Will these taxes make a comeback?

By Larissa Fernand |  12-06-19 | 
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Larissa Fernand is Website Editor for Morningstar.in. She would like to hear from you and welcomes your feedback.

Union Budget 2019 will be presented in parliament on July 5, 2019, by Finance Minister Nirmala Sitharaman.

The mutual fund industry would love to see the roll back of LTCG on equity funds that was introduced in the 2018-19 budget. While there is an extremely slim chance of that happening, some quarters are even talking of long-term capital gains tax being increased.

However, there is a possibility of two taxes making an appearance.

Will inheritance tax make a comeback?

An inheritance tax is what you pay when you receive money or property from the estate of a deceased person. The beneficiary is responsible for paying the tax.

It is common in developed countries, when the inheritance is above a threshold. For example, in the U.K., there is no inheritance tax to pay if the value of your estate is below the £325,000 threshold. So if your estate is worth £500,000 and your tax-free threshold is £325,000, the inheritance tax charged will be 40% of £175,000 (500,000 - 325,000). (source)

At this point in time, India doesn’t have inheritance tax. However, you may need to pay income tax (if your inheritance generates income such as rent) and capital gains tax (if you sell it) on your inheritance.

Inheritance Tax was abolished in 1985. According to this article in Moneycontrol, authorities are considering imposing estate tax on inherited property. However, they might exempt properties whose value is less than Rs 5 crore.

Way back in 2014, it was reported that Arun Jaitley, then the finance minister, believed that inheritance tax would not make much sense as a source of revenue as people in India do not inherit much. But there is a counter view that inherited wealth is a huge source of economic inequality and it should be imposed with the option that the tax can be calibrated by offering exemptions to certain people.

Do note, this is not the same as wealth tax. Wealth tax was abolished from April 1, 2016, on the grounds that the cost of administering was more than collections. It was replaced with an additional surcharge of 2% on those with a taxable income of over Rs 1 crore per annum.

Will cash transaction tax make a comeback?

It has been well covered in the media that the Budget may introduce a tax of 3-5% on a cumulative cash withdrawal from the bank of Rs 10 lakh per annum. That means, paying Rs 30,000-50,000 on an annual cash withdrawal of Rs 10 lakh.

This is not new.

In 2005, the then finance minister Chidambaram, set the Banking Cash Transaction Tax (BCTT) @ 0.1% tax on cash withdrawals over Rs 10,000. After much uproar, the minimum limit was raised from Rs 10,000 to Rs 25,000 for individuals and Hindu Undivided Families (HUF), and Rs 1 lakh (other + corporate accounts). This tax was eventually withdrawn in 2009.

The authorities agree that the BCTT is not really a source of revenue (in 2005-06, it was reported that the BCTT collected a mere Rs 350 crore). It’s mail purpose is to act as a disincentive of sorts. They are hoping to curb black money transactions and push society towards digital payments.

The push towards digital payments is strong.

The Reserve Bank of India removed charges for payments via NEFT and RTGS and asked banks to pass on the benefits to customers. This means that payments via NEFT and RTGS would become either free or charges would be drastically reduced.

This was recently announced in the Statement on Developmental and Regulatory Policies, which was released by the central bank as part of its monetary policy review.

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