Inheritance Tax in India- Explained Pointwise

Recently, during the Lok Sabha elections campaigning, the issue of introduction of Inheritance Tax in India has led to the eruption of a major political row. Inheritance Tax is perceived by many as a taxation tool for equitable wealth distribution. However, there remains concerns about its use as a symbolic tool and its marketing as a Robin Hood Tax, for populism.

What is Inheritance tax? What has been its history in India? What is its status around the world?

Inheritance Tax- This tax is imposed on those those who inherit assets from a deceased person. The rate of this tax depends on the value of the property received by the heir and his relationship to the decedent. This tax is a form of death tax.

India’s history of Inheritance Tax

India used to impose another form of Inheritance Tax (Death Tax), which was popularly known as the estate duty. It was introduced in 1953. The Estate duty was levied on the market value of all immovable properties in India, as well as on all movable property passed on to successors upon the death of an individual. 

However, large number of litigations and high tax administration costs, led to its scrappage by the Rajiv Gandhi Government in 1985.

Inheritance Tax in US

In the United States, inheritance tax is levied on money or property that is inherited from a deceased person’s estate. The inheritance tax is fulfilled by the beneficiary. The tax is implemented in 6 states of US- Lowa, Kentucky, Maryland, Nebraska, New Jersey, and Pennsylvania.

Calls to tax billionaires to build more equitable societies have been growing louder globally.

a. Levying a global minimum corporate tax rate
b. Proposal in the US to levy a minimum 25% tax on taxpayers with wealth over $100 million.
c. France and Brazil have been pushing for a G20 declaration on taxing the super rich

Why has there been growing demands for the implementation of Inheritance Tax in India?

1. Rising wealth and income inequality in India- In the post-liberalisation period of the Indian economy, the wealth and income inequality has been rising in India. According to Credit Suisse 2018 Global Wealth Report, the richest 1% own 51.5% and the richest 10% account for 77.4% of the nation’s wealth. Bottom 60% of the population own only a meagre 4.7% nation’s wealth.

2. Lack of Inclusive Growth- The Gini wealth coefficient in India has gone up from 81.3% in 2013 to 85.4% in 2017 (100% represents maximal inequality). The growth in India has not been inclusive.

3. Endowments to Social Sector Institutions- Indian hospitals, universities, and other institutions need endowments and funds from inheritance tax. For ex- Harvard University receiving funds from estates, is exempt from Inheritance tax.

4. Need for more direct taxes- The government’s fiscal deficit has increased after the COVID-19 pandemic. Hence, additional sources of direct taxes like inheritance tax need to be explored to contain the fiscal deficit as mandated by the FRBM Act.

5. International practices– Developed countries such as England, France, Germany, the USA and India’s South East Asian counterparts like Philippines, Taiwan and Thailand have been charging inheritance tax.

What are the benefits of Inheritance Tax?

1. Reduction of inequalities- The inheritance tax reduces Intra-Generational Inequality and promotes Inter-Generational Equity by preventing the concentration of income and wealth in the hands of a few.

2. Greater financial resources for Govt- According to an Oxfam Survey of 2018, 51 of a total of 101 billionaires are more than 65 years old and collectively own ₹10.54 trillion. A moderate inheritance tax of 10-15% (like other Asian countries such as the Philippines, Taiwan and Thailand) can act as a stable and significant source of revenue for the government.

3. Greater Revenue to fund public welfare- Inheritance tax provides additional sources of revenue to the government for expansion of social sector programmes, and its push towards universal health insurance.

4. Creation of meritocratic society- It will help in creation of a meritocratic society by chipping away the advantages the children of the wealthiest families enjoy by accident of birth. The redistribution of initial endowments can help in the establishment of optimal social state.

5. Progressive in nature- Inheritance tax is a progressive tax as it places a higher tax burden on wealthy individuals only.

What are the Challenges in the implementation of Inheritance Tax in India?

1. Difficulty in evaluation- The government will have to incur large levels of expense and expertise in the valuation of property and collection of the revenues accruing from inheritance tax.

2. Risk of closure of businesses- Inheritance tax will create extra pressure on less profitable businesses and small businesses, as the recipient of the property may not have the money available to pay tax. This could also lead to situations of distress sale.

3. Flight of Capitals and Entrepreneurs- Inheritance tax can result in the outflow of entrepreneurial human capital and financial resources.

4. Dampening of capital asset creation and high inflation- Inheritance tax can discourage savings and increase consumerism. This can result in high inflation rates in the economy. Also, the tax can dampen the spirit of capital asset creation which can hamper the economic growth.

5. Secondary Tax leading to double taxation- Inheritance tax is criticized for double taxation as the property or money inherited has already been taxed as earned income.

What should be the way Forward?

1. Introduction of higher threshold- If the government intends to introduce inheritance tax, it should introduce it with a higher threshold.

2. Making provisions for donations to hospitals and universities- The endowments by the super rich to the hospitals and universities should be exempted from the inheritance tax calculations.

3. Improving the government’s tax administrative capacity- The tax agencies should draw strength from the information technology revolution to reduce the marginal cost of administering and monitoring compliance of inheritance tax. For ex- Usage of Project Insight of the Central Board of Direct Taxes.

4. Changes in complementary taxes- The government must make changes in complementary taxes like the Wealth Tax and Gift Tax to ensure that inheritance tax is not evaded by the super rich. For ex- Increasing evidence of the creation of family trusts such as the Hindu Undivided Family (HUF) by high net-worth individuals for tax avoidance purposes.