Inheritance tax in India

SYLLABUS

GS 3 >> Indian Economy >> Taxation

REFERENCE NEWS

• In the recent Lok Sabha election campaigning, the proposal to introduce an Inheritance Tax in India has sparked a significant political dispute. Many view Inheritance Tax as a means to achieve fairer wealth distribution. However, there are apprehensions regarding its portrayal as a symbolic tool and its promotion as a populist measure under the guise of a "Robin Hood Tax".

ABOUT INHERITANCE TAX

• This tax is imposed on 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 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, a large number of litigations and high tax administration costs led to its scrappage by the Rajiv Gandhi Government in 1985.

NEED FOR INHERITANCE TAX

• Escalating Wealth and Income Disparities: India has witnessed a surge in wealth and income inequality, particularly in the post-liberalization era. The Credit Suisse 2018 Global Wealth Report reveals stark figures, with the top 1% holding 51.5% of the nation's wealth, and the top 10% controlling 77.4%. In contrast, the bottom 60% owns a mere 4.7%. This disparity underscores the need for redistributive measures like Inheritance Tax.
• Inclusive Growth Deficit: The Gini wealth coefficient, a measure of economic inequality, has risen from 81.3% in 2013 to 85.4% in 2017 in India, indicating a lack of inclusive growth. The prevailing economic growth has failed to benefit all segments of society equitably.
• Support for Social Sector Institutions: Inheritance Tax could provide crucial endowments and funds for vital social sector institutions in India, such as hospitals and universities. For instance, institutions like Harvard University receive substantial funds from estates.
• Fiscal Deficit Management: The government's fiscal deficit has surged following the COVID-19 pandemic. To address this challenge in line with the Fiscal Responsibility and Budget Management (FRBM) Act, exploring additional sources of direct taxes like the Inheritance Tax becomes imperative.
• International Precedents: Many developed countries, including England, France, Germany, and the USA, along with India's Southeast Asian counterparts like the Philippines, Taiwan, and Thailand, levy Inheritance Tax. Embracing similar practices aligns with global standards and could contribute to fiscal sustainability and equitable wealth distribution in India.

SIGNIFICANCE OF INHERITANCE TAX

• Mitigation of Inequality: By curbing the concentration of wealth within certain families, the Inheritance Tax plays a pivotal role in reducing intra-generational disparities and fostering inter-generational equity. This prevents a scenario where a few individuals amass disproportionate wealth while others struggle, thus promoting a more balanced distribution of resources across society.
• Increased Government Revenue: With a considerable portion of wealth often passing through inheritance, implementing a moderate Inheritance Tax, similar to other Asian countries like the Philippines, Taiwan, and Thailand, can significantly bolster government finances. This additional revenue can be utilized to fund various public welfare initiatives, including the expansion of social sector programs and the promotion of universal health insurance.
• Funding Social Welfare Programs: Inheritance Tax serves as a vital revenue source that enables the government to allocate greater financial resources towards public welfare endeavors. This includes initiatives aimed at enhancing healthcare accessibility, education, and other social services, thereby fostering societal well-being and development.
• Promotion of Meritocracy: By diminishing the undue advantages enjoyed by individuals solely due to their familial wealth, Inheritance Tax contributes to the creation of a more meritocratic society. This ensures that individuals' success is determined more by their abilities and efforts rather than their inherited privileges, fostering a fairer and more equitable social landscape.
• Progressive Taxation: Inheritance Tax is inherently progressive, as it places a higher tax burden on wealthy individuals who inherit substantial assets. This aligns with principles of fairness and equity in taxation, ensuring that those with greater financial means contribute proportionately more towards the common good and societal welfare. Ex: A global minimum tax on billionaires, equal to 2% of their wealth, could potentially raise close to $250 billion from fewer than 3,000 individuals annually.(Global Tax Evasion Report 2024).

CHALLENGES OF INHERITANCE TAX

• Complex Valuation Process: Valuing inherited property accurately can be a daunting task, requiring significant expertise and resources. The government would need to invest substantial funds and employ specialized professionals for property valuation and revenue collection, adding to administrative complexities and costs.
• Impact on Businesses: Inheritance Tax may exert additional pressure on less profitable or small businesses, potentially leading to financial strain or even closure. Recipients of inherited assets may struggle to meet tax obligations, leading to distress sales and adverse impacts on entrepreneurship and economic activity.
• Risk of Capital Flight: The imposition of Inheritance Tax could prompt affluent individuals and entrepreneurs to relocate or transfer their assets abroad to avoid taxation. This flight of capital and skilled human resources poses a risk to domestic investment and economic development.
• Dampened Capital Formation: Inheritance Tax may discourage savings and investment, as beneficiaries may prioritize immediate consumption over long-term wealth accumulation. This shift towards increased consumerism could contribute to higher inflation rates and dampen the spirit of capital formation, thereby impeding economic growth.
• Potential for Double Taxation: Critics argue that Inheritance Tax constitutes double taxation, as the inherited property or wealth may have already been subjected to taxation as earned income during the donor's lifetime. This perception of unfairness may undermine public support for the tax and complicate its implementation.

WAY FORWARD

• Establishing a Higher Threshold: Introducing an Inheritance Tax with a higher threshold can help mitigate concerns about its impact on middle-income families. By setting a threshold above a certain value, the tax can target the wealthiest individuals while providing relief to those inheriting smaller estates.
• Provision for Charitable Donations: Exempting endowments made to hospitals, universities, and other charitable institutions from Inheritance Tax calculations can incentivize philanthropy and support social welfare causes. This provision encourages the affluent to contribute to public goods and services while reducing their tax liability.
• Strengthening Tax Administration: Enhancing the government's tax administrative capacity is crucial for the effective implementation and enforcement of Inheritance Tax laws. Leveraging advancements in information technology, such as the Central Board of Direct Taxes' Project Insight, can streamline tax monitoring and compliance processes, reducing administrative costs and enhancing transparency.
• Reforming Complementary Taxes: Concurrent changes in complementary taxes like Wealth Tax and Gift Tax are essential to prevent tax evasion and ensure the effectiveness of Inheritance Tax. Measures such as increasing scrutiny of family trusts, such as the Hindu Undivided Family (HUF), commonly used for tax avoidance, can help close loopholes and promote tax compliance among high-net-worth individuals.

PRACTICE QUESTION

Q: Evaluate the efficacy of the Inheritance Tax as a tool for mitigating income inequality in India.(10M,150W)