Inheritance Tax – rhetoric vs reality

 In the past fifteen years, the pre-budget narratives in India have always included discussions on the reimposition of Estate Duty (inheritance tax). The finance ministers, policy-makers, bureaucrats, economic thinkers, and members of the party think tanks, have all spoken about it and emphasized the need for such a tax in a country like India that has massive socioeconomic inequalities; poor GDP-to-Tax ratio; and significant fiscal, monetary, & social/sustainability concessions for entrepreneurs who ought to repay to the society after attaining a certain scale.

In the past few years, I have seen numerous wealthy families worrying about Estate Duty and making plans to preempt it. Some of the richest families in the country have relocated their wealth offshore to more convenient tax jurisdictions like Singapore, UAE, Luxemburg, etc., in anticipation of the imposition of Estate Duty or Inheritance Tax in some form.

Estate Duty has however not been an election issue ever since it was abolished in 1985.

Historical context

In India, the Estate Duty Act (EDA) was implemented in 1953. The EDA imposed a tax obligation on the inheritors of property from a deceased person. The tax was imposed if the current value of the property (excluding the exempted properties) of a deceased person exceeded Rs one lac at the time of passing over. The rate of duty ranged between 7.5% to 85%. The palpable objective of imposing the Estate Duty was to mitigate the massive economic inequalities prevalent in the country at the time of independence. A handful of large wealthy families controlled most of the businesses, agricultural land, and real estate. Abolition of the Privy purse, imposition of land ceiling, and nationalization of banking, insurance, and coal mining businesses, etc. were some other measures taken in the 1960s and 1970s, inter alia, for redistribution of wealth and mitigating socioeconomic inequalities.

However, given the complexities and high cost of enforcing EDA, the Act was abolished in 1985 as part of the larger tax reform strategy. For context, in the financial year 1984-85, only Rs20cr were collected as Estate Duty (0.4% of the total direct tax revenue) at a huge cost and numerous litigations. This was also the period in time when the marginal rate of income tax was capped at 50%.

International Scenario

It is pertinent to note several developed countries impose inheritance tax to mitigate inequality and to facilitate economic redistribution of wealth. For example—

·         England imposed Estate Duty in 1894, claiming that the title of the State to a share of the accumulated property of the deceased is anterior to that of the interest to be taken by those who are to share it. Presently, the UK imposes an Estate Duty of up to 40% on inheritance value exceeding £ 325,000. If the estate is given to the children or grandchildren, the threshold increases to £ 425,000.

·         The US imposes an inheritance tax at a rate of up to 40%, on inheritances exceeding $5.49 million per person for 2017.  The exemption gets doubled to $10.98 million for married couples filing joint tax returns. Besides the estate tax (a federal tax) several states have a state-level estate tax over and above the federal limit.

·         In France, the estate tax rate is varied between a minimum of 5% to a maximum of 60% with several tax slabs in between. There is a condition, whereby, if the beneficiaries are children or parents of the deceased, and the value of taxable inheritance (after permitted deduction) is up to € 8,072, the tax rate is 5%. Whereas, if the value of taxable inheritance is above € 1,805,677, the tax rate is 45%. If the beneficiary does not fall within the category of children, parent, brother, sister, nephew or niece, the taxable inheritance (after permissible deduction), is taxed at the rate of 60%.

·         In Japan, the estate tax rate ranges between 10% to 70%; in South Korea, the estate tax rate is up to 50%; in Spain it varies between 7.65% to 34%.

The short point is that the state taking a part of the estate of a deceased person for a larger social benefit is considered an acceptable norm for long. This practice has strong moral, economic, and social arguments in its favor. Of course, the inheritors who are subjected to this tax do not like it – but then who likes to pay taxes and duties anyway?

The most common argument against inheritance tax is that it is unfair because it is a form of double taxation.

Current narrative is mostly rhetorical

In the current context, I find the debate in India mistimed, misplaced, misinformed, and hence rhetorical. Firstly, it is mistimed as we do not have any concrete proposal on the table to discuss. Secondly, the current debate is misplaced since it does not seem to be distinguishing between income and wealth. Inheritance tax is essentially on accumulated wealth that is passed to others on the demise of the owner. Third, it is misinformed since the proportion of the population that could potentially be impacted by inheritance tax is much less than 1% of the total population.

As per the latest World Inequality Lab report, the bottom 50% of the 922 million Indian adults earn about Rs71000 per year or less than Rs6000 per month. Only the top 10% of the adults earn more than Rs25,000/month. The top 1% of adults earn more than Rs1,73,000/month.

From an accumulated wealth viewpoint, the top 10% of adults have an accumulated wealth of Rs 22,00,000 or more. If one has accumulated wealth of more than Rs 1 crore, such a person would be amongst the top 1% of the adults in India. The average wealth of the top 1% of adults is Rs5.4 crores.

Note that inheritance tax with a threshold exemption of Rs36 crores, would cover less than one lac people in a country of 140 crores.