In a bid to shore up its coffers, the government is planning to reintroduce inheritance tax in India, which may be introduced in the coming Budget, according to media reports. It may be noted that inheritance tax, which was known in India as ‘estate duty’ and is imposed on the property passed to an heir, was abolished in India by the Rajiv Gandhi government in 1985 as it failed to reduce wealth inequality.
However, some economists are now in favour of reintroducing it to boost tax revenues. Earlier Finance Minister Arun Jaitley was also not in favour of levying a tax on inherited wealth as he felt that taxpayes in India don’t inherit as much wealth as those in developed countries, but now he is having second thoughts on it and has reportedly also sought feedback and recommendations on it.
Whatever be the case, tax experts say that we live in a country where the polarization of wealth and power is a common phenomenon, and very few individuals control a large chunk of the total wealth of the county.
“This greed to amass power and wealth has been a big reason for rising corruption as well. This kind of concentration of wealth or power is not good for a stable and sustainable economy and may lead to economic unrest if left uncontrolled (e.g. Naxalite movement). Keeping this in view, the government is trying to plug the open ends and evaluate the re-introduction of the concept of inheritance tax. This move is aimed at bringing equilibrium in distribution of wealth and controlling the unfettered inheritance,” says Chetan Chandak, Head of Tax Research, H&R Block India.
Countries such as the UK and the US already have inheritance tax in place. In fact, the US has three types of taxes on estates/assets being passed on to the next generation, which are, Gift Tax, Estate Tax and Inheritance Tax. The US imposes a gift tax of 40% if the amount gifted to any person in a year exceeds $14,000 (subject to lifetime exclusion of $5.49 million and certain other exceptions).
“In addition to the gift tax, a taxpayer’s estate may even be subjected to estate tax starting at 18%, which may may go up to 40% if total value of the estate of a deceased person at the time of his death exceeds the threshold of $5.49 million. Though many adopt trust as a medium to reduce the estate tax or gift tax burden, the person inheriting the estate beyond the threshold will end up paying some taxes which may be in the range of 5-20%,” says Chandak.
India can also have the same progressive tax system where the inheritance tax increases gradually with the rise in wealth. However, it also need to be kept in mind that most of the countries which impose hefty taxes on inheritance also provide very strong social security systems to their taxpayers. Hence, “when the Indian government contemplates introduction of inheritance tax, it should also pay due attention on building a strong social security system which will release the pressure on an individual to accumulate wealth for future uncertainty,” says Chandak.
Some financial planners also say that reintroduction of inheritance tax may be a big setback for the Indian people. According to them, inheritance tax does provide the government a substantial revenue. The Indian think tank is considering the reintroduction of this tax, but it may be limited to only a specific segment, such as on the wealth above a threshold limit, and the tax rate also may not be high. However, “inheritance tax is good only when it can be supplement by a good social security system. Developed countries like the UK and the US have high inheritance tax and that is effective there because they have a very strong social security system in place. Unfortunately, in India, we do not have any such social security system and so reintroduction of inheritance tax may be a big setback for Indians,” says Jitendra P S Solanki, CFP & Planner for Special Needs Member Families.