 "Decoded: The history and political relevance of inheritance tax in India")
Recent remarks by Sam Pitroda, chairman of the Indian Overseas Congress, regarding the absence of inheritance tax in India have sparked controversy in the middle of Lok Sabha Elections 2024. However, the notion of an inheritance tax is not new in India. Referred to as estate duty or "death tax" in some nations, such a tax was prevalent in India four decades ago until its abolition in 1985.
And Pitroda isn't the first to address this issue. The Bharatiya Janata Party (BJP) is attempting to exploit Pitroda's statement against the Congress, yet senior party figure Arun Jaitley had also hinted at supporting an inheritance tax in 2017.
Furthermore, in 2014, the then Minister of State for Finance, Jayant Sinha, openly advocated for reintroducing an inheritance tax, supported by Amit Malviya, the current head of the BJP's IT cell. In a now-deleted tweet on X (formerly Twitter), Malviya had said, "I am all for @JayantSinha's idea to tax inheritance wealth."
So, what is inheritance tax and why has the topic of this tax remained contentious over the years?
What is deceased estate and inheritance tax?
When someone passes away, their assets and liabilities form what's commonly known as a deceased estate. This estate typically includes everything from property and investments to personal belongings and debts. However, what happens to these assets and debts can vary significantly depending on the laws of the jurisdiction and whether or not the deceased had a will.
It's the responsibility of the deceased's executor or administrator (appointed by the deceased or by the court) to manage and distribute these assets according to the deceased's wishes or the laws of intestacy (if there is no will).
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Meanwhile, inheritance tax, also known as estate tax or death duty in some countries, is a tax imposed on the transfer of assets from a deceased person to their heirs. The tax is typically based on the value of the assets transferred and can vary depending on the relationship between the deceased and the beneficiary, the total value of the estate, and the jurisdiction's tax laws.
How is inheritance tax calculated?
The first step in dealing with a deceased estate is often to determine its total value. This involves assessing the value of all assets owned by the deceased, including real estate, investments, bank accounts, vehicles, and personal belongings, while also considering any outstanding debts or liabilities.
Whether or not inheritance tax applies depends on several factors, including the total value of the estate and the laws of the jurisdiction. In some places, certain beneficiaries, such as spouses or children, may be exempt from paying inheritance tax or may receive a reduced tax rate.
India's experiment with estate/inheritance tax
In 1953, the Estate Duty Act introduced the inheritance tax to mitigate economic inequality. It served as a mechanism to levy taxes on the extremely wealthy who transferred huge wealth to their successors.
Estate duty meant taxing the entirety of an individual's property value at the time of their passing, with the tax obligation triggered upon transfer to heirs.
This duty applied to real estate and movable assets within or outside India.
However, the tax faced public Opposition due to its steep rates, reaching up to 85 per cent for properties valued over Rs 20 lakh. It commenced at 7.5 per cent for properties valued at Rs 1 lakh.
Property worth was determined based on market value at the time of the individual's demise.
Why was inheritance tax abolished in India?
The law, enacted to boost state revenue and address economic inequality, faced intense criticism from the Opposition and various sectors during its three-decade tenure.
Moreover, the legislation featured disparate valuation rules for different types of property, rendering it complex and resulting in extensive court battles over property valuation, leading to substantial administrative costs.
An audit revealed that estate tax collections constituted only a negligible fraction of the total direct taxes collected by the government.
Reportedly, the total estate tax collection in 1984-85 amounted to Rs 20 crore, which was overshadowed by high collection costs.
Collections from the inheritance tax remained low as individuals sought ways to evade the tax, including concealing inherited properties and engaging in benami property transactions.
Furthermore, the imposition of an estate tax alongside a wealth tax was viewed as double taxation, evoking strong public resentment.
All these factors contributed to the eventual abolition of the tax in 1985 by the then Finance Minister V P Singh.
Congress and BJP both tried to bring back inheritance tax
The notion of reintroducing an inheritance tax has been circulating within political spheres for over a decade.
The concept was initially brought up by the then Home Minister P Chidambaram in 2011 during a Planning Commission meeting under the chairmanship of Prime Minister Manmohan Singh. Chidambaram, who served as the finance minister during the initial four years of the UPA-I government, proposed the idea as a means to augment tax resources and address the declining tax-to-GDP ratio.
A year later, in 2012, Chidambaram reiterated the proposal at a National Institute of Public Finance and Policy event, stressing the necessity of an inheritance tax to counter the concentration of wealth among a select few.
However, the matter was put on hold following the victory of the Narendra Modi-led NDA government in the 2014 Lok Sabha elections.
During the same year, Jayant Sinha, the then minister of state for finance in the BJP government, publicly endorsed the introduction of an inheritance tax, citing its potential to diminish the advantages enjoyed by dynastic business figures and foster a fairer economic landscape.
In 2017, there were indications that the government was contemplating the reintroduction of an inheritance tax.
In 2018, then Finance Minister Arun Jaitley supported the idea, highlighting how hospitals and universities in developed nations benefited from substantial endowments facilitated by inheritance taxes. Jaitley underscored the absence of a similar trend in India, attributing it partly to the absence of inheritance tax and its impact on charitable contributions.
However, these endorsements by ministers in different governments remained individual endorsements only and were not adopted as policy by either the Congress or the BJP.
Global parallels: Inheritance tax in the US
Globally, inheritance taxes are widespread in nations like the UK, Japan, France, and Finland. It is important to note that the US inheritance tax that Pitroda was drawing parallels from, within the United States it is only enforced in six states. With a striking 40 per cent rate, the US holds one of the highest inheritance tax rates. Japan tops the list with a 55 per cent rate, followed by South Korea at 50 per cent and France at 45 per cent.
In the US, as of 2023, inheritance taxes are scarce, imposed only within Iowa, Kentucky, Maryland, Nebraska, New Jersey, and Pennsylvania. The taxation amount depends on factors like the inheritance's value, the beneficiary's relationship to the deceased, and the local legislation. Additionally, the state where the deceased lived or owned property may also impose inheritance tax.