Inheritance Tax in India – A Looming Debate

Have you ever wondered what happens to the tax burden on wealth after someone passes away? In India, unlike many developed nations, there is currently no national inheritance tax. However, the topic has recently sparked debate, with some suggesting its reintroduction. Let’s delve into the complexities of inheritance tax in India, exploring its history, the arguments for and against its return, and the current state of affairs.What is Inheritance Tax?Inheritance tax, also known as estate duty, is a levy imposed on the value of assets inherited from a deceased person. Essentially, the government collects a share of the wealth transferred from the deceased to their beneficiaries. This tax is typically applied before the inheritance is distributed to heirs. It’s important to distinguish inheritance tax from other taxes related to death, such as capital gains tax, which may apply when inherited assets are sold.A Few Inheritance Tax Law Applicable in Some World EconomiesCountryInheritance Tax TypeRatesExemptionsSourceCanadaNoneN/AAll assets inherited by a spouse are exempt.https://www.fidelity.ca/en/insights/articles/canadian-inheritance-tax/ChinaNoneN/ASome inheritances from close relatives are exempt.https://www.chinajusticeobserver.com/a/does-china-have-inheritance-tax-2FranceEstate Tax18% – 60% (progressive)Spouses and registered partners are largely exempt.https://www.cjfinance.co.uk/inheritance-tax-france-ultimate-guide/GermanyInheritance Tax7% – 50% (progressive)Spouses and partners are partially exempt.https://n26.com/en-de/blog/german-inheritance-taxIndiaNoneN/AAbolished in 1985.https://www.tataaia.com/blogs/tax-savings/what-is-inheritance-tax-in-india.htmlJapanInheritance Tax10% – 55% (progressive)Spouses are partially exempt.https://www.nta.go.jp/english/taxes/others/02/index.htmSingaporeInheritance Tax3% – 20% (progressive)Spouses are exempt for the first S$400,000https://www.iras.gov.sg/taxes/other-taxes/estate-duty/estate-dutySouth KoreaInheritance Tax10% – 60% (progressive)Spouses are partially exempt.https://pureumlawoffice.com/blog-updates/korea-inheritance-tax/United Kingdom (UK)Inheritance Tax0% – 40% (flat rate above £325,000 threshold)Spouses are exempt.https://www.gov.uk/browse/tax/inheritance-taxUnited States (US)Estate TaxUp to 40% (flat rate above $12.9 million threshold)Spouses are exempt. Capital gains tax applies.https://www.irs.gov/businesses/small-businesses-self-employed/estate-taxHistory of Inheritance Tax in IndiaIndia has a brief history with inheritance tax. The Estate Duty Act was introduced in 1953, aiming to address wealth inequality by taxing the estates of the very wealthy when passed on. This tax system functioned progressively, meaning higher tax rates were applied to larger estates.There was also an exemption for inheritances below a certain value. Unfortunately, details about the specific tax brackets are difficult to find without extensive historical research. However, sources suggest the tax rate could be as high as 85% for estates exceeding Rs. 20 lakh (apply time value of money), indicating a potentially low exemption threshold and a significant rise in tax rates for wealthier inheritances.Despite these efforts, the estate duty faced challenges in its implementation. Issues like low revenue collection due to high exemption limits and difficulties in tracking assets led to its abolishment in 1985 by the then Rajiv Gandhi government.The Debate for ReintroductionThe potential return of inheritance tax in India has ignited a national conversation. Recently, there was a remark from Mr. Sam Pitroda that let the ball rolling on the topic of inheritance tax.Proponents of its reintroduction argue that it can serve several crucial purposes:Reducing Wealth Inequality: A significant argument for inheritance tax is its potential to lessen the gap between the rich and the poor. By taxing a portion of large inheritances, the government could generate revenue that could be used for social programs aimed at uplifting the underprivileged. This could help create a more equitable society where opportunities are not solely determined by birthright.Boosting Government Revenue: Inheritance tax can be a significant source of income for governments. In countries with established inheritance tax systems, it contributes a notable portion of government revenue. This additional revenue could be used to fund various public services like infrastructure development, education, and healthcare.Examples from Developed Nations: Many developed nations, such as the United States and several European countries, have well-established inheritance tax systems. Proponents argue that India could learn from these examples and implement a fair and effective inheritance tax system that benefits society as a whole.The potential for increased government revenue and reduced wealth inequality are compelling arguments for the return of inheritance tax. However, some concerns and challenges need to be addressed.Concerns and ChallengesWhile the idea of inheritance tax holds some promise, its reintroduction wouldn’t be without its fair share of concerns:The burden on Families: Critics argue that inheritance tax could place a significant financial burden on families inheriting assets, especially those with moderate wealth. They might have to sell inherited assets quickly to pay the tax, potentially forcing them to part with sentimental belongings or disrupting financial plans.Complexity of Implementation: Designing and implementing a fair and effective inheritance tax system can be complex. Determining appropriate tax brackets, exemptions, and valuation methods for various assets requires careful consideration. Additionally, concerns exist about potential loopholes and the possibility of increased tax evasion.Discouraging Investment and Philanthropy: High inheritance tax rates could discourage wealthy individuals from investing in India or engaging in philanthropy. They might relocate their assets to countries with lower inheritance tax burdens, ultimately hindering economic growth and charitable giving.Double Taxation Concerns: Some argue that inheritance tax represents a form of double taxation. The deceased would have already paid taxes on their income throughout their lifetime, and taxing the same wealth again upon inheritance seems unfair.These concerns highlight the complexities of inheritance tax and the need for careful consideration before its potential reintroduction.Current Situation and FutureAs of today (April 29, 2024), there is no national inheritance tax in India. The debate surrounding its return continues, with both sides presenting valid arguments. In my view, the government might not be considering its reintroduction. But if any government is thinking about it, such a tax must be backed by concrete plans, Otherwise, the cost of maintaining such a tax law will exceed its benefits.The ongoing debate reflects India’s evolving economic landscape. As the nation’s wealth gap widens, some policymakers might view inheritance tax as a tool for promoting social justice. However, the potential economic and administrative challenges require careful analysis.Unveiling a Global Legacy: Comparing Inheritance Tax Policies of Former British ColoniesIndia’s inheritance tax story is a fascinating one, marked by its abolition in 1985 and the subsequent failed attempt at revival in 1989. But how does this policy choice compare to other nations that share a similar historical link – their past as British colonies? Let’s embark on a global journey to understand how inheritance tax is structured in these countries.We’ll delve into the tax systems of places like Singapore, the United Kingdom (Britain itself), and potentially even the United States. By looking at their inheritance tax rates, exemptions, and any existing loopholes, we can identify both similarities and differences in their approaches.More importantly, we’ll explore the impact these policies have had on wealth distribution and social mobility within these nations. Does a robust inheritance tax system foster a more equitable society, or are there unintended consequences?This comparative analysis will offer valuable insights into India’s ongoing debate on inheritance tax. By understanding the global picture, we can gain a clearer perspective of the potential benefits and drawbacks of implementing such a system in the Indian context.Diving Deeper: A Tale of Three ColoniesLet’s take a closer look at three former British colonies with distinct approaches to inheritance tax:Singapore: The “Lion City” boasts a progressive inheritance tax system. Estates exceeding S$2 million (approximately ₹11.4 crore) are taxed at rates between 3% and 20%. Notably, Singapore also levies a separate “goods and services tax” on inherited assets, further reducing wealth concentration.United Kingdom: The UK reintroduced inheritance tax in 1986, following its abolition in the 1970s. Currently, a tax-free threshold of £325,000 (approximately ₹3.3 crore) exists for inheritance. However, anything exceeding this amount is taxed at a flat rate of 40%, potentially impacting the ability of families to pass down assets like businesses or ancestral homes.United States: The US inheritance tax system is unique. A federal estate tax applies only to estates exceeding a very high threshold – currently $12.9 million (approximately ₹98 crore) per person in 2024. This means a vast majority of Americans don’t face inheritance tax. However, a separate capital gains tax applies when inherited assets are sold, potentially leading to a double taxation burden.These examples showcase the diverse approaches taken by former British colonies. Singapore’s progressive system aims to reduce wealth inequality, while the UK and the US prioritize a threshold-based approach with varying degrees of progressivity.Pros and ConsInheriting wealth creates an uneven playing field, as heirs gain money they didn’t work for. Inheritance tax can help narrow this gap by redistributing wealth from the rich to the poor through social programs.Studies suggest that inheriting a large sum discourages some from working, potentially reducing tax revenue from income. Inheritance tax can incentivize heirs to work and contribute to the economy.Maybe this is a reason why, many developed nations, including the UK, France, Germany, and Japan, have some form of inheritance tax. India also had an inheritance tax between 1957 to 1985. India abolished its inheritance tax in 1985 due to low revenue collection and high administrative costs.Arguments against inheritance tax:Discourages wealth creation: High inheritance taxes may reduce the investment capital available to wealthy individuals, potentially hindering economic growth.Encourages tax avoidance: The wealthy may use loopholes like inter vivos transfers (gifting while alive) or trusts to minimize their inheritance tax burden.Leads to capital flight: To escape inheritance taxes, the wealthy may move their assets to tax havens or even renounce their citizenship.I think the debate on inheritance tax is likely to continue before it gets reinstated again. For no government, it will be an easy implementation. It highlights the need for well-designed inheritance tax laws to balance the goal of reducing inequality with the potential drawbacks.ConclusionInheritance tax in India remains a topic of debate. Understanding its history, the arguments for and against its return, and the current situation is crucial for informed discussion. Whether or not India chooses to implement inheritance tax, the conversation highlights the nation’s ongoing efforts to address wealth inequality and ensure a sustainable future.A Legacy Reexamined: Lessons for IndiaIndia’s decision to abolish inheritance tax in 1985 stands in stark contrast to the diverse approaches adopted by other former British colonies. Our global exploration revealed Singapore’s progressive system aimed at curbing wealth concentration, the UK’s threshold-based approach with a flat tax rate, and the US’s high exemption threshold coupled with capital gains tax.The next stage of our journey involves analyzing the impact of these policies. Do they foster greater wealth distribution and social mobility, or do unintended consequences arise? By examining these questions in the context of Singapore, the UK, and the US, we can gain valuable insights applicable to India’s ongoing debate.Can a well-designed inheritance tax system help bridge the gap between the rich and the poor in India? Will it create a more level playing field for future generations? The answers lie in a thorough evaluation of both the potential benefits and drawbacks, informed by the experiences of other nations that have grappled with this complex issue.