Disapproving the idea of an inheritance tax, Reserve Bank of India (RBI) governor Raghuram Rajan has advocated a “cultural change” which pulls the rich towards philanthropy or giving back to the society.
“I would argue rather than a blanket inheritance tax, let’s change the culture. Make it such that people don’t want to leave a lot of wealth for their children,” he said while delivering the keynote address at DD Kosambi Festival of Ideas in Panaji over the weekend.
The industry has been demanding the introduction of inheritance tax — an estate tax that people have to pay for inheriting a priced property — in the upcoming budget as one of the means to increase tax collections and generate additional revenues to address the fiscal deficit situation.
A majority of Indian companies are family owned, In a recent seminar, industrialist Adi Godrej, who is also the head of the Godrej group, said 95% of the registered companies in India are family-managed businesses.
The RBI governor said such a tax serves limited purpose. “I think rather than bringing people down our focus should be on taking people up,” he said. “Inheritance tax only helps the lawyers in the society. A dramatic estate tax generates value for lawyers as they figure out ways to hide the estate so that it does not get taxed.”
He added that the reason the median voter rationally agrees to protect the property of the rich and tax them moderately may be “that she sees the rich as more efficient managers of that property, and therefore as creators of jobs and prosperity that everyone will benefit from. So, to the extent that the rich are self-made, and have come out winners in a competitive, fair, and transparent market, society may be better off allowing them to own and manage their wealth, settling in return for a reasonable share of their produce as taxes.”
(with agency inputs)