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Smells like legacy tax in budget
Who will be affected by the so-called inheritance tax?
Those who have formed private trusts.
What is a private trust?
A trust that is not a charity. A private trust is usually formed to ensure that inheritance is not splintered. For instance, let’s take A who has four children. In the absence of a trust, A’s wealth — which can include shares, property, gold, paintings, etc. — may have to be split into four if the children insist so. But if a private trust is created with the four children as the beneficiaries, the assets can remain undivided. Or, if the asset is an industrial enterprise, the continuity of the business can be ensured even while the children are being assured of the inheritance.
What does the budget propose?
Till now, dividend the trust earned from the companies under its watch was exempt from the dividend distribution tax, which works out to 10 per cent of the dividend. But after April 1, if the budget is passed unchanged, the trust will have to pay the dividend distribution tax.
Two, capital gains tax (15 per cent) will have to be paid if the trust sells the shares of the company. Till now the sale of shares acquired as gifts did not attract the capital gains tax.
Three, even if the assets are transferred to the trusts without payment or after inadequate payment, it will be treated as income and the trusts will have to pay tax on that income. Till now, such transfers did not qualify as income.
Who are likely to be hit the most?
Industrialists who had finalised succession planning that involves private trusts will be affected. Corporate restructuring plans driven by inheritance concerns will also be hit. Some industrialists fear that the changes are precursors to a formal inheritance tax. The “anti-rich” discourse — underscored by demonetisation and the Prime Minister’s barbs such as “kadak chai (strong tea)” — is further fuelling this fear psychosis.