Inheritance Tax in India: Should It Be Introduced?

Introduction

Inheritance tax, also known as estate tax, is a levy imposed on the assets passed down from a deceased person to their heirs. While many countries, including the United States and the United Kingdom, have such a tax in place, India abolished inheritance tax in 1985. However, in recent years, discussions have resurfaced about whether inheritance tax in India should be reintroduced to address wealth inequality and boost government revenue. This blog explores the pros and cons of implementing inheritance tax in India and its potential impact on the economy and society.

The Concept of Inheritance Tax

Inheritance tax in India would mean that a portion of an individual’s estate, upon their death, is taxed before being transferred to legal heirs. This tax is usually progressive, meaning higher-value estates are taxed at a higher rate. The main objectives of inheritance tax in India would be to curb wealth concentration among a few families and generate additional government revenue.

Arguments in Favor of Introducing Inheritance Tax in India

1. Reducing Wealth Inequality

India has a significant wealth gap, with a small percentage of the population holding a majority of the nation’s assets. Implementing inheritance tax in India could help reduce this disparity by ensuring that a portion of inherited wealth is redistributed through government spending on public welfare programs.

2. Boosting Government Revenue

A well-structured inheritance tax in India could generate substantial revenue for the government. These funds could be utilized for infrastructure development, education, healthcare, and poverty alleviation, ultimately benefiting the entire nation.

3. Encouraging Philanthropy

High-net-worth individuals may be encouraged to donate more of their wealth to charitable organizations instead of leaving it for taxation. This could promote philanthropy and contribute to societal development.

4. Aligning with Global Practices

Countries like the U.S., U.K., France, and Japan have inheritance or estate taxes in place. If inheritance tax in India is introduced, it would align India’s tax policies with those of developed economies, fostering a more balanced tax system.

Arguments Against Introducing Inheritance Tax in India

1. Double Taxation on Wealth

Opponents argue that inheritance tax in India would result in double taxation, as individuals already pay income tax, capital gains tax, and wealth tax during their lifetime. Taxing inherited wealth would impose an additional financial burden on families.

2. Discouraging Wealth Creation

If high-net-worth individuals anticipate a significant portion of their estate being taxed after death, they may seek ways to transfer assets abroad or limit investments in India. This could negatively impact economic growth and capital formation.

3. Implementation Challenges and Evasion

Enforcing inheritance tax in India could be challenging due to tax evasion and loopholes. Individuals might transfer assets to offshore accounts, create trusts, or use legal structures to minimize tax liability, making the tax difficult to enforce effectively.

4. Potential Impact on Family-Owned Businesses

Many businesses in India are family-run, and inheritance tax in India could disrupt business continuity. Heirs may be forced to sell off assets to pay the tax, potentially leading to job losses and reduced economic stability.

The Global Perspective on Inheritance Tax

Different countries have varied approaches to inheritance taxation. For example:

• The U.S. has an estate tax that applies to estates exceeding $12.06 million (as of 2022).
• The U.K. imposes an inheritance tax of 40% on estates valued over £325,000.
• Japan has one of the highest inheritance tax rates, going up to 55%.

If inheritance tax in India is introduced, policymakers would need to carefully assess international models and adapt them to suit India’s economic and social conditions.

Possible Alternatives to Inheritance Tax

Rather than imposing inheritance tax in India, the government could consider alternative measures to reduce wealth disparity and increase revenue:

1. Higher Wealth Tax

Reintroducing or increasing wealth tax on ultra-rich individuals could ensure that wealth is taxed progressively without disrupting intergenerational wealth transfers.

2. Capital Gains Tax on Inherited Property

Instead of an outright inheritance tax in India, increasing capital gains tax on inherited properties when they are sold could be a viable option to generate revenue.

3. Encouraging Voluntary Wealth Redistribution

Incentivizing voluntary donations and philanthropic contributions through tax benefits can help achieve wealth redistribution without coercion.

Conclusion

The debate over whether inheritance tax in India should be introduced remains complex. While it could help reduce wealth inequality and increase government revenue, it may also pose challenges related to tax evasion, business disruptions, and double taxation. Instead of directly implementing inheritance tax in India, policymakers could explore alternative taxation methods to strike a balance between economic growth and wealth distribution. A carefully structured approach, combined with efficient tax administration, could ensure a fair and progressive taxation system in India.