PublicationsIS THERE A CASE FOR INHERITANCE TAX IN INDIA?

July 5, 20210
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INTRODUCTION

Inheritance tax is a direct tax and is considered as the most progressive of major tax systems[1]out of the present tax regime in the country. Inheritance Tax is imposed on inherited property. Inherited property are the assets that are transferred to a person from a deceased person. Inheritance is the practice of transferring property, titles, debts, rights, and obligations to the legal heir of a person upon the death of that person either by way of ‘Will’ or through the prevalent laws of succession[2]. It was first introduced in India as Estate Duty under the Estate Duty Act, 1953. The inheritance tax rate generally depends on the value of the property received by the heir, and his relationship to the descendant[3]. This type of tax is being levied by most of the developed countries such as United States of America, United Kingdom, Australia, Japan, Canada, France, and South Korea.

At this point this tax is not imposed in India as any inherited property received under a Will or by way of inheritance or in contemplation of death of the payer is exempted under Section 56(ii) from the levy of any Income Tax[4].A report submitted by the Income Tax Department to the Finance Ministry suggested that reintroduction of Inheritance tax to help reduce the concentration of wealth, widen the tax base, and enhance revenue. This will, in turn, help bridge the gap in division of wealth as well[5]. Indian Shareholders and Promoters have generated a fortune of wealth through the economic growth and flourishing capital markets that India has witnessed[6], which has resulted in an increase in the wealth of many businessmen and industrialists. At the same time India is failing to lower down its fiscal deficit which has led to a decrease in tax revenues. This tax would benefit the government to increase their tax revenues. The non-levying of this tax has resulted in numerous socio-economic problems and issues, which can be tackled and solved if this tax is levied and implemented correctly in the country.

HISTORY OF INHERITANCE TAX IN INDIA

The first ever Inheritance Tax or Estate Duty was introduced by the Central Government after Independence, under the Estate Duty Act, 1953. It was modelled after the British Finance Act of 1894 with modifications relevant to the Indian society[7]. Estate Duty was levied under Section 5(1)[8] of the Estate Duty Act. Inheritance tax was levied on a different rate system (slab basis) which is similar to the Income tax levied currently in the present tax system. The tax rate slabs were ranging from 7.5% up to 85% when the principal value of the assets or estates exceeded₹20 lakhs. Compared to other countries where a similar tax existed, the maximum tax rate was 40%. Inheritance tax continued to be levied till the year 1985.The Inheritance or Estate Tax was abolished with effect from 1985[9]. There were a lot of problems and issues related to the implementations and execution of such a complicated tax system when it was introduced in independent India. Though the purpose of the duty was to augment government revenues and remove extant inequalities in income and wealth, it failed to achieve the objectives owing to the very low marginal benefit (in revenue terms) and the innumerable litigation into which the government found itself trapped, due to the complex nature of the Act[10]. The low yield and the comparative higher administrative cost of collection forced the abolishment of the tax was not what the government were expecting and because they could not generate the revenue they expected, eventually they were forced to abolish it. One more reason for them to remove the Tax was that “the low threshold and progressively high duties led to evasion and avoidance, rendering it futile, as the yield from the tax was lower than the cost of its administration”[11].

THE NEED FOR INTRODUCTION OF INHERITANCE TAX

Over the past two decades, India has been developing constantly in terms of trade, commerce, and technology. Today, India has one of the largest GDPs in the world. The Government with its aim to promote growth, has given various incentives for entrepreneurs to set up businesses and establish global markets. This has led to a massive rise of millionaires and billionaires. This can be traced back to 1990 when India became Liberalized and Globalized.  Presently, India has 134 billionaires compared to only two billionaires in the 1990s. Though this number can be looked positively, but on the flipside the disparity between the rich and the poor has been growing year by year. The richest 1% Indians own 58.1% of the wealth and the top 10% of the richest own 80.7% of the wealth. The poor people who constitute 50% of the population only own a meagre 2.1% of the total wealth. These facts provide a clear picture of the rising income inequality in India. The concentration of wealth by the world’s richest has been increasing with no fee or a tax being charged on them for inheriting the wealth. In India, over 40% of the wealth is inherited and growing while the rest is self-made[12]. Over the past decade with various economic reforms, there has been an increase in the disposable income of the consumers leading to more spending. This has facilitated in increasing the wealth of already the richest.

Inheritance tax, that already exists in majority of the developed countries in the world, is levied to ensure there is a reduction in the income inequality that persists. A country like India where the rich continue to become richer and the poor who are unable to rise, a tax like this would ensure a fair distribution of income by not imposing all the taxes on a middle or a lower-class man. The introduction of this tax would also aid in bridging various loopholes that exist in the Income Tax Act. To understand this better, one can look at the FDI that takes place in Mauritius. Mauritius is the largest FDI country to India due to its relaxed tax laws. Many High-Net-Worth Individuals (HNIs) and other wealthy people launder their money through countries such as Mauritius and Cayman Islands to India, so as to avoid various taxes which called ‘round tripping’[13]. Through this mechanism, many people have been able to build their wealth illegally while leaving the common man to pay for the heavy taxes.

Another loophole which is often used by politicians and individuals is holding property in another person’s name which is called benami property. This transaction is illegal in the eyes of the law but has been going on for various decades. Many politicians and HNI’s do so to avoid tax liability and at the same time own multiple assets which cannot be taxed. Benami properties come into question when there is an inheritance of a property. Also, in a Hindu Undivided Family, though the Karta is the manager of the assets, they are often in another person’s name which would constitute as benami property and many HUFs purchase assets in another’s name to avoid tax[14]. While this could pose a problem for inheritance tax, this can be avoided by ensuring there exists a comprehensive inheritance tax including for gifts or donations as this would plug the loophole and also pave way for a strong act on benami transactions which already exists but is not able to weed out illegal transactions as much as the Government thought it could.

With the introduction of GST in 2018, various tax slabs have been carved out for businesses as well as individuals for the ease of understanding and payment of the same. The GST was criticized for levying a high amount of tax on medium to small scale enterprises and middle-class individuals earning less than ₹20 lakhs per annum. The inheritance tax at this stage would prove to be a big relief for these people as it would widen the tax base and consequently reduce the direct tax rates. There exist different slabs ranging from ₹10 lakhs to ₹5 crores where in different percentages of tax is levied. A person earning ₹5 crores would pay an income tax surcharge amounting to ₹40%[15] and this has been unopposed and has been welcomed by many. Therefore, an addition of this tax would not burden the taxpayer but ensure a fair income distribution between different stratums of the society while also reducing the rising inequality that persists. If this tax were to be implemented, it would contribute substantially to the GDP of the country and ease the fiscal expenditure incurred by the Government. This tax could alone contribute up to 20% of the total expenditure done by Government and could boost the infrastructure and development of the nation[16]. In today’s technological world, the implementation of this tax would not be a big hurdle as it was during the 1950s. The income earned by each person and the assets they own can be ascertained via numerous ways and can be incorporated in a software.

Therefore, this tax would not only help in upliftment of the society and reduce income inequality, but it would also reduce the concentration of wealth by certain people, and it would in future increase donations to charities and NGOs and help in development of a stronger backbone for our economy.

WHAT SHOULD BE KEPT IN MIND WHILE INTRODUCING THE TAX

The advantages of the Inheritance Tax or the Estate Duty are many. The argument being that it would help reduce the disparity of unequal wealth and income disparity between the rich and the poor which has been increasing year by year. The government feels reintroducing the tax could increase the tax revenue and improve tax imparity. However, before the government thinks of reintroducing the tax, there are a number of points and arguments which need to be taken into consideration and should be worked upon to ensure they do not hinder the implementation. They should also keep in mind the various problems that forced them to abolish a similar tax regime in 1985 and ensure that such problems do not crop up while devising a new tax regime. The Government should assess the availability of resources and its capability to tackle any issues or contingencies that may arise in the future post the introduction of the tax.

The Inheritance Tax was abolished in the year 1985due to meagre tax collection and high costs, besides inefficiencies in implementation[17]. Also, a similar Wealth Tax was also abolished in the year 2016owing to the same reasons. One of the main reasons why introducing the Inheritance tax is going to be a controversial topic is because the most impacted group is going to be the High-Income Groups and there could be resistance and consequent litigation that could be faced by the government. In an article by Abhishek Rastogi, Partner, Khaitan and Co. has said that the levy of Inheritance Tax would put additional burden to the already overburdened estates of the high-income groups by the high rate of income tax and the capital gains tax that are being imposed.[18]. Amarpal Chadha, Tax Partner and mobility Leader, EY India said in an article that –

“Governments across the world look for opportunities to streamline taxation to ensure maximum coverage both in terms of sources of income and the number of people under the tax net. At the same time, governments need to balance the impact of taxes. Given our current system of social security, there is always an unsettling urge to save for the future, save for the next generation. Reintroduction of inheritance tax may negatively impact this sentiment of saving for the future and or passing on the”[19].

Additionally, this tax could also work as a negative reinforcement for businessmen and could demotivate them to earn more wealth and open anew business as they would have to pay more taxes if they do so. This could also encourage people to find loopholes is the legislation and get around to not pay the tax. This could work against the motive of increasing the collection of the tax revenue.

The administration cost that was incurred by the government when the inheritance tax was in place before the 1985 was so high that they could not afford the costs which forced them to abolish the tax in 1985. If the government reintroduces the tax, their biggest issue would be to tackle the problem of high administration costs. Also, when the tax was abolished in 1985 there was lack of data, and the accountability of assets was very challenging. Lastly, the cost of collecting the tax might turn out to be too high compared to the total collections and may not result in it being a “pragmatic tax”[20].Innovation has made information on the budgetary side accessible. What is woefully missing is information on the genuine resources side. For inheritance tax to work, vigorous components that carefully approve genuine resources possessions must arise[21].

Therefore, if the government really decides to bring such a complex legislation as the Inheritance Tax, they should be aware of all the issues and problems that could arise and be ready with a fool-proof plan to tackle these issues and problems and try to implement the tax in such a way that these issues do not arise at all. With tax collection using deep data analysis tools and real time linking of financial transactions, inheritance tax monitoring and collection can be spruced up effectively.

INHERITANCE TAX AROUND THE WORLD

The introduction of this tax would not be an easy task; however, this tax is prevalent in many countries and the Government can design its framework by gathering various provisions and sections from the respective countries. In USA for instance, several states have the inheritance tax and they levy it depending on the heir who is inheriting and a threshold. In Pennsylvania, there is no inheritance tax if the assets are inherited by a living spouse or their children and thereafter tax is levied depending on the relationship to the deceased ranging from 4.5% to 15%. The tax earned by the Federal Government is equivalent to the funding it provides to the Food and Drug administration and on Environmental Protection. It contributes about $269 billion to the taxes of USA[22]. UK on the other hand has an inheritance tax rate of 40% which is levied if the assets owned by the deceased are more than £325,000. The threshold can be increased if the legal heirs are children and the spouse[23]. In countries where the inheritance tax is present, it is levied only after a certain amount which largely exempts the middle and lower section of the society and taxes the super-rich[24]. Since the COVID-19 pandemic has struck the world, numerous billionaires from around the world have requested their governments to introduce a “COVID Wealth Tax” as these people during lockdowns became more rich doubling and tripling their net worth while others lost their jobs. The current economic situation in India is very alarming with various economists stating India is undergoing a recession and would not recover until the end of 2021[25].

CONCLUSION

Today, India is one of the most fastest developing economies all over the world with major advancements and amendments taking place in our tax regime and at the same time there is an alarming increase of income inequality which needs to be kept in check. The introduction of inheritance tax is therefore the need of the hour and cannot come at a better time to reduce the wealth concentration in the hands and ensure that there is fair distribution of income and the richest do not continue to reap the benefits of the deceased and work hard and make their own wealth.

India today, has the benefit of making a comprehensive inheritance tax law with greater flexibility with regards to thresholds and exemptions by taking inputs from several countries as well as from the citizens. The new law would not resemble the Estate Duty that was abolished due to its complexity as we are benefitted with the technology that is available around us. It would also enable the Government to weed out corruption within its system as well as from any person to a certain extent. This law may be inserted by a new Chapter or can be incorporated within the head of “Capital Gains”.  While there may be a few changes that need to be made to fill loopholes that exist, inheritance tax law would aid in building a stronger social security framework for India which would make us come at par with nations like USA, UK, and Japan.

REFERENCES

[1]Smarak Swain & Janardhan S, to tax or not to tax: Why India needs to reintroduce inheritance tax, CNBC TV18 (Jun. 27, 2019), https://www.cnbctv18.com/views/to-tax-or-not-to-tax-why-india-needs-to-re-introduce-inheritance-tax-3788851.htm.

[2]Lawyer, Law on Property Inheritance in India, Helpline Law (Accessed on Dec. 03, 2020), https://www.helplinelaw.com/real-estate-wills-probate-and-trust/GIPIL/law-on-property-inheritance-in-india.html

[3]Julia Kagan, What is Inheritance Tax?, Investopedia (Jul. 7, 2020), https://www.investopedia.com/terms/i/inheritancetax.asp.

[4]Alan Cole, Estate and Inheritance Taxes Around the World, Tax Foundation (Mar. 17, 2015),https://taxfoundation.org/estate-and-inheritance-taxes-around world/#:~:text=Key%20Findings,property%20passed%20to%20lineal%20heirs.

[5]Bank Bazaar, Inheritance Tax, Bank Bazaar (Accessed on Dec. 03, 2020), https://www.bankbazaar.com/tax/understanding-inheritance-tax-in-india.html.

[6]Maulik Doshi, Budget 2019: Many benefits of Inheritance Tax; Here’s why India needs one more tax, Financial Express (Jul. 4, 2019), https://www.financialexpress.com/budget/budget-2019-many-benefits-of-inheritance-tax-heres-why-india-needs-one-more-tax/1628061/.

[7]AmarenduNandy et al., The Case for Introducing Inheritance Tax in India, 4:1 JTA 81, 81-87 (2018).

[8]Estate Duty Act, 1953, §5(1), (Repealed, 1985).

[9]Correspondent, Tax on Inheritance in India, Cleartax (Nov. 10, 2020), https://cleartax.in/s/inheritance-tax.

[10]Id. at 7.

[11]Id. at 7.

[12] Sakti Golder, Inheritance Tax & Inequality: Global experiences & Lessons for India, 25 OXFAM 1, 1-10 (2017).

[13]Id.at 7.

[14] ET Bureau, Should India reintroduce inheritance tax? Here are 4 expert reviews, ET Prime (Oct. 17, 2017), https://economictimes.indiatimes.com/wealth/tax/should-india-reintroduce-inheritance-tax-here-are-4-expert-views/articleshow/61078197.cms.

[15]ET Online, here are the latest income tax slabs and rates, The Economic Times wealth (Dec. 03, 2020), https://economictimes.indiatimes.com/wealth/tax/latest-income-tax-slabs/articleshow/62751981.cms.

[16]Ashwini Kumar Sharma,is it viable to reintroduce estate tax in the upcoming budget?livemint (Jul. 1, 2019),https://www.livemint.com/money/personal-finance/union-budget-2019-is-it-viable-to-reintroduce-estate-tax-in-the-upcoming-budget-1562000837590.html.

[17]Ibid.

[18]Ibid.

[19]Id. at 14.

[20]Id. at 16.

[21]Id. at 14.

[22]Susannah Snider, What is Inheritance Tax?,U.S. News (Oct. 8, 2019), https://money.usnews.com/money/personal-finance/taxes/articles/what-is-inheritance-tax#:~:text=The%20federal%20estate%20tax%20is,are%20paid%20by%20the%20heirs

[23] U.K. Government, Inheritance Tax, Government of U.K. (Dec. 3, 2020), https://www.gov.uk/inheritance-tax/print.

[24]Divi Dutta & Himanshu Malhotra, Estate Duty Act- A Critical Analysis of The Journey So Far, Mondaq (Jun. 6, 2018), https://www.mondaq.com/india/inheritance-tax/708128/estate-duty-act-a-critical-analysis-of-the-journey-so-far.

[25]Correspondent, its time for centibillionaires to help pay the cost of COVID, The Guardian(Aug.9,2020),https://www.theguardian.com/business/2020/aug/09/centibillionaires-help-pay-costs-covid-wealth-tax.

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