While a debate is raging in political circles over the desirability of “inheritance tax” as a tool for wealth “redistribution,” tax experts say such an impost –- abolished in India way back in 1985 due to “costs outweighing benefits”– would discourage “savings and investments.” The tax would prove to be unaffordable for India which is struggling to keep a high pace of economic growth, they said, adding that the revenue gains for the government won’t be much either.
Inheritance tax has examples in the developed world, but is largely absent in middle income countries.
“It is unwise for India to introduce inheritance tax at this point. We are right now focusing on becoming a developed country and generating wealth, and until we do so, we shouldn’t think of such a levy,” said Sudhir Kapadia, partner – tax & regulatory services, EY India. “India earlier had inheritance tax, did it reduce poverty or help in reducing inequality?” he asked.
As per a UBS report, the global wealth in 2022 was at $454.39 trillion. India’s share in the global wealth was just 3.34% at $15.36 trillion, while that of Europe was 23% and the US’ was 30.3%.
Inheritance tax is a levy that a person must pay for inheriting movable or immovable assets from her ancestors. In several countries, when the property or assets of a deceased individual get passed on to their legal heirs, such tax is paid by the legal heir.
In the US, for instance, inheritance tax is levied by the states on the money or property a heir receives from a deceased person’s estate. This tax, as opposed to the federal estate tax, is paid by the beneficiary. As of 2021, only six states in the US impose an inheritance tax: Iowa, Kentucky, Maryland, Nebraska, New Jersey, and Pennsylvania.
India had abolished the inheritance tax, or estate duty almost four decades ago due to concerns around dual taxation and its perceived ineffectiveness in reducing societal inequalities, say experts. The tax had existed between 1953-1985. The “estate duty” was levied on movable assets and real estate above with rates ranging from 5% to 40%, with the tax kicking in at inherited assets of Rs 1 lakh, and the marginal rate at Rs 20 lakh.
“Reintroducing inheritance tax could indeed increase tax collection but might discourage savings and investment, as individuals may be reluctant to accumulate wealth if a significant portion is to be taxed on inheritance,” said Akhil Chandna, partner, Grant Thornton Bharat.
The UK, Japan, South Korea and some other developed countries that seeks to generate revenue for the government and address wealth inequality via inheritance taxes. The rates vary from as low as 1% to as high as 55%, in different countries and across different assets. In the case of India, if introduced, the levy may not be easy and may pose administrative challenges, say experts.
“It poses administrative complexities in valuing inherited assets, potentially impacting family-owned businesses crucial for economic growth. Tax avoidance through offshore structures and disincentives for savings and investments are additional concerns,” said Sandeep Jhunjhunwala, Partner, Nangia Andersen.
Some experts suggest that if inheritance tax is to be brought in, the tax rates should be progressive, with exemptions/ thresholds, to minimize the burden on low to middle-income families while specifically targeting wealthier estates.
Anti-avoidance measures like a “look-back” period and taxing certain gifts/transfers before death could prevent tax evasion, said Jhunjhunwala, while adding that clear legislative frameworks, robust administrative systems, and coordination among tax authorities would be crucial for effective implementation.
Some suggest that rather than introducing an inheritance tax, increasing surcharges on High-Net-Worth Individuals (HNIs) could be an alternative approach for India to raise revenue from wealthy sections. This option directly taxes high income and net worth during one’s lifetime, avoiding the complexities of valuing and taxing inherited assets, they say.
At present, a surcharge of 10% is levied on the total income of individuals, if it exceeds Rs 50 lakh per annum. The maximum surcharge rate applicable on an individual is 25% as per the new tax regime, in case the annual income exceeds Rs 2 crore. In the Budget for FY16, the Modi government had announced the abolition of wealth tax and its replacement with a surcharge on the super rich.
The current row over inheritance tax began when Sam Pitroda, who was adviser to many Congress-led governments, talked about inheritance tax in the US as an “interesting law,” inviting sharp reaction from Prime Minister Narendra Modi who alleged that that Congress party “would snatch the property left behind by people for their children.” Modi said that the “Congress party’s mantra was to loot (the people)…both when you are alive and when you are dead”.
Pitroda’s comments came in the wake of the Congress manifesto talking of addressing wealth and income inequalities in India with suitable changes in policies. The Congress party’s communications chief Jairam Ramesh distanced the party from Pitroda’s comments by saying that there was “no plan whatsoever to introduce an inheritance tax”, and it was in fact, the “Modi Sarkar that has wanted to do so”