Tax inheritance,luxury items: Chidambaram

To mobilise more resource,the government can consider taxing conspicuous consumption and imposing inheritance tax,according to Home Minister P Chidambaram.

To mobilise more resource,the government can consider taxing conspicuous consumption and imposing inheritance tax,according to Home Minister P Chidambaram,who was the finance minister during the first four years of the United Progressive Alliance-I government. He said this at the Full Planning Commission meeting chaired by Prime Minister Manmohan Singh on April 21.

We are really underestimating our capacity to raise resources,especially tax resources, he is learnt to gave said during the meeting where Finance Minister Pranab Mukherjee was also present. Chidambaram observed that since non-Plan expenditure was difficult to contain,the tax-GDP ratio must be raised especially by taxing conspicuous consumption and imposing inheritance tax.

Inheritance tax is also known as estate tax and arises in the event of an individuals death and the assets are given to the legal heir(s). In India,such an inheritance is exempt from taxes and income arising out of such inheritance is subject to ordinary tax rates.

The practice of charging estate duty,i.e. when the estate of the deceased is passed on to the legal heir,was started in 1953,but was discontinued in 1985. Experts said this was also a means to tax the super-rich who pass on significant wealth to the next generation.

The tax on conspicuous consumption,also known as luxury tax,is generally imposed on products or services that are deemed to be unnecessary or non-essential. It is in the nature of an indirect tax and is borne by those who indulge in such purchases. Currently,luxury tax is levied by some states including Delhi,Maharashtra,and Goa on services such as stay in hotels that charge over a threshold,lodges etc. It differs from state to state.

According to finance ministry data,tax-GDP ratio has been declining and stood at 10.8 as against 11.9 in 2007-08. A declining tax to GDP ratio is a cause of concern because it reflects poorly on the state of tax administration,the scope for taxation as well as the efficiency of collection.

According to tax experts,the government should conduct an in-depth study of pros and cons of such taxes so that it does not impact the middle class. The aim of the government is to generate more revenues but it should not be done at the cost of middle class. The government should look at an appropriate threshold,really high,so that poor people dont get impacted by such an inheritance tax, Amitabh Singh,tax partner,Ernst and Young said.