Reintroduction of estate duties may mean a flight of both people and capital, say experts.

India's fiscal deficit has always largely been attributed to various subsidies - be it food or fertiliser, but this time it is also being attributed to a slowdown in tax collections. However, most experts say that re-introduction of estate duties (also known as inheritance tax or death tax) is not the solution.

Historically rich countries imposed estate duties, but over a period of time many countries such as Australia, Israel, New Zealand and more recently Sweden, Singapore and Austria have abolished these duties.
In India, estate duty was payable by the executors of the estate of a deceased under the Estate Duty Act, 1953. This Act was finally abolished in 1985. It was a complex law riddled with different valuation rules for different kinds of property, thus it gave rise to a host of litigation and the collections were not commensurate with the cost of administration of this tax.

There is a growing apprehension that estate duties may be reintroduced. Anil Harish, partner, DM Harish & Co, advocates and solicitors, is against its reintroduction in any form. "The fallout of such an introduction could be a surge of generation of black money and also a flight of people and capital to other more tax favourable countries such as Singapore and Dubai. This tax may also lead to corruption, " he explains.

When estate duties existed, estates valued at over Rs 20 lakh attracted a high duty of 85%. "Many heirs had to sell their assets to be able to meet their estate duty liabilities. The tax on capital gains, along with the estate duties wiped out a significant share of inherited wealth, " adds Harish.

Gautam Nayak, partner at Contractor, Nayak & Kishnadwala Chartered Accountants, points out: "As a fair share of Indian business entities are family run, introduction of estate duties will cause havoc on the economy. Such families would be rich in terms of share ownership and not necessarily liquid cash. "

Economist and Professor, at the Delhi School of Economics, Pulin Nayak, has a different view. "If the main objective is to bridge the fiscal gap, reintroduction of estate duties may not be the right kind of tax. However, estate duties have an important role to play in the societal notion of creating greater equality. After all, it is the society as a whole that enables a person to prosper. India has more than one lakh millionaires, yet philanthropy is not widespread, thus a calibrated rate of estate duties payable by the heirs appears to be logical. "

"While reintroduction of estate duty would be a step backwards, if at all it is to be introduced, exemptions must be carved out - such as a residential house should not be subject to estate duties, the basic exemption limit itself must be quite high. For instance, in the United States there is a basic exemption of $5 million (Rs 27. 50 crore approx), per person. Over and above that, estate duty is payable at about 40% (till recently the rate was 35%), "explains Harish.

"By not introducing estate duties or hiking tax rates, there may arguably be a good 'contra-case' to project India as an attractive destination for HNIs, especially those of Indian origin. Return of HNIs to India will help accelerate growth through increase in investments and in consumption (which also means higher indirect tax collections), " suggests Sudhir Kapadia, partner and India tax leader, Ernst & Young.