Inheritance tax: Jayant Sinha is bang on, but that's only half work done

Mention of death tax in any form envisions images of a bleeding heart socialist government at the helm but the truth is the most liberal and capitalistic countries like the USA and the Netherlands have been swearing by it.

Having had a long stint in the US it was but natural for the newly inducted Minister of State for Finance Jayant Sinha to enjoy the top of the mind recall of this seemingly somber tax and highlight its importance in the Indian context.

In India Estate Duty, a variant of inheritance tax was abolished in 1985 on the specious ground that not much revenue was in any case accruing from it. In 1992, Raja Chelliah Committee made a similar pitch for abolition of wealth tax on the same ground but went on to suggest that if for some reason it had to continue, it should apply to only non-productive assets.

Indirect taxes are generally regressive so much so that direct taxes are perceived to be more equitable. While estate duty and wealth tax might never have set the governmental cash registers ringing merrily, they do have an important role in achieving horizontal equity.

It remains to be seen whether vested interest would scuttle the incipient move to restore inheritance tax in India but alongside tax on death there must be other reforms that brook no delay. The tax paying populace in India is abysmally low especially amongst the business class which by and large thumbs its collective nose at the taxman.

GST is the need of the hour. To be sure it is an indirect tax but income-tax officers can piggyback GST officials, taking advantage of the tax trail left by GST that is a variant of value added tax. The Modi government must implement GST from 1 April 2015 now that the BJP is in power in many states including the commercial states of Maharashtra and Gujarat. Until all businessmen are brought into the tax net, some form of presumptive taxation must be enforced seriously.

There are a few schemes already in vogue like presumptive tax on truckers and small traders with turnover not exceeding Rs 1 crore but both are abject failures in the absence of imaginative interlocking mechanisms. For example, presumptive tax on trucks should be interlocked with pollution control certification.

On the direct taxes front, the government should dust up the pristine version of the Direct Taxes Code (DTC) which set store by an important principle - income is income and no favor should be done to one type of income over another just as wealth is wealth and all assets should be taxed.

There is no reason why long-term capital gains from the bourses should be let off completely from the tax hook and the short term gains taxed at a concessional flat rate.

In fact, if this is done, the tax collections would go up significantly especially if the Securities Transactions Tax (STT) is retained because if a businessman and companies can pay both direct and indirect taxes, there is no reason why share market operators should not be similarly taxed with STT being a sort of indirect tax. Similarly, there is no reason why shares should remain impervious to wealth tax when an earthy Maruti 800 car is.

The single most damage done to the tax structure of the country was by the finance minister P. Chidambaram vide Finance Act, 1996, when he abolished tax on dividend and concomitantly ushered in dividend distribution tax (DDT) which taxes the Indian companies that pay dividend in addition to corporate tax.

He did this apparently in the name of abolishing double taxation of dividend little realizing that now companies are taxed twice over. Equity demands that the receiver of income should be taxed. To this edict, dividend must not be an exception.

To be sure it would result in double taxation of dividend inasmuch as it emanates out of tax paid income of a company but to overcome this problem the government must think of imputing some of the corporate tax on to the shareholders like done in the UK. That would give a partial relief to shareholders from double taxation. That would also spare widows and pensioners who may not otherwise have to pay tax from the one-size-fits-all DDT.