Context:
A prominent political leader from India’s opposition party has recently expressed interest in proposed legislation regarding Inheritance Tax. This move comes amidst ongoing discussions about utilizing inheritance tax as a means to address income inequality and facilitate wealth redistribution in the country.
Relevance:
GS III: Indian Economy
Dimensions of the Article:
- Inheritance Tax: Overview
- Advantages of Implementing Inheritance Tax in India
- Challenges in Implementing Inheritance Tax in India
Inheritance Tax: Overview
- A tax paid on inheriting property or assets from a deceased person, levied on the value received by the beneficiary.
- Paid by the beneficiary, with rates varying by country, sometimes as high as 55%.
- Inheritance can be received under a Will or personal law of the deceased.
- In India, the concept of inheritance tax currently does not exist.
Determination of Total Asset Value
- First step involves assessing the deceased’s assets: real estate, investments, bank accounts, vehicles, and personal belongings.
- Consideration of outstanding debts or liabilities.
- Applicability of inheritance tax depends on estate value and jurisdictional laws.
- Some beneficiaries may be exempt or receive reduced rates, such as spouses or children.
Reasons for Abolishing Inheritance Tax
- Taxpayer harassment due to pre-death wealth tax and post-death estate duty.
- Inadequate impact on wealth distribution or state financing.
- Estate duty yielded low revenue compared to administration costs.
- High tax rates can lead to capital flight to tax havens or jurisdictions with favorable rates.
Examples of Inheritance Tax Worldwide
- Widely levied in Europe, America, and Africa.
- Top nations with inheritance tax include France (60%), Germany (50%), UK (40%), Spain (33%), and Hungary (18%).
- Other countries with notable rates include Japan (55%), South Korea (50%), Ecuador (37%), Chile (25%), South Africa (25%), and Taiwan (20%).
Advantages of Implementing Inheritance Tax in India
- Addresses staggering wealth inequality in India, where the top percentile holds a disproportionate share of national wealth.
- Promotes social mobility by redistributing excessive wealth and preventing its concentration within a few families.
- Generates additional revenue for the government to fund social sector programs and welfare schemes, aiding in public welfare initiatives.
- Acts as a progressive tax, placing a higher burden on wealthy individuals, contributing to a fairer tax system.
- Potential to reduce basic income tax liability for economically weaker sections, fostering entrepreneurship and economic participation.
Challenges in Implementing Inheritance Tax in India
- India’s already complex tax system may face further complications with the introduction of inheritance tax, leading to compliance and enforcement challenges.
- Requires a robust administrative infrastructure for effective enforcement and administration, which may be lacking.
- Resistance from wealthy families who stand to lose a portion of their inherited wealth, posing political and social challenges for implementation.
- Implications for family-owned businesses, particularly in sectors reliant on succession planning.
- Collection of accurate wealth and asset data poses challenges, especially in rural areas with prevalent informal economies.
- Potential for tax avoidance or evasion by high net worth individuals through trusts, offshore accounts, or asset gifting.
- Agricultural land, culturally and economically significant, presents challenges in imposing inheritance tax due to resistance from agricultural communities and concerns about land fragmentation.
-Source: The Hindu
