Inheritance Tax-Its relevance is highly debatable!

Before being abolished in the year 1985, the Inheritance Tax was in vogue in India for the previous 30 years. The then VP Singh-government did away with the tax, stating that “the estate duty has not achieved the twin objectives to reduce the unequal distribution of wealth and assist the states in financing their development schemes. While the yield from estate duty is only about ₹20 crore, the cost of administration is relatively high.”

Inheritance tax or estate duty is a form of taxation that is levied against assets gained as part of inheritance. When someone’s property and assets pass on to their legal heirs, the latter must pay inheritance tax for inheriting such property or assets. While this is the norm in many countries, India scrapped the law in 1985 due to implementation issues.

In fact, 4 years later i.e. in 1989, there was an attempt to revive the inheritance tax through the Wealth (Inheritance) Duty Bill, 1989, but the Parliament was dissolved before the Bill could be passed. Since then, and especially when the Budget session is nearing, there are murmurs about the Inheritance Tax/ Estate Duty being reintroduced. In fact, countries such as England, France, Germany, the USA, and Greece have been taxing inherited wealth at as high as 40 percent.

In January this year, Nikhil Kamath, the self-made billionaire, wrote in Forbes India, making a case for the reintroduction of Inheritance Tax, offering the below stated arguments in favour of the legislation:

• allows for a more efficient dispersion of wealth (most wealthy families from different walks of life have one thing in common—inherited wealth)
• aligns with the egalitarian ideals enshrined in the Constitution of India, under the Right to Equality
• since most of India’s tax revenues accrue from indirect taxes, which have further intensified on the economically weaker sections, more direct taxes are the need of the hour, and inheritance tax is an important part of this – it can raise a significant quantum of revenue for the exchequer
• the government could have the liberty of reducing the basic income tax liability on the economically weaker sections of the country

On the other hand one of the criticisms of the Inheritance Tax, from the perspective of taxpayers, is that it can force you to pay taxes on the same money twice: once when you earn it and once when the money passes to your heirs. Also, it punishes success in that the more money you earn, the more likely you are to pay it, creating a disincentive to work, earn income and take risks, which are essential to innovation.

Summing it up: The rich and the middle class control a major share of the world’s resources, which consequently is not available to the poor. They enjoy higher incomes from better jobs and investments.  There is no inheritance tax in India, whereas the poor face high taxes on certain basic consumption goods. But Government needs to tread with caution and take a systemic approach. It have to look beyond taxes and ensure social goods — education and healthcare — for all in order to level the playing field. This requires an imaginative public policy and a steady governance. Progressive taxation is essential to finance public investments in education or health for everybody but it is just a mean and not the end. 

Source: Forbes India, ET, ForumIAS