Inheritance Tax: Past, Progression, And Controversy

Have you ever thought what happens to your money after you are gone? In India, inheritance has traditionally been a way to transfer wealth across generations. But what about the tax implications?

In this blog, we will explore the history of inheritance tax, find out why it was eventually removed, and the ongoing debate about its potential return.

What Is Inheritance Tax

Inheritance Tax, also known as death duty in some regions, is a levy on assets or money that someone inherits after a person dies.

However, there is a subtle difference between inheritance tax and estate tax. Inheritance Tax is a tax on the value of the inheritance received by the beneficiary. In contrast, the estate tax is a tax on the total value of a deceased person’s estate before it is given to their heirs.

The objectives of the Inheritance Tax vary across countries, including generating government revenue, redistributing wealth, and preventing wealth concentration within families.

The tax is paid by the person who inherits the assets, and the amount of tax depends on the value of the inheritance and the relationship between the beneficiary and the deceased. Close relatives often get tax exemptions that lower their tax burden. Tax rates differ depending on the country and can be as high as 40%.

India does not currently have an inheritance tax. And if we talk about developed nations such as USA, there is no federal inheritance tax exists, although certain states impose their own. For example, states in USA such as Pennsylvania and New Jersey have inheritance taxes that apply to a broader range of wealth, irrespective of the federal threshold.

Did you Know?

Japan has the highest inheritance tax rate, i.e., 40%.

Evolution of Inheritance Tax

Inheritance taxes have roots in ancient civilizations such as Egypt and Rome. In the US, these taxes were introduced during the Civil War to raise revenue but were revoked soon after.

The 19th and 20th centuries saw a sharp increase in inheritance taxes globally, and many countries, including the US, implemented them to address wealth concentration and raise revenue.

However, inheritance taxes gradually lost favour among the government because some countries found them challenging to manage, while others considered them a barrier to investment and creating wealth.

From 1953 to 1985, India had an inheritance tax called the Estate Duty, introduced under the Estate Duty Act of 1953. However, India abolished its inheritance tax in 1985.

Why was the Inheritance Tax abolished in India?

The estate duty in India was introduced to reduce wealth inequality. It functioned like a progressive tax. People inheriting smaller estates were not subject to taxation. In contrast, those inheriting substantial wealth were liable to pay a higher percentage, with rates reaching as high as 85% for the largest estates.

For your reference, a progressive tax is a tax system in which the tax rate increases as the taxable income increases. In simpler terms, the more you earn, the higher the percentage of your income you pay in taxes, which is determined by the tax brackets.

The tax rate you pay depends on which bracket you fall into. Suppose you have an income within the 22% bracket. You will only pay 22% tax on the portion of your income that falls within the bracket, and for any income exceeding that amount, you might pay a higher rate according to the next tax bracket.

Despite its good intentions, the Estate Duty fell short for several reasons:

• Many estates were not taxed because of a high threshold for consumption.
• People started looking for methods to avoid paying taxes, such as concealing assets or engaging in benami property transactions.

Furthermore, discussions about reintroducing have emerged in recent years, which is fuelled by the following reasons:

• The gap between rich and poor is widening, and some argue that inheritance tax helps redistribute wealth.
• Many developed countries have the concept of inheritance tax, and some consider it a standard wealth management tool.
• Taxing inheritances can generate revenue for the government, which can be used to create social programs that help those in need.

The Ongoing Debate

Sam Pitroda, the president of the India Overseas Congress, has caused trouble for the Congress party with his controversial comments about the inheritance tax. His remarks have been the subject of debates and intense criticism.

He caused controversy by advocating for an inheritance tax as a means of wealth distribution, citing its implementation in America. He stated that there is an inheritance tax in America where 45% of a $100 million estate goes to the children and 55% goes to the government.

Two national political parties in India, i.e., the Congress and the BJP, are arguing over the statement made by Sam Pitroda. However, the former clarified that the statements did not represent the party’s official stance and accused the BJP of trying to gain political advantage and divert attention during ongoing Lok Sabha elections.

Conclusion

To sum it up, India’s story with inheritance tax is one of a brief implementation, abolition, and a recent resurgence in debate. While there is no inheritance tax currently, the conversation surrounding its return highlights the complexities of managing wealth inequality and the government’s revenue. The future of this tax remains uncertain. We will have to wait and see how this exciting story plays out.

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