Abstract
The debate over reintroducing inheritance taxation in India has gained attention due to comments by Congress Overseas Chairman Sam Pitroda. This tax, known as the death levy, would be levied on the property inherited by legal successors. While it aims to reduce inequality and boost revenue, critics argue it may be a double burden. Historically, India had an inheritance tax under the Estate Duty Act of 1953, which was abolished in 1985 due to inefficiencies. The blog argues for the reintroduction of the same as the conditions of the past have now changed and along with the mentioned suggestions in the blog, such reintroduction will prove to be a boon for India’s fiscal figures. Comparing international practices, the blog suggests adopting tailored policies to reintroduce inheritance tax, focusing on socio-economic welfare, equity, and cultural considerations.
I. Introduction
The debate over reintroducing inheritance taxation in India has resurfaced as a result of recent remarks by Congress Overseas Chairman Sam Pitroda, who claimed that if elected, Congress will implement this tax. Despite Congress’ refusal to impose such taxes, it is imperative to scrutinize the viability of such taxes. The matter is significant politically and in terms of taxation law and economics. The blog intends to delve into the economic and jurisprudential value of this discourse, underscoring whether such a tax is necessary and whether it will be a masterstroke. The blog will also feature a cross-jurisdictional examination of the countries that have enacted this legislation and their respective outcomes. The blog will conclude with suggestions for the same and the way forward.
II. Demystifying Inheritance Tax
Inheritance tax, also known as death levy, is a form of direct progressive taxation in which tax is levied when the property of a deceased person is bequeathed upon his legal successors or heirs. Max West defines this form of taxation as a fiscal imposition in the form of a fee, as a payment in return for benefits received, or as a public contribution according to the ability of the taxpayer. This definition characterizes it as a public service, suggesting that such taxation serves the public interest by addressing societal needs and funding essential services. By integrating the principle of contributing based on ability, this form of taxation can contribute to reducing inequality, thereby promoting a fairer distribution of resources and opportunities within society. It is charged based on the total value of the asset and the property left by the deceased person. The rationale for such a tax was that when a successor inherits the property, he can profit from it in the form of rent, interest, capital gains, and so on, all of which are not taxed. As a result, the individual was required to report such income to the government, and the government, under this taxation, had the authority to levy tax. However, it has been characterized as a double burden on the person as he first has to pay wealth tax on the property, and on inheriting the property, he also has to pay inheritance tax. On the other hand, since this is a progressive tax, it is attributed to reducing the expanding income inequality between the wealthy and the impoverished and boosting the revenue collection of the government. This tax is also regarded as a measure towards equity and justice in the economic distribution of the economy. Reflecting upon the legislative intent behind estate duty, the Apex Court in Controller of Estate Duty, Gujarat v. Shri Kantilal Trikamlal, emphasised the purpose of paring the unearned accumulation of inheritances and diminishing wealth disparities.
III. Inheritance Tax Status And Legal Framework In India
Many countries have inheritance tax as part of their tax regime, excluding India. However, there was a time when such a tax was levied. Under the Estate Duty Act 1953, there were rules relating to levying inheritance tax when the property of a deceased person was to be transferred to his legal successor. However, it was to be paid only if the inherited amount was more than the limit proposed under the act. The main goal of such an Act was to impose progressive taxation to receive revenue and redistribute it to the public to bridge the gap between the rich and the poor. However, the same was abolished later on by the then Finance Minister Vishwanath Pratap Singh in his budget speech of 1985-86. In his budget speech, para. 88, he remarked that the given legislation was unsuccessful in achieving its desired objectives. The minimal estate duty collected suggests that either the wealth thresholds were too high, or that wealth was being transferred through means designed to circumvent the tax, highlighting the need for better enforcement mechanisms. The abolition of the Estate Duty Act can be seen from multiple perspectives. On one hand, it removed a cumbersome tax that did not yield significant revenue and was costly to administer. On the other hand, it eliminated a tool aimed at progressive taxation and wealth redistribution. He reasoned that an individual suffers procedural harassment as he is obligated to pay tax on the same property twice. It is important to consider that it was a time of fiscal imbalance in India and the huge administrative costs for levying the tax were not viable for the then government. His critique of the Estate Duty Act highlighted both the procedural inefficiencies and the ineffectiveness in achieving wealth redistribution. What is important to note here is that in the same paragraph, the finance minister proposed that he would introduce new legislation for this purpose, but today, even in 2024, no legislation has been drafted. However, four years after the removal of such tax, a bill was tabled that aimed to simplify the administrative procedure for the implementation of such taxation named, the Wealth (Inheritance) Duty Bill, 1989. However, after the loss of Congress in the next election, the bill was never debated. The lack of follow-through reflects a missed opportunity to refine and improve the system. The current tax regime, which includes wealth tax and other forms of direct and indirect taxation, does not specifically address the issue of wealth accumulation and its transfer across generations in the same manner.
IV. Cross-Jurisdictional Analysis
In the list of the top estate or inheritance tax rates imposed by any country, Japan stands at the apex. The inheritance tax range in Japan is 10%-55%, along with a basic exemption. These taxes are imposed not on the estate but on the beneficiaries’ deriving benefits from the estate. This prevents double taxation of the same estate, which was a problem in India. The inheritance tax in the US applies to the estate, a situation different from Japan. They also have a considerably lower tax range. However, around 55% of the inherited estate will go to the US government, which ultimately gets redistributed to the public. In this spirit, the government and the public are the ultimate beneficiaries. UK has a simplified inheritance tax administration where the tax on the estate is to be paid to HM Revenue and Customs. If the payment is due, it has to be paid by the end of the sixth month following the death. However, like in India, there is still an issue surrounding the interpretation of rules and maintaining records of lifetime gifts. To address the issue, the HMRC designed a checker tool to smooth the process. Some countries in the EU do not levy this form of tax. There is great variation in the inheritance tax across countries in Europe, with most countries having a progressive tax system similar to India but charging relatively lower rates. However, this largely goes untaxed due to preferential treatment provided to close relatives and practices of tax evasion through in-life gifts. China does not have any form of inheritance tax, however, there is a deed tax which you have to pay in case you are inheriting the deceased’s house. From this comparison, it can be inferred that most countries support such a form of taxation and the issues in India are not unique. However, these countries have policies in place to tackle the drawbacks and India can implement some of these policies. Suggestions to do the same are mentioned in the next section.
V. Suggestions And Conclusion
The inheritance tax in India must be reintroduced in India to achieve the goals of socio-economic welfare. For smooth implementation of this taxation, we can combine the approaches propounded by Bentham and John Stuart Mill, as direct heirs (spouses, children) would be exempt from the tax, close relatives (grandparents, uncles, aunts) would pay a reduced rate (e.g., 50%), and distant relatives or non-family members would pay the full rate, with the state taking the entire estate in cases of intestacy, by the state laws. India faces substantial income and wealth inequality, with a small percentage of the population holding a significant portion of the country’s wealth. The concept of reducing such disparities to improve social welfare is endorsed by Bentham’s approach. The concentration of wealth within a few families over generations can be mitigated by an inheritance tax that exempts direct heirs but imposes taxes on remote relatives and non-family members.
Perhaps inspiration can be taken from the Constituent Assembly Debates, where Shri Damodar Swarup Seth while debating upon the issue of compulsory acquisition of property proposed that inheritance must be taxed and socialised only following the law. Building upon the principle of socialism, as suggested, India can design an inheritance tax system that targets only the wealthiest individuals. This legal framework would ensure fairness and transparency, preventing undue financial burdens on lower and middle-income families while promoting economic equity.
By imposing the tax on the beneficiaries, Japan effectively prevents double taxation, which has been a concern in countries like India. The basic exemption also helps to reduce the tax burden on smaller inheritances, ensuring that only significant transfers of wealth are heavily taxed. Moreover, agreeing with Pitroda’s suggestion, the inheritance tax policy of the US can be implemented with some structural changes. These can include allocating the revenue generated from such taxation, directly to education, healthcare, or social security programs, instead of transferring it to general federal revenue. To avoid the huge amount of tax rates that emerged in the 1980s, the EU’s policy can be adopted to fix them at a lower rate.
The economic differences between these countries and India must be considered while preparing the new legislation. For example, policies must be tailored to account for the valuation difficulties and tax collection challenges associated with the informal economy in India. The inheritance tax in India must be designed to target only the wealthiest individuals to avoid placing additional financial burdens on lower and middle-income families. This can be achieved by establishing a high exemption threshold, ensuring that only estates above a certain value are subject to inheritance tax. For example, the threshold could be set at a level that encompasses only the top 5-10% of estates by value. The government can make periodic adjustments in the threshold for inflation and changes in average wealth to maintain its effectiveness over time. Implementing a progressive tax structure with rates increasing with the value of the estate may also become beneficial. Lower-value estates could be taxed minimally or not at all, while higher-value estates face higher tax rates.
Culturally, in India, passing wealth to direct heirs is culturally ingrained and may face resistance if heavily taxed, therefore, the same should be avoided. In this spirit, the government may provide exemptions or lower tax rates for primary residences to protect family homes from excessive taxation. For example, Japan’s system of taxing beneficiaries rather than the estate itself and setting high exemption thresholds could serve as a model. Similarly, the UK’s simplified inheritance tax process and the EU’s lower tax rates for smaller inheritances can be adapted to the Indian context.
By designing an inheritance tax system that targets only the wealthiest individuals, India can foster economic equity without imposing undue hardships on lower and middle-income families. Implementing such a tax, with appropriate exemptions and progressive rates, has the potential to reduce wealth disparities, boost government revenue, and fund essential public services. For instance, revenue from this tax could be allocated directly to education and healthcare programs, as suggested for the US model. Ultimately, a well-structured inheritance tax can contribute to the nation’s fiscal health and promote a more just and equitable society.
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Student, National Law Institute University, Bhopal