Amid the political firestorm over inheritance tax, an old video of Zerodha co-founder Nikhil Kamath has emerged where he is seen backing the contentious move. "When predicated wealth transfers from one generation to another, there has to be a filter so that a part of it can be redistributed. There is plenty of precedence to inheritance tax," Kamath said in the purported video interaction with Mint newspaper.
'South Korea has it, America has it, UK has it where it is called estate taxes. For India, where about 3% of population pays income tax, something like the inheritance tax will bring more people under the tax net," he said.
Kamath said such a move for the 'extremely affluent' could give the necessary gunpowder to the government to go out and do the reforms which are needed, adding that this (inheritance tax) could be one good way to achieve that.
Inheritance tax, not new to India
The concept of an inheritance tax is, however, not new to India. Such a tax, known as estate duty or "death tax" in some countries, was very much prevalent in India around four decades ago before it was abolished in 1985.
Since then, the idea of bringing back such a tax has been floated by both the erstwhile Congress-led UPA government and the NDA regime.
Former finance minister P Chidambaram, on several occasions between 2011-2013, mentioned imposing inheritance tax to shore up government resources. Similarly, during the first term of the NDA government, former Minister of State for Finance Jayant Sinha was an ardent advocate of the idea.
The tax was introduced in 1953 under the Estate Duty Act in a bid to reduce economic disparity. In 1953, the government found that there were glaring inequalities of wealth and thus the idea of such a tax was conceived.
Moreover, it was also a means to tax the super-rich who passed on a huge amount of wealth to the next generation.
While the law was brought to increase state revenue and reduce the stark economic disparity, it came under fierce criticism from the opposition as well as other sectors throughout the 30 years it was in force.
What led to its scrapping?
There were multiple factors that eventually led the tax to be abolished in 1985 by then finance minister VP Singh.
The law had different valuation rules for different kinds of property, making it a complex legislation. This resulted in a huge amount of court litigation amid disputes over the valuation of the property. This resulted in a significant administration cost.
An audit revealed that the estate tax collection was a negligible percentage of the total direct tax collected by the Centre.
According to a report in The Economic Times, the total tax collected in 1984-85 under the Estate Duty Act was Rs 20 crore. However, the cost of collection was very high.
The collection remained meagre as individuals started finding ways to circumvent paying the tax. Apart from illegally concealing inherited properties, the practice of holding benami properties also gained traction.
Moreover, a separate estate tax on top of an income tax was seen as double taxation, leading to resentment among the public.