or evaded.

The third message is that 2024 elections have downgraded the national exchequer, the ultimate Kamdhenu, as a muddy football for politics. Exchequer should instead be worshipped as Lakshmi and its revenue streams discussed responsibly at public platforms.

All leaders should introspect over the long-term adverse impact of casual approach towards tax & non-tax revenue. It is the key to our collective survival & growth. Doubting Thomases can read the World Bank's report captioned 'Sri Lanka Development Update -Mobilizing Tax Revenue for a Brighter Future' October 2023.

Says the Report, "Sri Lanka used to have a wealth tax, but this was abolished in 1992. This tax may need to be reinstated, albeit with a better design. The wealth tax should be broad-based, with no exemptions as to the form of the taxpayer (physical person or legal person) and with no exemptions on the type of assets (shares, immovable property, rights). A high enough threshold would ensure that such a tax covers only the very wealthy to minimize compliance costs for others…Finally, the introduction of gift and inheritance taxes can also contribute towards strengthening capital taxation."

Fourth message is that half-baked-knowledge strategists like Dr. Sam Pitroda should do solid homework before giving interviews on sensitive subjects.

The plain truth is that neo-rich middle class is exempted from taxation of wealth in all formats across the world. And the poor don't have to worry as they don't have any wealth except the dreams that politicians sell during the polls. This holds true of the USA as well.

It is here pertinent to cite Congressional Budget Office's report captioned 'Understanding Federal Estate and Gift Taxes' published in June 2021.

As put by the report, "Estate and gift taxes are a linked set of federal taxes that apply to transfers of wealth. In 2021, estates face a 40 percent tax rate on their value above USD 11.7 million, although various deductions reduce the value subject to the tax. The same threshold and tax rate apply to gift taxes."

The report cites enlightening data for 2016 to show that "relatively few people pay estate and gift taxes".

As for IHT, there is no federal impost. Only six States in the USA levy IHT, which is in addition to the federal Estate tax. The issue of taxing wealth held by living rich has been debated in the USA as well as in other developed countries after arrival of Covid pandemic. Three European countries currently levy wealth tax in addition to estate tax.

As many as 43 countries/jurisdictions levied IHT and or estate tax and gift tax, according to EY's Worldwide Estate and Inheritance Tax Guide 2023 (WEITG).

Return now to our Bharat. Neither the manifestos nor the elections speeches have awakened the public about the danger of fiscal irresponsibility of all parties. All are competing to flog the fiscal space by guaranteeing freebies.

No one has pitched for taxing the wealth of the super-rich, say top 1000 individuals and top 1000 profitable companies to enhance tax revenue? Can India exorcise the centuries-old curse of poverty without attaining robust tax-GDP ratio on sustained basis?

An eye-opener study on alarming rise of 'Billionaire Raj' in India published during March 2024 offers the clue. The study remains a non-issue in political rallies. The crafted fear of Congress snatching Mangalsutra of ordinary women is more appealing to voters than the chilling facts about India's super-rich & decaying governance.

"The Billionaire Raj headed by India's modern bourgeoisie is now more unequal than the British Raj headed by the colonialist forces. One reason to be concerned with such high levels of inequality is that extreme concentration of incomes and wealth is likely to facilitate disproportionate influence on society and government. This is even more so in contexts with weak democratic institutions," says the study/working paper.

It is captioned 'Income and Wealth Inequality in India, 1922-2023: The Rise of the Billionaire Raj'. It is authored by four renowned economists affiliated with World Inequality Lab (WIL) & reputed global academic institutions.

The study concludes: "Wealth-to-income ratios in the recent years could be as low as 30%-40% at the lower end of the wealth distribution compared to over 4600% at the very top of the distribution. In line with earlier work, this suggests that the Indian tax system might well be regressive when viewed from the lens of net wealth. This is perhaps good reason to consider a restructuring of the tax code to account for both income and wealth. Moreover, broad-based public investments in health, education and nutrition are needed to enable the average Indian, and not just the elites, to meaningfully benefit from the ongoing wave of globalization. Besides serving as a tool to fight inequality, a "super tax" of 2% on the net wealth of the 167 wealthiest families in 2022-23 would yield 0.5% of national income in revenues and create valuable fiscal space to facilitate such investments."

Taxation of wealth only worries the super-rich. They have successfully lobbied to sustain India as a Zero Wealth-Tax nation! They also lobby successfully for tax & non-tax incentives such as production-linked scheme, interest subsidies (subvention) and loan write-offs running into lakh of crores per year.

It is here apt to recall what Prime Minister Narendra Modi stated at ET Global Summit on 29th January 2016.

Mr. Modi noted: "When a benefit is given to farmers or to the poor, experts and government officers normally call it a subsidy. However, I find that if a benefit is given to industry or commerce, it is usually called an 'incentive' or a 'subvention'. We must ask ourselves whether this difference in language also reflects a difference in our attitude? Why is it that subsidies going to the well-off are portrayed in a positive manner?"

He continued: "Let me give you an example. The total revenue loss from incentives to corporate tax payers was over Rs. 62,000 crores. Dividends and long-term capital gains on shares traded in stock exchanges are totally exempt from income tax even though it is not the poor who earn them. Since it is exempt, it is not even counted in the Rs. 62,000 crores. Double Taxation avoidance treaties have in some cases resulted in double non-taxation."

Imagine the monetary value of benefits reaped by crony capitalists from policies & regulations tailored to protect and promote their interests. One can only wish Mr. Modi gives an updated and complete picture of whopping cost borne by the exchequer to sustain crony capitalism. The full picture always remains buried under Official Secrets Act, a slave-era law that PM has never mocked.

Why should wealth (not income) generated through this rich-friendly ecosystem remain tax-free? Alternatively, why should all income tax exemptions & non-tax incentives not be withdrawn? Is there any guarantee from anyone on this issue?

No stalwart has alerted the public during the raging electoral campaign that the nation is perilously living beyond its means. Even PM has so far avoided recalling and reiterating his 2023 sermon for obvious reasons.

Replying to the No-confidence Motion against his Government in Lok Sabha on 10th August 2023, Mr Modi said: "We can clearly see that the Congress and its allies want to move forward with economic policies followed by the countries around us. They are playing the game of getting votes by misusing the treasury ...I can clearly see the result of the economic policies of this arrogant coalition. And that's why I want to warn the countrymen, tell them the truth. These people, this arrogant alliance, is the guarantee of India's bankruptcy. India's bankruptcy is guaranteed."

No wonder then that all manifestos have avoided giving the guarantee to slash public debt to sustainable level. Neither BJP nor Congress believes in treating the prudent level of public debt as the Lakshman Rekha.

As for IHT-DTC matrix, full facts on direct tax reforms are difficult to dig under an opaque governance framework in which we live. The best indicator of opacity is the Government's reluctance to make public an official report on Direct Tax Law (DTL) that was submitted in August 2019. DTL or DTC is urgently required to attain Modiji's vision for Viksit Bharat in Amrit Kal.

The Finance Ministry has also kept the nation in the dark about unimplemented recommendations contained in seven secret reports of Special Investigation Team (SIT) on black money. It has also not made public three studies on black money that were commissioned by UPA regime.

This opacity does not benefit the Indian masses. It only shields the super-rich from criticism. If all reports and studies are declassified, then many citizens would demand certain reforms disliked by crony capitalists & delayed by the Government.

Transparency ushers in facts, which triggers informed discourse, making vulnerable votes-harvesting political rhetoric. To facilitate transparency and meaningful debate, World Inequality Lab (WIL) study has thus drafted a table on classification of income groups by Government for an in-depth debate on Billionaire Raj.

As noted by the Study, "We emphasize that the quality of economic data in India is notably poor and has seen a decline recently."

Anyway, freebies-loving voters are disinterested in knowing full facts on worsening fiscal situation. Has any INDIA alliance leader cared to urge Modiji to make public the DTL report, which would, in all probability, have given recommendations on taxing wealth?

The probability of DTL report making recommendations for taxing wealth in one or more ways is very high, if its terms of reference is any indication.

Without using the name 'DTC', Finance Ministry constituted a task force (TF) to draft a direct tax law on 22nd November 2017. TF's Terms of Reference were: "(i) The direct tax system prevalent in various countries, (ii) The international best practices, (iii) The economic needs of the country and (iv) Any other matter connected thereto."

Would TF have finalized its recommendations by turning blind eye to ideas on IHT, estate duty and wealth tax documented by International Monetary Fund, the World Bank, Organisation for Economic Development (OECD), etc. in their reports? The obvious answer is no.

Taxation of the wealth, of which IHT is one of the means, is vital element of DTC. The latter was mooted way back in 1992 by Tax Reforms Committee (TRC). Chaired by eminent fiscal economist, Dr. Raja J. Chelliah, TRC also took a call on IHT, estate duty and wealth tax.

TRC, however, recommended that both DTC and IHT ideas should be deferred to enable the Government to focus on urgent reforms in four areas: corporate tax, income tax, wealth tax on unproductive assets and gift tax.

In Part I of its final report submitted in August 1992, TRC stated: "While a theoretical case can be made out for the introduction of the inheritance tax with a moderate single rate of tax, given the many practical problems that are likely to be created as under the erstwhile estate duty and given the fact that even the existing direct taxes are not being enforced efficiently, the Committee does not recommend that a tax on estates passing at death or inheritances should be contemplated in the near future."

Estate Duty was abolished by Rajiv Gandhi Government in 1985. Announcing the abolition proposal in the 1985-86 budget speech, Finance Minister V.P Singh, explained: "As both wealth-tax and estate duty laws apply to the property of a person, the former applying to his property before death and the latter after his death, the existence of two separate laws with reference to the same property amounts to procedural harassment to the taxpayers and the heirs of the deceased who have to comply with the provisions of two different laws." He logically preferred continuation of wealth tax to estate duty.

In its interim report submitted in December 1991, TRC recommended: "The tax on wealth should be abolished in respect of all items of wealth other than those which can be regarded as unproductive forms of wealth or other items whose possession and use could legitimately be discouraged in the social interest."

Dr Manmohan Singh implemented TRC's recommendations on wealth tax in the budget for 1992-93.

The UPA Government proposed integration of Income Tax Act and Wealth Tax Act into single law - DTC. It even moved DTC Bill, 2010, which lapsed after 2014 Lok Sabha polls. The Central Board of Direct Taxes (CBDT) had released revised version of DTC, 2013, affirming the tax administrations' resolve for transforming India.

Instead of introducing revised DTC bill in Parliament, Modi Government abolished wealth tax (WT) in 2015-2016 budget. In lieu of WT, it imposed 2% additional surcharge on income tax. Additional surcharge is like a rivulet merging into the surcharge river.

The point to be noted here is that no separate account & name for this additional surcharge was created. WT should have been replaced as WT surcharge or as WT cess on income tax with specified exemptions.

Generic surcharge is tinkered in the budgets over the years. The Rajiv Gandhi Government had, for instance, imposed surcharge on WT to finance drought relief in 1988. This shows importance of specific accounting and naming of taxes and add-on levies on them.

DTC has been successfully stalled by NDA Government ever since it came to power in mid-2014. In initial years, Finance Ministry didn't find any logic in pursuing DTC is its existing form.

As put by Finance Minister Arun Jaitley in his budget speech for 2015-16, "Enactment of a Direct Taxes Code (DTC) has been under discussion for quite some time. Most of the provisions of the DTC have already been included in the Income-tax Act. Among the very few aspects of DTC which were left out, we have addressed some of the issues in the present Budget. Further, the jurisprudence under the Income-tax Act is well evolved. Considering all these aspects, there is no great merit in going ahead with the Direct Tax Code as it exists today."

Later, the Finance Ministry changed its stance following observations about outdated Income Tax Act made by Mr. Modi at annual CBDT-CBIC conference held during September 2017.

Without using the name 'DTC', it constituted a task force to draft a direct tax law on 22nd November 2017.

Another message to be deciphered from party manifestos is that BJP and Congress are poles apart on DTC. BJP had, in fact, raised strong reservations against DTC in an eight-page release issued during February 2010.

The ruling party has blacked out 'DTC' from its manifesto since 2014. Even DTL does not figure in BJP's 2024 manifesto. It has preferred silence to giving #ModiGuarantee on taking any decision on DTL report in 2024 manifesto.

The Congress party, on the other hand, has scored a hat-trick by penning its resolve to implement DTC in 2014, 2019 and 2024 manifestos. It has, however, failed to market DTC before voters as a means to keep national exchequer in robust health. DTC is required for national security & for making India a developed nation.

It is still not too late for political parties to debate DTC rationally & without rhetoric in the interest of beneficiaries of freebies, which are, at present, partly financed by government borrowings.

The ball now lies in the court of Rahul Gandhi!


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