The Bogeyman Of Inheritance Tax
Finance Minister Dr. Yubaraj Khatiwada the other day said that inheritance tax should be levied at the rate of 50 or 60 per cent when property was inherited by a person from his/her parent or grandparent. The Finance Minister cited examples of inheritance tax prevalent in developed countries to justify his move. Discussions on levying inheritance tax are now going on at the Ministry of Finance and the matter will be submitted to the Revenue Board. This shows that the government seems to be hell-bent on levying inheritance tax under any circumstances.
The government argues that the provision of inheritance tax will make the property possessed by individuals 'formal' and also makes it easier for businessmen to operate their business. It will also make the country prosperous.
However, the revelation of the possible levying of inheritance tax has sent chills down the people's spines. Now, only a nominal registration charge has to be paid for the transfer of the ownership of ancestral property. Immovable property would denote land and buildings, whereas movable property for the purpose of taxation could mean money, including bank balances, shares, debentures, vehicles, etc. It means the movable property that is registered with the concerned authorities could be taxed.
Inheritance tax is prevalent in developed countries. Such a tax was in force in India till 1985, when the government was forced to abolish it due to widespread protests. However, China does not have the provision of inheritance tax.
The main objective of inheritance tax is to redistribute wealth among people by taxing rich people, thus creating an equitable society through various social security programs. Where the provision of social security is robust, such a tax will definitely benefit people.
Nepal has now a federal system of governance. There is the federal government at the central level, seven provincial governments at the provincial level and many local governments at the local level. Such a system of governance requires a huge sum of money to operate. But the sources of revenue are limited in the country. On the other hand, there is a huge trade gap as imports far exceed exports. In such a situation, the government has eyed tax as a reliable source of revenue, the other source being remittance money. This may be the reason the government is pondering over the levying of inheritance tax as an added avenue of tax.
The government has raised the subject of inheritance tax when it is under fire for levying high taxes. However, the government says that such a tax will not be levied right now. It is still under discussion.
It is not reasonable for the government to impose inheritance tax simply because developed countries have such a tax provision. There, tax money is used for the welfare and amenities of the people. Here in this part of the world, the government has yet to meet even the basic requirements of the people. Almost all the sectors- be it education, healthcare, drinking water, sanitation or transportation- are in a shambles. Misuse of vehicle and road tax, for example, is manifested in the sorry condition of roads across the country. So the people are not satisfied with the tax they are paying to the government.
If inheritance tax is imposed at a staggering 50 or 60 per cent as uttered by the Finance Minister the other day, there will be grave ramifications on the life of the people. A poor inheritor of small property, for example a small house, may have no option but to sell that property and live in a rented room. This may render the poor homeless due to the juggernaut of inheritance tax. The people may also fear buying property like vehicles subject to inheritance tax. Moreover, they may hesitate to put money in banks as such bank deposits may also be subjected to inheritance tax. Instead of accumulating money and investing in shares, debentures and bonds, they may invest in gold and jewellery. Some affluent persons may leave the country to live abroad. Some rich persons may also transfer their wealth abroad.
A 50 or 60 per cent inheritance tax is not practicable. Even if inheritance tax is to be imposed, a threshold of exemption should be determined. For example, a threshold of Rs. 20 million may be determined, which means that property up to Rs. 20 million will be exempt from tax. After that, progressive tax may be imposed starting from, say, one per cent. This will give relief to the poor. In the United Kingdom, there is a threshold of GBP 325,000 under the provision of inheritance tax.
The most important aspect of the inheritance tax system should be to utilise the revenue generated from the tax towards the welfare of the poor as well as the elderly through various social security programs. Using the revenue to meet the administrative expenses of the government will not commend itself to the people. Redistribution of wealth and creation of a just and equitable society should be the motive of an inheritance tax system.
It follows that if the government is to levy inheritance tax, it should be levied above a certain threshold and on a slab basis starting with a very low percentage. Abrupt imposing of a huge inheritance tax may give rise to public protests across the country.
(Former banker, Maharjan has been regularly writing on contemporary issues for this daily since 2000. He can be reached at firstname.lastname@example.org)