K. Parthasarathi

K. Parthasarathi argues for the reimposition of estate duty

AS THE new Finance Minister is grappling with the problem of raising the revenues of the government without hurting large sections of the people, he has very few choices. He cannot raise the taxes of the salaried and middle-income classes who already want higher exemption limits nor can he alter the corporate tax and the several exemptions that virtually reduce the tax payable given their powerful lobby.

Can he approach the noveau-rich BPO/IT sector? Unthinkable, you say. And the farmers are holy cow and beyond the pale of the tax system. Can he reduce the innumerable subsidies that do not really reach the intended poor? No, the political system will not allow him. Finally, to whom can he turn for taxing, but the hapless common man, with no lobby whatsoever, by raising the indirect duties on several items in common use?

It is in this context that he can think of reviving the estate or inheritance tax, by whatever name you call it, that was put on hold in 1985. (Incidentally, the Estate Duty Act is in a suspended state. All that Parliament has to do is to revoke this suspension.)

There was little justification for the step then. When the very rich die, they pass their estate on to their heirs completely tax-free — in fact, they get a valuable tax break on capital gains. This tax is on the transfer of large amounts of money.

In the past two decades, the cessation of levying the estate tax has cost the country hugely in terms of revenue foregone. This has denied the Government the much-needed revenues that could have been spent usefully on reducing poverty and providing primary education, medical facilities and infrastructure that are sorely needed in the rural areas.

The opposition to the tax would come only from the garishly rich. The vast majority forming more than 95 per cent of the population would remain unaffected by it. With suitable threshold limits, the tax need not touch many who have accumulated reasonable wealth for the security of their spouses and children. The tax may also be not made applicable where the wealth or a portion of it is left for designated charitable purposes. The tax can be imposed in a graded scale at different rates depending on the value of the estate left behind, thus rendering larger estates to pay more than the smaller ones.

The rates of tax beyond the exempted limits can be different for spouse and own children, on the one side, and relatives and others, on the other. The threshold limits would prevent the break up of small family farms and small businesses. This tax will be a remote issue for most, except for the miniscule but the rich few. This tax will not discourage either the thrift or ambition to leave one's children well off. This can be achieved by not taxing moderate amounts of property. The estate tax should be directed only at vast fortunes.

The estate tax cannot be deemed as double taxation. The money in the hands of the inheritor(s) is unearned in a strict sense and like all other income should be subject to tax.

The money earned by a salaried worker or a businessman is taxed as income and again on the interest earned when invested in banks. Money is taxed any number of times as it cycles through the economy. If we were to disqualify a tax on the plea that somewhere along the chain of transactions another tax was imposed, we would have to totally give up all taxation. The large estates, which consist of unrealised capital gains, would never get taxed but for the estate tax. The imposition of this tax will not in any way stand in the way of people accumulating wealth just as the high income-tax rate at the highest slab does not deter people from earning more.

The cost of collection of such tax cannot also be high as there are very few persons involved in the super rich bracket nor will it be high as a percentage of such tax collected. With the fast growing economy, the number of billionaires is growing fast. It is time that the estate duty be introduced to collect sizable revenue.

The rich who have a high net worth owe this to society and the social framework that has been built through public investment and private institutions.

Democratic society has a valid claim for some portion of the accumulated wealth of the rich when they depart from this world. The collection of estate tax from this super rich can by no stretch of imagination therefore be called unethical or inequitable if tested on the touchstone of greatest good for the largest number.

Should the revenue come from an increase in bus fare that common man uses or from the cost of foodgrains sold through the PDS? Should it come from depriving the poor of primary schools or health centres or should it come from taxing commodities of daily use? The imposition of estate tax on multibillionaires is not only fair but also in accordance with the principle of each according to his capacity. This alone would spread the money across a larger number reflecting the democratic ethos.

It is expected that substantial money would be raised through this source to cover many urgent programmes to ameliorate the conditions of the poor. Levying an estate duty is not something unusual. Most of the countries have this revenue raising measure. Among the OECD countries, barring a very few, that have this tax, the revenue as a percentage of GDP varies from 0.05 to 0.40.

While there is no accurate figure on the amount lost by way of charitable contributions, it is clear that the absence of estate tax would have a significant adverse impact on charitable bequests The unintended effect of the tax in the words of Carnegie is "to induce the rich man to attend to the administration of wealth during his life."

Wealth is a trust fund for the community that helps the rich "dignify their own lives." Carnegie concludes his famous tract with the words: "The man who dies rich dies disgraced." Carnegie, it is learnt, practised what he preached and besides testifying before Congress in favour of an estate tax also gave away over 90 per cent of his estate before his death, leaving a modest trust fund for his family.

(The author is a Chennai-based freelance writer.)

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