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Should India Implement an Inheritance Tax? Exploring the Debate Amidst Political Turmoil!

Sam Pitroda's suggestion of adopting a system akin to the existing tax structure in the United States has led to divergent opinions on whether such a tax could contribute to fairer wealth distribution.

Pratik Sharma and Syed Hassan Kazim
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As the General Election in India enters its second phase, recent comments by Indian Overseas Congress chairman Sam Pitroda on the prospect of implementing an "inheritance tax" in the country have sparked a political slugfest between the ruling Bharatiya Janata Party (BJP) and the opposition Congress.

Pitroda's suggestion of adopting a system akin to the existing tax structure in the United States has led to divergent opinions on whether such a tax could contribute to fairer wealth distribution. The Indian National Congress (INC) swiftly distanced itself from Pitroda’s remarks, asserting that his views do not align with the official stance of the party. "The Congress has no plan whatsoever to introduce an inheritance tax. In fact, Rajiv Gandhi abolished estate duty in 1985," party leader Jairam Ramesh tweeted.

Sam Pitroda himself issued a clarification saying that his statements were twisted and had nothing to do with the Congress party.

While, the BJP accused the grand old party of wanting to seize and redistribute the wealth of Indians. “They (Congress) want to snatch your assets and rights of your children,” PM Narendra Modi told an election rally in north Chhattisgarh's Ambikapur.

A day earlier, the PM, targeting the opposition party, said that the Congress, if voted to power, could distribute the nation’s wealth among “infiltrators”.

So, what is much talked about “inheritance tax”, how is it levied, what is its history in India and which are the countries where it has been implemented? 

The concept of an inheritance tax, also known as estate tax or death duty, involves levying taxes on the assets transferred from a deceased individual to their heirs. While some advocate for its implementation as a means of addressing wealth inequality, others argue against it, citing concerns about its potential impact on family-owned businesses and the possibility of double taxation.

Inheritance Tax: Variations Across Global Taxation Systems

In countries like the United States, United Kingdom, France, Germany, Japan, Canada, and Australia, inheritance tax forms a part of the taxation system. However, the specifics of how it is levied and its historical context vary from one country to another.

Country

Tax Name

Description

United States

Estate Tax

Imposed on the transfer of property upon death by the federal government. Certain exemptions and thresholds apply. Some states also have their own estate or inheritance taxes.

United Kingdom

Inheritance Tax

Levied on the estate of a deceased person above a certain threshold. Exemptions and reliefs are available, and the tax rate may vary based on the relationship between the deceased and the beneficiary.

France

Inheritance Tax (Droits de Succession)

Imposed on the transfer of property from a deceased person to their heirs. Tax rate depends on the value of the estate and the relationship between the deceased and the beneficiary.

Germany

Inheritance and Gift Tax (Erbschaftsteuer und Schenkungsteuer)

Levied on the transfer of property between living individuals and from a deceased person to their heirs. Tax rates depend on factors such as the value of the inheritance and the relationship between the deceased and the beneficiary.

Japan

Inheritance Tax (Sōzokuzei)

Imposed on the transfer of property upon death. Tax rates vary based on the value of the inheritance and the relationship between the deceased and the beneficiary.

Canada

Probate Fees/Estate Administration Taxes

While Canada does not have a federal inheritance tax, some provinces impose probate fees or estate administration taxes on the value of the estate. Additionally, certain types of income earned by the deceased before death may be subject to tax.

Australia

Probate or Estate Duty

Australia does not have a national inheritance tax, but some states impose duties on the transfer of property upon death, known as probate or estate duty.

 

Comparing Inheritance Tax Systems: U.S. and India Perspectives

Exploring the U.S. Model

In the United States, the concept of inheritance tax is intricately woven into the state tax framework. Unlike the federal estate tax, which is imposed on the estate itself, the inheritance tax is paid by the beneficiary upon receiving money or property from the deceased's estate.

As of 2021, only six states in the U.S. impose an inheritance tax: Iowa, Kentucky, Maryland, Nebraska, New Jersey, and Pennsylvania. The tax rates and exemptions vary by state, with some states offering exclusions for certain classes of heirs or applying lower tax rates to transfers made to close family members.

Inheritance tax rates in the U.S. can range from less than 1% to 20% of the inherited property or cash value. However, the tax is typically calculated on the portion of the property or money exceeding a specified threshold.

Sam Pitroda's advocacy inheritance tax in the U.S. draws attention to the existing system, where inheritors may only retain a portion of the deceased's wealth while the remainder is claimed by the government.

The Absence of Inheritance Tax in India: A Historical Perspective

Contrary to the U.S., India currently does not impose a tax on inheritance.

The concept of inheritance tax is not new to India. Known as estate duty, the tax was introduced in India in 1953, but approximately four decades ago, it was abolished by then-Prime Minister Rajiv Gandhi in 1985. Gandhi's decision aimed to streamline the tax structure and promote investment and savings.

Former finance minister P Chidambaram, on multiple occasions spanning from 2011 to 2013, voiced the proposal of implementing an inheritance tax as a means to bolster government revenue. Similarly, during the initial tenure of the NDA government, former Minister of State for Finance Jayant Sinha fervently championed the concept.

In 2018, then Finance Minister Arun Jaitley also advocated the idea of inheritance tax, highlighting that hospitals and universities in developed nations garnered substantial endowments, partly owing to the presence of inheritance tax. He has underscored that major healthcare and educational institutions in the United States and Europe amassed endowments totaling billions of dollars, courtesy of contributions from individuals and patients who had benefited from their services.

Elon Musk and Warren Buffett: Divergent Views on Inheritance Tax and Wealth Distribution

American business tycoons too have varied views regarding the inheritance tax. In 2021, Elon Musk, CEO of Tesla and SpaceX, voiced his backing for the inheritance tax, describing it as a commendable levy. He argued that it's equitable for individuals to allocate a portion of their wealth to benefit the broader public.

Elon MuskElon Musk

While, Warren Buffett, the esteemed investor and Berkshire Hathaway chairman, takes a distinctive approach to managing his wealth posthumously. While Musk advocates for wealth redistribution via inheritance tax, Buffett emphasizes practical investment approaches and philanthropy to foster enduring positive outcomes.

Warren BuffetWarren Buffett

According to a report released by UBS Global Wealth Management in 2023, newly minted billionaires have accrued a larger portion of their wealth from inheritances rather than from their own entrepreneurial endeavors or work. Out of the 137 individuals who joined the billionaire club within a year, 53 inherited a collective sum of $150.8 billion from their families. This inheritance total surpasses the combined wealth creation of $140.7 billion by 84 individuals who became billionaires through self-made means during the same timeframe.

While Sam Pitroda issued a clarification and the Congress party distanced itself from his remarks, the debate surrounding the implementation of an inheritance tax in India remains highly contentious, especially in the midst of ongoing political happenings

BJP Elon Musk Indian National Congress inheritance tax Sam Pitroda Warren Buffet Global Taxation Systems