Inheritance Tax In India: A Timely Imperative

This tax is imposed on the property that a deceased person leaves to a lawful heir or successor. Although this tax is usually considered as the most progressive of all the tax systems in various countries, its implementation in many other nations is still a matter of controversy. While economic and legal scholars recommend countries that charge a high inheritance tax, like the USA, to repeal it, certain nations that do not presently levy it are taking steps forward and contemplating implementing it for a variety of reasons, such as economic development of the country. While recommending against it, researchers often overlook not just the social necessities of an inheritance tax, but also the additional legal and commercial advantages that the imposition can have.

Despite India being one of the nations where the inheritance tax is not presently imposed, it is crucial to take into account that it was levied in the past as estate duty before it was scrapped in the year 1985 after the recommendation of the Economic Administration Commission. The then finance minister V.P. Singh scrapped it stating that the Estate Duty Act of 1953^[1] had failed to achieve its goals of achieving social equality and reducing the wealth gap^[2]. Nevertheless, there were speculations that the Indian government might reintroduce the inheritance tax in the Union Budget for 2018–19. Although, this was never actually implemented, there are still persistent rumors in corporate circles regarding its imposition.

The central argument of the paper revolves around whether India, having previously abolished the inheritance tax, should reconsider its reintroduction due to various economic, social, and legal considerations. Moreover, the article aims to examine the impact of inheritance tax in other countries compared to India to bolster the case for its timely reinstatement. The primary objective is to advocate for the reintroduction of the inheritance tax while addressing and countering common arguments against it. Additionally, the article will explore the implications of inheritance tax in other nations that currently enforce it, and discuss its relevance in the context of the COVID-19 pandemic and Uniform Civil Code (UCC).

The Need Of The Hour

As previously stated, there are several reasons, including societal, legal, and economic ones, why it is finally the time for India to impose the inheritance tax. The primary and most compelling argument put up by researchers in favor of the inheritance tax is that it will enhance government revenue, further boost the Gross Domestic Product (GDP), and ultimately lead to the overall economic growth of the country. However, there are various counter arguments in this regard which are addressed further.

Firstly, the most developed countries which have been enforcing the inheritance tax or estate tax since decades are unable to generate substantial amounts of revenue, and it contributes only 0.5% of the government's total revenue in most countries, making it almost insignificant, and that the tax should be abolished as it has failed to achieve its goals^[3]. While in response to this, it is pertinent to emphasize that the majority of developed nations who impose inheritance taxes are unable to make major revenues due to the numerous exemptions granted. As an instance, the United Kingdom levies an inheritance tax of 40%; however, there were exemptions, such as gifts to trusts and donations, which were later subjected to taxation and the revenue increased^[4]. However, several exceptions, such as donations, agricultural property, and lifelong gifts, continue to be the statutory loopholes that result in more tax evasion and lower revenue collection which should not be granted in India for effective imposition.

Secondly, another economic as well as logistical limitation that is frequently brought up is the problem of "double taxation". The inheritance tax not only results in double taxation, but even multiplicity of taxes, that too on the property not earned but inherited which was already been taxed. Even in the United Kingdom, it is contended that estate tax is a second tax on the same income as individuals already pay "income tax" or "capital gain tax" on their earnings^[5]. Similarly, in the past, in India, the imposition of the tax became challenging due to the issue of double taxation caused due to levying the inheritance tax and wealth tax simultaneously. Even in the present day, the problem of multiplicity of taxes being levied on the same income will arise if inheritance tax is implemented alongside the other taxes such as the wealth tax, property tax, capital gains tax and many others. However, in response to this, many economists and legal scholars argue that if the inheritance tax is levied accurately and in the appropriate quantum in tandem with other taxations, it will be much easier to implement, and the state will also be able to generate revenue. For instance, if the wealth tax is imposed at around 2-3% and the inheritance tax is levied at around 20%, it is unlikely to result in a problematic situation of double taxation^[6].

Thirdly, it is claimed that the enforcement of the inheritance tax results in significant administrative expenses for the government, but does not generate any substantial tax income. The same arguments were put forward in India when the estate duty was scrapped, where it was claimed that even though it only generates revenue of about 20 crores, the high administrative expenses and increasing litigation rendered it useless^[7]. However, this reasoning seems erroneous because the lawmakers must consider that application of a tax depends upon number of factors, including the policy characteristics, size of the jurisdiction and even the time period for which the tax was imposed. Moreover, how did the collection of estate duty by the already existing Income Tax department led to an increase in administrative costs? In countries like Ireland, France, Germany and even United Kingdom, the long run implementation of inheritance tax resulted in higher revenue and negligible administrative costs of only around 0.52% of the year's total tax revenue^[8]. Additionally, the Swiss model of tax implementation highlights the importance of automatic administrative processes and digitizing the filing of tax returns^[9]. Even, by establishing a third-party reporting, the administrative burden for both taxpayers and the tax authority can be minimized by lower human resource, infrastructure and IT development costs^[10].

Another evidence in favor of the argument is that, based on the statistics at hand, the cost of collecting income taxes for the fiscal year 2000–01 in India was as high as 1.36%. But the income tax was not abolished as a result of this. Thus, the bureaucratic inefficiencies should not have resulted in the inheritance tax being repealed entirely, since the state should receive a share in the assets not earned by an individual for welfare functions.

Another essential justification for the reinstatement of the inheritance tax in India is the persistent issue of Benami transactions. Although the Benami Transactions (Prohibition) Act of 1988 was introduced to render the Benami property as illegal, but the execution problem still persists. The authorities frequently introduce multiple schemes to reward those who report Benami property and also impose severe fines on the beneficial owners, yet Benami transactions along with extensive tax evasion continue. Therefore, imposing an inheritance tax will help the government to uncover, prevent and keep a track of Benami transactions and level of tax evasion. For instance, if a legal heir acquires property from his ascendant, he will be required to pay inheritance tax and because of the required wealth transparency, the government will be able to attest that the inherited property is actually a Benami property.

Now, the only argument in opposition that can be made in this regard is that imposing an inheritance tax will encourage the rich class to hold more assets as Benami property, which will increase tax evasion and reduce government income. In response to this, some economists propose that the inheritance tax should be combined alongside other taxes to prevent tax evasion, such as a gift tax, to prevent people from outrightly gifting their property to their heirs. Additionally, it can be argued that the estate duty, which was repealed in India being unable to achieve its objectives, was because of being unreasonably high around 85% which resulted in increased Benami transactions and tax evasion. It was practically impossible for the country's ultra-rich to pay an 85% tax to the government in order to inherit their own hereditary fortune. For instance, Japan, which has the highest inheritance tax globally with rates ranging from 10% to as high as 55%, still generates revenue for the government and being reasonable does not encourage tax evasion^[11]. Yet again, because of the unrealistic approach of the government of levying an exorbitant 85% inheritance tax is another reason why the much-needed inheritance tax had to be repealed.

Finally, the most significant yet controversial argument in support of enacting inheritance tax is that executing it would reduce the concentration of wealth in the hands of a select group of individuals and narrow the gap between the rich and poor. The rich percentile, who usually inherit their wealth, contribute significantly to this disparity. Applying the inheritance tax will improve wealth distribution and minimize the economic inequality which is rampant in India. Through this tax, the government may gradually tax the richer segment of the population, generate revenues that can be utilized for social initiatives. However, this argument is contradicted by various scholars from a religious, political, and even logistical standpoints, which are addressed in the paragraphs that follow.

Firstly, the most heated counter argument in this regard is that the Indian constitution guarantees freedom of religion and that since inheritance is one of the crucial practices of one's religion, the government should not interfere in it. Thus, the imposition of inheritance tax will lead to a complex legislation as its predecessor, Estate Duty Act, resulting in increased litigations. However, in response to this, it is argued that the Estate Duty Act was a complicated statute primarily because of its frequent modifications, exemptions and high estate tax of 85% which led to its failure. Estate Duty while being in implementation for around 30 years, was paid by citizens, and the super-rich percentile was the one who evaded the tax - not because it interfered with one's religion. A tax that is levied consistently across all religions is neither discriminatory nor restricts the right to practice any religion. Furthermore, despite the fact that in present time, the Uniform Civil Code is the most contentious issue in the nation, it is crucial to argue for the inheritance tax to be imposed uniformly on every individual.

Second, it is contended that even if a property is inherited, the heir may not be able to afford the tax. For instance, if a person inherits a property worth Rs. 100 crores, they might not be wealthy enough to pay the Rs. 1-2 crores of inheritance tax on that property. Herein, inheritance tax will again become a problem for both taxpayers and the authorities. However, this argument can be refuted by stating that there is always an option for the heir to get a loan or sell a portion of the inherited property. For instance, even if a bank loan of Rs. 1 crore is taken to pay the tax, a part of the inherited property can be mortgaged with the bank; yet, the successor can conveniently sell another portion of the property and use the proceeds to pay off the loan. Hence, the inheritance tax can easily be paid.

Finally, the very basis of the imposition is questioned that, whether the government would actually utilize the revenue generated to carry out "social initiatives" and reduce inequality. In response to this, it is again argued that the issue still lies with the administrative procedures rather than the tax.

After taking into account all the requirements and addressing the counter arguments raised against the imposition of Inheritance tax, it is therefore concluded that it is the right time for the government to reinstate the tax. While the nation has a number of indirect taxes, which disproportionately impact the country's economically poorer groups, a direct tax like inheritance tax is a necessity. It seems absurd that an individual who earns money from his time, efforts and skills is required to pay income tax. However, one might become extremely wealthy just by being born into a wealthy family and will not have to pay taxes on the inherited property. The Estate Duty Act was not effective due to structural limitations since it had undergone several alterations, including the introduction of a gift tax, changes in slab rates, and several exceptions. Rather than rectifying the statute and improve the administration procedure, the then government simply chose to give up and abolish the tax. In addition to many of the social, economic, and legal factors, the resurrection of the inheritance tax would work wonders in this time of legislative reform that can be brought by the Uniform Civil Code and the uncertain era of pandemic which widened the gap between rich and poor. The tax will generate revenue that can be utilised to develop infrastructure, generate employment, and enhance its human resources, which were tarnished after the COVID outbreak. However, the lawmakers must consider that the tax cannot be as high as the 85% originally imposed; the quantum must be realistic and reasonable. As the prominent economist and lawyer Nani Palkhivala stated, "the health of our economy won't improve unless we give our fiscal regulations the "S" factor and make them Sane, Simple, and Stable.^[12]"

Views are personal.

[1] ESTATE DUTY ACT, 1953, No. 34, Acts of Parliament.