An inheritance tax, also called an estate tax, is a tax assessed on all or a portion of an inherited estate. Life insurance, pensions, real estate, cars, belongings and debts are all part of one’s estate. The inheritance tax rate depends on the value of the inheritance and the beneficiary’s relationship to the decedent. Such a tax can potentially prevent the concentration of income and wealth in the hands of a few. It is more than three decades since estate duty was abolished in India

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The objective behind the reintroduction of an inheritance tax:

• Wealth, income, and consumption inequality is high and has been rising in India, particularly in the post-liberalisation period.
• Economists Lucas Chancel and Thomas Piketty, analysing the dynamics of income inequality between 1922 and 2014, found that income inequality in India is at its peak since 1922, when income tax was first introduced here. In the 1930s, the top 1% of earners in India accounted for less than 21% of total income. This dropped significantly to 6% in the 1980s. However, it thereafter steadily increased to a historical high of 22% in 2014.
• Wealth inequality in India has also been alarming. According to Credit Suisse 2018 Global Wealth Report, the richest 1% own 51.5% and the richest 10% account for 77.4% of the nation’s wealth. In contrast, the bottom 60% of the population owns only a meagre 4.7% of it.
• While the per capita income of Indians has risen since liberalisation, growth has failed to be inclusive.
• An inheritance tax, coupled with associated tax reforms, can potentially prevent the concentration of income and wealth in the hands of a few, reduce intra-generational inequality, promote inter-generational equity, and serve a meaningful purpose to address the distributional gaps that exist in India today.
• An inheritance tax, if implemented well, can potentially help the government exchequer at a time when it has been scouting for additional sources of revenue to bridge the persistent gap between fiscal targets and outcomes.
• According to an Oxfam survey in 2018, the wealth of the richest 1% of the population increased by ?20.91 trillion, equivalent to total budget of the central government in 2017-18.
• Moreover, 37% of Indian billionaires have inherited family wealth, and control 51% of the total wealth of billionaires in the country. The survey also points out that 51 of a total of 101 billionaires are more than 65 years old and collectively own ?10.54 trillion.
• Thus, even a moderate inheritance tax of 10-15%, benchmarked to other Asian countries such as the Philippines, Taiwan and Thailand, can potentially act as a stable and significant source of revenue for the government.
• There has been a discernible improvement in the government’s tax administrative capacity, drawing upon the strengths of the information technology revolution.
• Project Insight of the Central Board of Direct Taxes and the application of Big Data analytics to improve tax compliance have strengthened tax administration.
• This, along with the thrust towards a digital economy, could potentially reduce the marginal cost of administering and monitoring compliance of an inheritance tax.

Global Experience:

• Today, many developed countries such as the US, UK, France, Japan and the Netherlands have inheritance tax laws in place.
• The US imposes Gift Tax and Estate Tax (both taxes levied on the donor) at 40 percent with a combined lifetime exemption threshold for both taxes amounting to approximately $11 million per person.
• Likewise, inheritance tax in the UK is levied at 40 percent, but with a far lower exemption threshold.
• The growing concern surrounding India’s increasing economic disparity, the imposition of estate duty may seem desirable.

Concerns:

• The inheritance tax is payable by the legal representative to whom the property may pass on death.
• The recipient of the property may not have the money available to pay tax that could lead to situations of distress sale.
• Arguments against the levy of inheritance tax mainly revolve around fears regarding the outflow of entrepreneurial human capital and financial resources going abroad.
• With India being a developing country, keeping capital intact in the hands of entrepreneurs may represent a more efficient investment for economic development.
• India needs to review the case for re-introducing an inheritance/estate tax with, ideally, relatively high thresholds, so it’s targeted at the very rich.

Conclusion:

India’s inheritance tax must not be used as a symbolic tool, marketed as a Robin Hood tax, for populism. Rather, the intent should be grounded in the substantial distributional inequities that exist in the country today.