Inheritance Tax in India: A New Approach to Wealth Redistribution?

The topic of inheritance tax has gained attention in India, particularly after Indian Overseas Congress chairman Sam Pitroda referred to the inheritance tax laws in the US as an “interesting law,” especially in the context of wealth redistribution. As discussions continue, it becomes necessary to understand the nitty-gritty details of inheritance tax, its implications, and the lessons from other countries.

What is Inheritance Tax?

Inheritance tax, sometimes called estate or death tax, is imposed on an individual inheriting assets from a deceased person. The legal heir, nominee, or beneficiary of the deceased’s property must pay this tax. However, it is essential to note that not all countries levy inheritance taxes.

In India, there is currently no inheritance tax on the transfer of assets or property to heirs. While no inheritance tax is charged on movable or immovable assets inherited, taxes apply to any income derived from these inherited assets. For example, if an individual inherits a house, they won’t have to pay any inheritance tax. However, they would be required to pay applicable taxes if they sell or rent out the house.

It is essential to differentiate inheritance tax from wealth tax and gift tax:

  • Wealth Tax is charged on the wealth of individuals exceeding a certain threshold, aiming to reduce wealth inequality.
  • Gift Tax is levied on money or property transferred as gifts between individuals.

Potential Features of an Inheritance Tax in India

While India currently does not have an inheritance tax, experts suggest that introducing such a tax could be a means of addressing wealth inequalities. If an inheritance tax is implemented, it would likely be levied on the deceased’s entire estate, covering both movable and immovable properties and investments. The deceased’s estate would be valued at the time of their death, and progressive tax rates would apply, with exemptions or thresholds to minimize the burden on low- to middle-income families.

To prevent tax avoidance, anti-avoidance measures like a “look-back” period could be implemented, alongside taxing sure gifts or transfers made before death. The government would likely establish a dedicated tax wing for assessing, collecting, and ensuring compliance through audits and enforcement. Clear legislative frameworks, taxpayer education, and robust administrative systems would be essential in ensuring the success of such a policy.

India’s Previous Experience with Inheritance Tax

India did, at one point, have an inheritance tax. The Estate Duty Act was introduced in 1953 but was abolished in 1985 by the Rajiv Gandhi-led government. The rationale behind scrapping the tax included high collection costs, tax evasion, and concerns over double taxation. Along with the inheritance tax, India also had a gift tax (abolished in 1998) and a wealth tax (repealed in 2015). In the 2016 Union Budget, the government announced the abolition of wealth tax, replacing it with a surcharge on the super-rich. A 10% surcharge is levied on personal income exceeding ₹50 lakh, with the maximum surcharge rate reaching 25% for those earning above ₹2 crore.

Although the reintroduction of inheritance tax has been discussed several times, including internally in 2019, it has not yet been implemented.

The Role of Inheritance Tax in Addressing Income Inequality

Proponents of inheritance tax argue that it could address the growing income inequality in India by taxing larger estates. The revenue from inheritance tax could fund public services and initiatives to support the underprivileged. Additionally, it could curb the intergenerational transfer of wealth, fostering economic mobility and reducing the concentration of wealth in a few hands.

As tax expert Sandeep Jhunjhunwala from Nangia Andersen notes, a progressive inheritance tax with exemptions for lower—and middle-income families could help promote a fairer distribution of wealth.

However, there are also opposing views. Sudhir Kapadia, Partner at EY India, believes India should focus on wealth creation before implementing an inheritance tax. He argues that introducing such a tax might not be advisable until the country generates sufficient wealth.

International Experience with Inheritance Tax

India isn’t alone in considering inheritance tax. At least 26 countries, including developed nations such as the US, UK, Germany, Japan, South Korea, France, and Italy, have implemented inheritance taxes, with rates varying from 4% to 80%.

In the US, for instance, certain types of trusts, like irrevocable trusts, can help heirs avoid estate taxes. Such trusts transfer the ownership of assets from the original owner to the beneficiaries without triggering inheritance tax.

Impact of Inheritance Tax on Government Revenue

Introducing an inheritance tax in India could increase tax collections. This could open up a new source of government revenue, especially targeting large estates that have been transferred across generations. If effectively structured, the revenue generated could be substantial and directed towards public services.

However, opponents argue that it could discourage savings and investments. Individuals may be reluctant to accumulate wealth if they know a large portion of it will be taxed upon inheritance. Additionally, inheritance tax could lead to legal disputes among heirs, further escalating financial and emotional burdens on families.

Akhil Chandna, Partner at Grant Thornton Bharat, raises concerns that inheritance tax could provoke litigation and create more complications for legal heirs.

Conclusion

The debate surrounding inheritance tax in India is multi-faceted. While it holds the potential to address wealth inequality and contribute to government revenue, it also presents challenges in terms of implementation, potential disputes, and discouraging savings. It is crucial for the government to carefully evaluate the lessons from international experiences and India’s past attempts before deciding whether to bring back an inheritance tax. The success of such a tax would depend on creating a clear legislative framework, implementing anti-avoidance measures, and ensuring effective administrative systems to enforce compliance. Until such measures are implemented, inheritance tax remains a contentious issue in India.

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