What is Inheritance tax?

• This tax is imposed on those who inherit assets from a deceased person.
• The rate of this tax depends on the value of the property received by the heir and his relationship to the decedent.
• This tax is a form of death tax.

Debate on Inheritance Tax:

• The concept of inheritance tax, sparked by Congress leader Sam Pitroda’s suggestion for its implementation, has brought this policy tool into the spotlight once again.
• Pitroda referenced the US example, where the government levies a 55% tax on the deceased’s wealth, while the remaining 45% is distributed among legal heirs or children.
• However, the Congress party distanced itself from Pitroda’s views, emphasizing that they are his own and do not represent the party’s stance.

Global Context of Inheritance Tax:

• Inheritance tax, also known as estate tax or death tax, exists in various forms across several countries, including South Africa, Brazil, and the US.
• However, emerging economies like India and China do not have provisions for such a duty.
• Examining the wealth distribution among the top 10% of the population in different countries reveals that an inheritance tax may not necessarily lead to equitable wealth distribution, as it is higher in countries like South Africa, Brazil, and the US compared to India and China.

Why has there been growing demands for the implementation of Inheritance Tax in India?

1. Rising wealth and income inequality in India– In the post-liberalisation period of the Indian economy, the wealth and income inequality has been rising in India. 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. Bottom 60% of the population own only a meagre 4.7% nation’s wealth.
2. Lack of Inclusive Growth– The Gini wealth coefficient in India has gone up from 81.3% in 2013 to 85.4% in 2017 (100% represents maximal inequality). The growth in India has not been inclusive.
3. Endowments to Social Sector Institutions– Indian hospitals, universities, and other institutions need endowments and funds from inheritance tax. For ex- Harvard University receiving funds from estates, is exempt from Inheritance tax.
4. Need for more direct taxes– The government’s fiscal deficit has increased after the COVID-19 pandemic. Hence, additional sources of direct taxes like inheritance tax need to be explored to contain the fiscal deficit as mandated by the FRBM Act.
5. International practices– Developed countries such as England, France, Germany, the USA and India’s South East Asian counterparts like Philippines, Taiwan and Thailand have been charging inheritance tax.

Challenges and Implications of Implementing Inheritance Tax:

• Implementing an inheritance tax may present several challenges and implications, particularly in countries like India.
• Wealthy individuals can easily avoid inheritance tax by utilizing tax-exempt assets or transferring their wealth before death.
• Furthermore, an inheritance tax could disincentivize wealth accumulation and investment, potentially hindering entrepreneurship and capital formation.
• It may also lead to the forced sale of assets to pay taxes, disrupting family enterprises and resulting in inefficient asset allocation.

Administrative Burdens and Resistance:

• In addition to economic concerns, an inheritance tax could impose significant administrative burdens, particularly for widows and non-resident Indians.
• Tax regulations and procedures may exacerbate emotional and financial stress, highlighting the need for simplified and accessible tax frameworks.
• Moreover, taxpayers may resist inheritance tax due to its visibility and perceived burden, leading to distorted perceptions of fiscal policy.

Impact on Middle-Class Aspirations and Economic Growth:

• The introduction of inheritance tax may negatively impact middle-class aspirations and wealth creation efforts.
• It could discourage savings and investment, slow down economic growth, and drive talent and capital flight abroad.
• Enforcement challenges and tax avoidance strategies may further limit revenue generation.

What are the benefits of Inheritance Tax?

1. Reduction of inequalities-The inheritance tax reduces Intra-Generational Inequality and promotes Inter-Generational Equity by preventing the concentration of income and wealth in the hands of a few.
2. Greater financial resources for Govt- According to an Oxfam Survey of 2018, 51 of a total of 101 billionaires are more than 65 years old and collectively own ₹10.54 trillion. A moderate inheritance tax of 10-15% (like other Asian countries such as the Philippines, Taiwan and Thailand) can act as a stable and significant source of revenue for the government.
3. Greater Revenue to fund public welfare- Inheritance tax provides additional sources of revenue to the government for expansion of social sector programmes, and its push towards universal health insurance.
4. Creation of meritocratic society-It will help in creation of a meritocratic society by chipping away the advantages the children of the wealthiest families enjoy by accident of birth. The redistribution of initial endowments can help in the establishment of optimal social state.
5. Progressive in nature-Inheritance tax is a progressive tax as it places a higher tax burden on wealthy individuals only.

Conclusion:

• While the debate on inheritance tax continues, its implementation poses complex challenges and implications for countries like India.
• Balancing the need for wealth redistribution with concerns about economic growth and middle-class aspirations is essential for effective policymaking.
• Ultimately, inclusive wealth creation efforts and innovative economic policies are crucial for achieving long-term prosperity and reducing wealth inequality.