ET in the classroom: Inheriting a taxing fortune

Fear is coursing through the corridors of the wealthy that the government could reintroduce inheritance tax in the Union Budget of 2013-14. The tax was introduced in 1953 and abolished by former finance minister VP Singh in 1985. ET takes you through the concept of inheritance tax and its implications, if it makes a comeback.

WHAT IS INHERITANCE TAX?

A tax imposed on a person who inherits assets. In many countries, it is also known as death tax. Such a tax is levied on the transfer of the estate of a deceased person. Various countries have different tax rates, ranging from 10% to 50%.

HOW IS IT CALCULATED?

The government assesses the worth of the deceased’s estate, which may include cash or investments and any other property or business owned by her or him. If the value of the estate exceeds the inheritance tax threshold set by the government, the deceased (or technically his/her estate) will pay tax on the same at the rate fixed by the government.

WHAT ARE THE PROS AND CONS OF SUCH A TAX?

A compelling factor behind it is that without such a tax, one perpetuates inherited wealth and children of the rich stay rich. Inheritance tax results in redistributing income, since a part of the wealth goes to the government, which is used for the benefit of all the citizens.

The argument against it is that when the deceased has already paid income-tax on income earned and possibly wealth tax every year for possessing the assets, to pay tax on it again is harsh and may result in multiple taxation. Industry chambers like FICCI and CII believe that inheritance tax is a phenomenon of the western world, which is struggling to boost growth.

WHY IS THE GOVERNMENT CONTEMPLATING AN INHERITANCE TAX?

On concerns of a widening fiscal gap and attempts to bridge the same raising tax revenues.
WHAT WOULD BE THE POSSIBLE RATE OF SUCH A TAX?

Reports suggest that it would be at par with the income tax rate. So, it could be 30%, which currently is the highest income tax rate.