The Indian Union government is debating the re-introduction of Inheritance Tax (also known as Estate Duty) in the budget of 2019. This form of tax pertains to the taxation of a property’s value upon the owner’s death. India has had a history with the Inheritance Tax, having implemented it from 1953 until its abolition in 1985.
Why Reintroduce Inheritance Tax?
The primary objective of this tax’s reintroduction is to confront the issue of economic inequality prevalent in the country. As per a survey by Oxfarm, a whopping 58% of India’s total wealth is held by a mere 1% of its population, which is higher than the global average of around 50%. These figures highlight the economic disparity within the nation, and the reintroduction of the Inheritance Tax could help redistribute wealth and reduce this gap.
In addition, this tax could potentially be a significant source of revenue for the government, leading to increased public expenditure.
Overview of Inheritance Tax in India
The Inheritance Tax, under the Estate Duty Act of 1953, was initially introduced to target economic disparity. The duty rates were progressive, with the highest being 85% on estates exceeding Rs. 20 lakh.
The duty applied to the market value of all immovable properties within India, and all movable properties (both within and outside the country) that were transferred to successors after the owner’s death. An anti-avoidance mechanism within the law aimed to curb any transactions made in anticipation of death or gifts given within two years before death.
However, the law faced disapproval mainly due to its complexity, perceived double taxation in the form of estate and wealth tax, illegal concealment, and the practice of holding benami properties.
| Year | Implementation of Inheritance Tax |
|---|---|
| 1953 | Inheritance tax introduced |
| 1985 | Inheritance tax abolished |
| 2019 | Possible reintroduction of inheritance tax |
Current Scenario in Other Countries
Today, many developed nations such as the USA, UK, France, Japan, and the Netherlands have enacted inheritance tax laws. The US has Gift and Estate Taxes at 40% with a joint lifetime exemption threshold for both taxes around $11 million per person. Similarly, the UK levies an inheritance tax at 40%, but with a much lower exemption threshold.
Given India’s growing economic disparity issue, resorting to an estate duty could indeed be beneficial.
Potential Issues
The legal representative who inherits the property might face difficulties paying the tax due to insufficient funds, possibly leading to distress sales. There are also fears regarding the possible outflow of entrepreneurial human capital and financial resources abroad.
With India being a developing nation, keeping capital in the hands of entrepreneurs may offer a more efficient investment for economic growth. Therefore, any decision on the reintroduction of an inheritance or estate tax must be carefully weighed, with ideally high thresholds to target only the very affluent.