Inheritance tax may lead to forced liquidation of assets to pay tax?

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Inheritance tax may lead to forced liquidation of assets
The arguments against introduction of inheritance tax are growing by the day, ever since Finance Minister P Chidambaram called for a debate on the introduction of an inheritance tax.

His arguments was largely to reduce the disparity between the rich and the poor, even while raising crucial revenues to bridge the huge fiscal deficit gap.

The problems for the introduction of inheritance tax are going to be plenty. Hitherto, until 1985 the country had what was called the estate tax. The folly with such a tax was that the administrative expenditure was more than the revenues collected from the tax. Dinesh Kanabar, Deputy CEO of KPMG was quoted by CNBC TV 18 as saying, "The estate duty in India was abolished in 1985 as the cost of collecting this tax was far higher than the revenues earned due to the ambiguities such as the computation of the wealth and valuation of the shares of an unlisted company that trapped the government in a landmine of litigation."

There are thoughts that Inheritance Tax would result in people desperately selling-off their properties to pay-off the tax. This could lead to a slowdown in the economy, even as the government bolsters its own revenues. If one has inherited an ancestral property worth Rs 3 crores and has an inheritance tax liability of Rs 30 lakhs (assuming tax rate of 10%), he may be forced to sell-off the property if he does not have the Rs 30 lakhs to pay off the tax.

There is also an argument that inheritance tax would need to be introduced along with Gift Tax or else one would see properties being transferred to eligible relatives. The Gift Tax was abolished in 1998.

The biggest problem, as in the case of the now abolished Estate Tax would be the valuation. How do you value an immovable property has always been an issue even in developed economies.

Also, the question would be on what assets to value?

If a certain asset is included in inheritance tax it could also lead to an individual being discouraged from buying the asset for fear that the inheritor would have to pay an inheritance tax. For example, if shares are included in inheritance tax and property excluded it would lead to people buying property and not shares.

The investment scenario is likely to get skewed in favour or against a certain asset class.

Clearly, the introduction of inheritance tax is going to be a tricky affair for Chidambaram and it's best the tax is debated upon before any hasty introduction.

GoodReturns.in

Read more about: inheritance tax
Story first published: Monday, February 18, 2013, 13:15 [IST]
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