Bringing Back the Past: Is India Ready for an Inheritance Tax Revival?

The author is Aditi Srivatsala Astakala, Penultimate Year Student at School of Law - Mahindra University

Abstract

Although log abolished, Indian Inheritance tax remains a hot topic in the tax policy discussions as recently the centre hinted at its possible revival. It was initially enacted in the year 1953 as Estate Duty which sought to foster fair wealth distribution and raise state revenue. It was criticized for its complex laws, modest fiscal returns, and perceived double taxation. Thus, it was repealed in the year 1985. The wealthiest 10% in India provide over 77% of the nation's total wealth. Reintroducing the inheritance tax, according to supporters, might help address this imbalance and provide a steady stream of revenue.

In order to address social equality and limit intergenerational wealth transfers, nations such as the United States, the United Kingdom, and Japan impose inheritance taxes. In contrast to these systems, India's approach ignores the global redistributive and fiscal effects. Therefore, a move to alleviate India's wealth inequality and improve fiscal capacity may involve reintroducing the inheritance tax. This continuing discussion highlights the inheritance tax's ability to change India's socioeconomic landscape, regardless of whether it is seen as a price on achievement or a tool for justice.

Introduction

Since Independence a number of changes have been made to the tax laws in India. Inheritance Tax or Estate Duty has been one of the most debated topics in the past and even in present as the recent indications by the government indicate a reintroduction of the same. Inheritance tax, if simply put, is a tax levied on the property or the estate of the person who has died at the time of his/her death. This tax is levied on the value of the assets which the legal heirs inherit. Inheritance tax is perceived to be an unpopular topic across the globe as most believe that it is a form of double taxation, but if implemented rationally, the inheritance tax may result in a constant source of stabilized income to the government.

History of Inheritance Tax in India

After Independence in 1947, the Indian government felt the need to regulate inheritance and introduced the first ever inheritance or estate tax during 1953. It was known as the Estate Duty tax, 1953 (the “Act”). It is a tax which is levied on the total value of assets that is being inherited by the successors of the individual who died. The tax is calculated upon the deceased’s property at the time of his/her death. And such tax is only payable only in certain circumstances where the total value of the inherited portion of the property exceeds the prescribed limit mentioned in the Act. In India, estate duty was set at a rate as high as 85% (eighty-five per cent).

Under this law, the liability on estate duty was triggered by the death of the property owner. This tax was charged on all the property of the deceased person, whether it’s situated in India or not. One exception to that rule is the estate duty is not applicable to the immovable property which is situated outside India. The term “property” under Estate Duty tax has a wider connotation, encompassing everything under it such as immovable and moveable assets, interest in expectancy, interest in co-parcenery property, debt, enforceable rights etc. However, after almost 30 years, the estate duty law was abolished in the year 1985.

Abolition Of Inheritance Tax In India

Like other tax laws, inheritance taxes were intended to strengthen national income and improve the terms of wealth accumulation, thus enhancing the equitable distribution of wealth Despite these well-intentioned goals, the estate tax met with considerable opposition during its three-decade existence. Complex legislation, particularly differential taxation rules for different properties, led to an increase in litigation over property disputes. Critics argue that the combination of property costs and wealth taxes is a double taxation on the same basis, and imposes an unreasonable burden on taxpayers. Revenue from estate duty is relatively modest, which accounted for a small share of the total direct taxes collected by the central government.

In addition, the large number of lawsuits stemming from the complexity of the regulations has significantly increased operating costs. The rampant use of benami properties highlighted the need for effective legislation to curb such practices. Illegal concealment of inherited assets from tax assessments contributed to the decline in tax collections. The Estate Tax Act was repealed in 1985, mainly because of the high time and cost involved compared to real income. Critics also argued that the estate tax hindered the finances of Indian families.

Implications of the Absence of Inheritence Tax in India

The absence of inheritance tax in India, the policy reforms implemented in 1985 had a significant impact on various elements of the country’s economy, especially on wealth distribution and taxable income. This decision had many telling effects social and economic fabric of India. One notable consequence is the potential income the state has given up by not having inheritance tax in place. A conservative estimate suggests that India could have collected around Rs 30 billion if it reintroduced the estate tax, underlining the importance of this tax in helping the country’s revenue. This foregone revenue represents a missed opportunity for the Indian government to enhance its fiscal capacity, especially considering the increasing demands on public resources for essential services and infrastructure development.

Furthermore, the absence of inheritance tax plays an important role in the accumulation of wealth. India is dealing with massive income inequality, with a large share of the country’s wealth concentrated in a very small segment of the population. The top 10% of the Indian population currently consumes a staggering 77% of the country’s total wealth. Such concentration has implications for economic inequality and social cohesion, emphasizing the need for effective measures to address wealth distribution

India has no inheritance tax, and other form of taxes come into play when you acquire property. Income tax, capital gains tax and wealth tax apply in these circumstances, which have implications for individuals receiving property. For example, the sale of hereditary assets triggers tax implications, which means that irrespective of the specific inheritance taxes, the Indian tax system deals with wealth transfers through various mechanisms.

The global comparison gave us an insight into India’s tax scenario. Experience with the wealth tax which ended in 2015 shows that it does not contribute much to the revenue, accounting for only Rs 1079 crore or 0.05% of the total tax revenue versus other countries like Ireland and Japan where property, the severity of gift or estate taxes varies, ranging from 33% to more than 50%. This global perspective highlights the potential of property taxes to play an increasingly important role in India’s economic system.

One possible consequence of not paying estate taxes is the risk of tax evasion. Wealthy individuals and corporations can take advantage of the specific inheritance tax exemption, avoiding taxes or paying only a fraction of the amount owed. This approach can bridge the gap between rich and poor expanded, perpetuated economic inequality and undermined the principles of a fair and just tax system.

In conclusion, the decision to eliminate the inheritance tax in India in 1985 has reverberated through various aspects of the country's economic landscape. The concentration of wealth among a few, the foregone revenue potential, and the potential for tax evasion highlight the ramifications of this policy choice. Reintroducing an inheritance tax or implementing alternative measures, such as a wealth tax, could serve as crucial steps in addressing these issues and fostering a more equitable distribution of wealth in India. These policy considerations are not merely fiscal measures but pivotal elements in shaping the socio-economic fabric and promoting a fair and just society.

In conclusion, India’s decision to abolish inheritance tax in 1985 has aligned with the economic conditions of the country. Investing some wealth, potential subsequent cash flows and possible tax avoidance highlight the effects of this policy. Other measures such as the reintroduction of inheritance taxes or estate duty can be an important step in addressing these issues to ensure equitable distribution of wealth in India. These policy considerations are not only economic policies but also fundamental elements in shaping the social and economic fabric and promoting a fair and equitable society.

Comparative Analysis of Global Inheritance Tax Systems Addressing Wealth Inequality and Economic Redistribution

The United States, the United Kingdom, Canada and France have adopted inheritance taxes to address social inequality and facilitate the redistribution of wealth. In these countries, inheritance taxes not only act as additional forms of government revenue but also in line with the broader goal of advancing economic equity.

The introduction of the inheritance tax in England in 1894 marks a pivotal moment in the history of inheritance taxation. Property charges incurred as ‘back taxes’ were made on the assumption that the property owed the state. The underlying philosophy holds that the state's claim to share in the accumulated wealth of the deceased takes precedence over the determination of access. This view emphasizes the social obligation to contribute to the welfare of all by paying taxes on emphasis on inherent wealth. In these countries, property taxes are not just a fiscal tool but a means of curbing inflation in the residential market. By selling a required property for tax purposes, property tax indirectly affects market dynamics, introducing additional assets and causing supply to match growing demand.

In the U.S. it is viewed as a means of preventing the concentration of wealth in a few hands, giving citizens equal rights regardless of their socioeconomic status. Inheritance taxes applied to an individual’s worldwide assets is 40%, with a generous exemption threshold. In addition, many states impose a domestic estate tax, further complicating the tax process.

The United Kingdom recognizes a uniform system of estate and gift taxes called inheritance tax. This tax is levied on the worldwide estate of a deceased UK resident. The standard estate tax rate is set at 40%, with varying exemptions depending on the relationship between the deceased and the beneficiary e.g., if the property is passed on to children or grandchildren, the threshold spikes.

In Canada, although there is no estate tax, tax rates for individuals are determined based on where they live. A transfer of an asset after death is considered a quantifiable asset and may result in the recognition of capital gains or losses. Profits are then taxed at the proper rate of capital gains. This approach ensures that both residents and non-residents pay taxes based on the use of their worldwide assets.

France, on the other hand, uses a progressive inheritance tax rate of 5% to 60%, which varies according to the relationship between the beneficiary and the deceased. Beneficiaries fall into categories such as children, parents, siblings, his nieces, or nephews can get tax rates as low as 5%. Conversely, beneficiaries outside these categories could face a 60% higher tax rate. Beyond the countries mentioned, the aggregate global assessment shows considerable variation in property taxes.

In Japan, tax rates range from 10% to 70%, while South Korea has taxes as high as 50%. Spanish property tax rates range from 7.65% to 34%. These taxes are generally levied only when the value of an estate exceeds specified limits, and the amount is usually based on the relationship between the value of the estate and the beneficiary and decedent.

In conclusion, the international trend on inheritance tax reflects a shared commitment among countries to address wealth inequality and promote economic redistribution. The varying rates and thresholds underscore the nuanced approaches adopted globally, each tailored to the socio-economic context and goals of the respective nations. These inheritance tax systems not only generate revenue for governments but also play a crucial role in shaping societal values around wealth and its intergenerational transfer.

Conclusion

In conclusion, India's inheritance tax, introduced in 1953 and abolished in 1985, remains a subject of ongoing debate, with recent government indications suggesting a potential reintroduction. The tax, levied on inherited property, faced challenges during its existence, including complex legislation, differential taxation rules, and criticism for perceived double taxation. The decision to abolish the estate duty in 1985, despite well-intentioned goals of strengthening national income and promoting wealth distribution, had significant implications.

The estimated Rs. 30 billion in revenue represents a lost opportunity for the government to increase fiscal efficiency amid increasing demand for public resources. The absence of an estate tax since 1985 contributes to the accumulation of wealth, with the top 10% of the population holding 77% of the total wealth of the nation. Optional taxes such as fees, capital taxes and wealth tax come into play when transferring property, but it's not specific focus on inherited wealth.

Global comparisons with countries such as the United States, the United Kingdom, Canada and France highlight the potential benefits of an estate tax. These countries use inheritance taxes to address social inequality and facilitate the redistribution of wealth in line with broader goals of economic equality. The potential restoration of inheritance taxes, according to recent government indicators, could be transformative in addressing wealth distribution challenges. Whether it is viewed as a stabilizing source of government revenue or a means through which a more equitable society is achieved, the discourse on inheritance tax in India continues to evolve.