By Shanker Man Singh

The 'High-Level Economic Reforms Suggestions Commission', formed under the coordination of former Finance Secretary Rameshwor Khanal, has recently mentioned in Schedule 4, under the heading "Significant Suggestions Received from Various Bodies and Individuals" that the government should levy tax even on the transfer of ancestral property, under the heading "Income Tax/Property Tax", "0-30 percent tax will be imposed on the transfer of ancestral property depending on the geographical area." Although this suggestion is not in the proposal, it seems that the intention is to discuss this.

In the past, the Ministry of Finance had also initiated discussions to propose a tax on ancestral property transfer to the Revenue Board to broaden the scope of revenue, perhaps as the Finance Minister was from the UML.

 Although the practice of the state levying tax on ancestral property transfer is common in most countries, it is not a good example to imitate developed countries without studying the situation in our neighboring country India, which was later withdrawn after it was implemented.

In Nepal, after the provinces, including federalism, and other current expenses, and the government's expenses cannot be met from existing tax sources, it seems that it has started looking for new areas of revenue.

Given the country's social and economic structure, it would not be an exaggeration to say that further discussion and careful consideration are necessary and essential.

Some economists seem to have a completely different view and say that the purpose of taxing inherited wealth is to reduce the wealth of the wealthy. Some believe that it is not a hard-earned asset that the person who inherits inherited wealth should be taxed well, but it should be realized that that asset is also lagging in terms of taxes.

In general, such taxes are imposed in developed countries. In this context, according to the Tax Foundation, Japan is the country with the highest tax on inherited wealth.

Here, taxes are levied at up to 55 percent. The second highest tax is in South Korea. Where inherited wealth is taxed at 50 percent. In the UK and the US, taxes are levied at up to 40 percent.

Inheritance tax or property tax is a transfer tax based on the value of the property you transfer. It is called an estate tax when the property is transferred at death and is called a gift tax when it is transferred during life, but the effect is the same.

This is double taxation to the extent that it taxes assets that are subject to income tax. But your assets are not subject to income tax at all, such as retirement plans and assets with valuations that are not taxed because the assets are not sold.

Some people opine that an inheritance tax is just another government grab. Everything inherited has already been taxed with every type of tax that could be paid!

So it should not be imposed in any way! If you inherit property from your parents or grandparents, it is not taxable income at the time of inheritance. But if you sell that property at a later stage, you will have to pay capital gains tax on it.

If the property is inherited, the cost of acquisition of the original buyer, say your father, will be taken into account to arrive at the gain amount. The holding period should also be calculated from the previous owner to determine long-term or short-term capital gains.

Adam Smith also thought so. He advocated a full confiscation tax on assets larger than necessary to provide for a living family (mostly children), on the grounds that capitalism works based on competition and that it is not good for the system for some people to start with a significant advantage based on the accident of birth rather than on the work they do. Thomas Jefferson also did the same; he saw the development of a hereditary aristocracy as an inevitable consequence of allowing wealth to grow unchecked and thought that this was corrosive to a democratic republic. In neighboring India, the tax rules for inherited wealth consist primarily of two types of taxes: an inheritance tax (which does not apply in India) and a capital gains tax on the sale of the property.

India does not impose an inheritance tax. This means that when you acquire property, you do not have to pay any tax on the value of the property you acquire.

When you sell inherited property, you may be liable to pay capital gains tax. The tax implications depend on how long the property was held before the sale.

If the property is sold within two years of inheritance, any profit on the sale is considered short-term capital gains and taxed at the applicable income tax slab rate.

If the property is sold after holding for two years, it is classified as a long-term capital asset. Long-term capital gains are taxed at 20% along with indexation gains, which adjusts the purchase price for inflation.

For inherited property, the cost of acquisition is considered to be the fair market value (FMV) of the property on the date of death of the previous owner. This value is considered the basis for calculating capital gains on the sale of the property. Exemption under Section 54; If the proceeds from the sale of the inherited property are reinvested in the purchase of another residential property, the seller can claim exemption under Section 54 of the Income Tax Act, subject to certain conditions.

It is important to have proper documents related to the estate, such as a will, death certificate of the deceased and any other relevant legal documents, to determine the chain of succession and value of property.

In summary, while there is no inheritance tax in India, the capital gains tax implications depend on the holding period of the property. If you are planning to sell an inherited property, it is advisable to consult a tax professional to ensure compliance with tax rules and explore any possible exemptions.

The hard-earned wealth of ancestors is not subject to tax. The government is only entitled to levy this tax if the state itself is doing its best to provide employment, education, health, and housing to the people.

Some people opine on social media that what is the moral basis for the government to impose such a tax on the wealth that ancestors have left behind for their descendants with their hard-earned wealth?

In such a case, it would be a situation where one would have to sell the ancestral house to pay the tax. In a country like ours, where income tax is already high at 30/35 percent, the proposal to impose a 30 percent tax on ancestral property is ridiculous and regrettable.

Inheritance tax policy is becoming increasingly controversial. Inheritances are growing - both in absolute terms and relative to the lifetime financial resources of those who receive them. This makes the design of inheritance taxes more important over time. The argument for an inheritance tax, also known as a tax, includes several key points:

Taxes are seen as a way to promote economic equality by redistributing wealth. By taxing large estates, governments can reduce the concentration of wealth among wealthy families and free up resources for public services and social programs that benefit society as a whole.

Inheritance taxes can generate significant revenue for governments. This revenue can be used to fund essential services such as education, healthcare, and infrastructure, which help support the broader economy.

By taxing large estates, individuals can be encouraged to engage in philanthropy or charity during their lifetimes, rather than leaving large sums of money to their heirs. This can increase funding for nonprofits and community initiatives.

Inheritance taxes can help prevent the establishment of financial dynasties, where wealth is passed down from generation to generation without being taxed. This can promote a more meritocratic society where individuals are rewarded based on their contributions rather than their family wealth.

By taxing inherited wealth, the argument is that individuals can be encouraged to use their wealth in more productive ways, such as investing in businesses or contributing to their communities, rather than depleting it.

In some cases, inheritance taxes can help address fiscal imbalances resulting from ageing populations, where the transfer of wealth from older to younger generations can create inequalities in financial security and opportunity.

While these arguments support the implementation of an inheritance tax, there are also arguments against it, such as double taxation (income tax already levied), potential negative effects on savings and investment, and the administrative complexities involved in tax assessment and collection.

The debate over inheritance tax often revolves around finding a balance between equity and economic incentives. In the US, there is an inheritance tax. If someone has a fortune of $100 million and can only pass on 45 percent to their children when they die, the government takes 55 percent. It’s an interesting law. In neighboring India, inheritance tax has been in the news from time to time since it was abolished in 1985.

Many times, before the Union Budget is presented in India , the Finance Minister has speculated whether it will be reintroduced. Inheritance or wealth tax accounts for only 0.5 percent of total tax revenue on average in the 24 countries in the OECD group that have such taxes, mostly developed countries. The inheritance tax in neighboring India was abolished in 1985 because it neither helped reduce economic inequality in society nor did it contribute significantly to the exchequer.

In 1984-85, the total tax collected under the Wealth Tax Act was Rs 200 million, but the collection costs were very high because of the complex calculation structure that gave rise to many cases. India imposed an inheritance tax between 1953 and 1985. Early budget documents from the 1980s show that the Indian government collected only Rs 200-400 crore from the tax each year, which is about 0.02% of all tax revenue.

Although the inheritance tax is meant to be levied only on the very rich and promises to generate large collections, in reality, it fails to deliver on its promise. Many experts believe that an inheritance tax in India is a bad idea at this stage. In developed countries that impose inheritance taxes, unlike India, it is said to be appropriate only where there is a structured social security and retirement scheme.

"Nepal is an underdeveloped country and still has a long way to go to become a developed economy. We are struggling with basic infrastructure issues in Nepal. At present, we need to encourage the spirit of entrepreneurship so that more private investment takes place, which will provide jobs and better opportunities. Furthermore, such a tax could lead to the exodus of high-net-worth individuals to countries without this tax. These wealthy individuals would not only be taking their money out of Nepal but also their entrepreneurial skills which are much needed as Nepal aims to continue growing at a high rate.

The tax also poses some practical problems. The tax levied on the value of the deceased's assets and paid by their heirs can suddenly translate into a huge financial burden for the heirs.

When an asset that has appreciated several times over the decades is passed on to an heir, the heir may sell the asset to generate the amount of tax payable on the estate.

Also, it can be very difficult to determine the value of some inherited assets, such as family antiques. If we want to make society inclusive and entrepreneurial, we need to create a sense of earning and living.

According to some people, it is appropriate to impose such a tax to reduce economic inequality and at the same time develop entrepreneurship. For example, there should be arrangements to impose low or zero taxes on the transfer of wealth earned through one's own enterprise and hard work, and higher taxes should be imposed on wealth earned through monopoly businesses obtained through government access.

The children of those rich people are not that rich. That may also be possible in highly monetized countries. However, it does not seem easy in Nepal.

It may be right to impose taxes based on economics, but it should not disrupt society. Therefore, this tax should be imposed at a very low rate initially.    The ratio of taxes to the gross domestic product of Nepal is almost comparable to that of developed countries.

In other words, tax revenue has not decreased, but government proportional expenditure has increased unreasonably. Again, in Nepal too, the issue of imposing taxes on ancestral property is currently in the news.

After the country went into federalism, the common citizen, who is affected by double/triple taxation, has been affected by the issue of imposing taxes on ancestral property.

The private sector says that it will be a matter of concern if the government imposes taxes on ancestral property. This will discourage private sector investment, and the private sector itself is establishing large-scale industries.

After their descendants, that industry will definitely go to their sons and grandchildren. If the hard work done by the future generations does not benefit the future generations, why does the investor increase the investment or does his company have to go public, this is not so easy and this negatively affects micro, small and medium entrepreneurs.

According to some economists, it is not relevant to tax ancestral property in Nepal at the moment. In a country where the government has taken responsibility for the education, health and social security of the citizens in their childhood, youth and old age, there is an argument for taxing ancestral property. What has the government given to the citizens in Nepal and taxing their ancestral property? The issue of social security has just come up, but it has not been implemented properly.