Should India seriously consider implementing an inheritance tax?

[Aratrik Banerjee]

To understand taxation on inheritance, we need to understand what inheritance is. Inheritance implies the assets that somebody leaves to their loved ones after their death. An inheritance can include cash, investments like stocks or bonds, and other things like jewellery, automobiles, art, antiques, and real estate. If we look at it, we will not be wrong to say that inheritance is a kind of gain to the individual on the receiving end. Many countries around the globe collect inheritance tax from their citizens, India was also one of those many countries but, effective immediately from 1985, India has abolished inheritance tax.

Yet, on various occasions, there have been debates on whether inheritance tax should be reintroduced in India. 

As of now any income which is made from the inheritance has to be declared to the authorities on which there will be tax liabilities on the new owner. This income can be in the form of rent, interest, etc. Also, in a situation where the inherited property has been sold then in such a scenario, there is again a tax liability on the head of capital gains, depending on the holding period of the asset, either short-term capital gain (STCG) tax or long-term capital gain (LTCG) tax.

The grounds for the elimination of inheritance tax were bureaucratic problems, the inability to provide adequate operation, and low revenue generation. Since then, the Indian economy has expanded greatly and the problem of inequality has emerged to make the wealth divide more acute, and the question of the possible prospects and drawbacks of reintroducing the tax has reemerged as well. In light of heightened fiscal pressures in India and widening income disparities, it behoves to reconsider whether the inheritance tax has to be restored and should provide due consideration to the economic, social, and administrative efficiency considerations.

Unsurprisingly, one of the biggest reasons many call to reinstate the inheritance tax is that it would reduce wealth disparity. Media sources suggest that the latest figures have shown that the top 1% of the population controls more than 40% of India's total assets. This kind of wealth distribution is not only unsustainable in terms of creating equity in the channel but also an issue of social cohesion and the need to foster inclusionary growth. IHT is regarded as a tool for reigning in generation and passing on of wealth, through implementing methods aimed at ensuring that the wealth is distributed evenly. By putting into place an inheritance tax, whereby people with large inheritances are taxed the government could reduce the effects of the cycling of wealth from generation to generation. A tax of such nature would be imposed on our super wealthy and could allow for the creation of resources to benefit and fund our population welfare, transport and infrastructure, and other projects to name but a few.

Another reason for bringing back an inheritance tax is the generation of revenues. With India looking to achieve its development goals and dealing with fiscal deficits on the rise the government is constantly in the search for new streams of revenue. An inheritance tax could bring in a large amount of revenue, especially from the rich, the wealthy. The spectrum of estimates on how much the well-developed inheritance tax could bring annually looks quite impressive. Namely, an excise tax on estates over some limit as is done in estate tax countries like the United States or the United Kingdom would be quite productive. During the current global economic circumstance, where governments are in a hurry to get the most efficient and stable source of revenue to finance welfare and development needs, an inheritance tax may well be the way to reach out to high-net-worth individuals.

The third argument in favour of an inheritance tax is that it stimulates philanthropy: with money in hand, people will donate more to charity. High inheritance taxes make the rich give their wealth to charity when they are alive to lighten their estates at their demise. Other developed countries such as the United States have seen this culture of billionaires donating huge chunks of their wealth to charity. In India, where a lot more private sector money is being contributed towards social and developmental causes an inheritance tax could well encourage the stupid rich to invest in charitable trusts, NGOs, and social causes. It could serve to augment the general culture of giving and establish a better mechanism for supporting social causes, public welfare appeals, education, health care, and protection of our environment.

Taxing proposals, particularly an inheritance tax is another area of concern due to a probable effect on family businesses, and SMEs. Most organizations operated in India are family-operated and are handed down through generations. If an inheritance tax were to be put in place, business heirs could be stretched for funds, maybe not possessing the necessary cash to get the tax done. This could pressure them to dispose of some of their subsidiaries to generate cash for the payment of taxes or acquire huge amounts of debts to meet their tax responsibilities, obviously an indication of a declining balance sheet in their businesses. At times, it could have extended its implications even to affecting some generations-old companies. This would go alongside influencing the families that these businesses cater to, employees, and the surrounding communities. To maintain an overall positive impact on the rest of the economy, policymakers will have to devise how best to present the proposed tax.

Another major concern to undertake is; Capital Flight. The affected high net-worth persons due to high rates of inheritance taxes may look for ways to transfer their estates, or even formally reside in countries with low or no IHT. India has already seen cases of high-net-worth individuals (HNIs) shifting their base to other states with lower taxation policies. If an inheritance tax is introduced this could lead to a further worsening of this trend and lead to loss of capital as well as talent. The capital flight from the country threatens to offset benefits from the tax and erode its relative economic strength. To avoid such capital flight, India would have to ensure that its IT rates are competitive and there are adequate provisions for anti-evasion.

Besides, there are certain questions about the future revenues of an inheritance tax. They got it wrong because the experience of other countries shows that the yields from inheritance taxes are much lower than expected. This is partly so because, due to one form of tax planning several, but setting up trusts, gifting assets before death, and other estate planning that decreases the taxable estate is given. Many developed nations have this type of tax; more often; the rich employ various strategies to avoid or reduce these taxes hence; the revenue generated is much lower than opposed to expectation. In the case of post-economy countries like India, it becomes a herculean task to implement tax laws as such; therefore, the cost of implementing an inheritance tax would be higher than its benefits if the revenue is low.

Concerning these issues, some scholars pointed out that instead of reinventing the IIT in India there are other options of wealth taxation. One measure is to resume the wealth tax, which was eliminated in 2015. A wealth tax focuses on the net worth of a person plus his or her real estate, shares, and other investments. Since inheritance tax is a one-time tax that is paid during an individual's death, a wealth tax is a recurrent yearly tax on assets. This could be a more dependable and stable source of income for the government as compared to most developmental taxes. Besides, a wealth tax could be correctly designed to leave out those who hold small amounts of wealth and target the elite wealthy population.

A further possibility might be to make reductions in the capital gains tax provisions on inherited properties. As of now in India, the inherited property is not charged to tax but any income that has arisen from the inherited asset is charged to tax under the head of capital gains tax. In this regard, the government could alternatively maintain the goals of collecting similar amounts of revenues through readjustment of the current capital gains tax rates or broadening of definitional attributes of other taxable transactions to the introduction of this new inheritance tax. For instance, the government could think about increasing the tax on the sale of an inheritance stock, which could have been bought many years ago, and has since increased in value. This would make sure that the transfer of wealth is easily taxed without creating more taxes and more work for the authorities.

Thus, decision-making on whether India should impose an inheritance tax is not a one-sided issue. Such a tax may assist in reducing inequality and raising much-needed revenue for the government; however, problems of implementation, administration, and enforcement cannot be overlooked. The issues of double taxation, bearing in mind the affecting prospect of family business, leading to capital flight, are some of the policies that must undergo a critical evaluation. Other forms like a reformed wealth tax or increases in capital gains taxes on inherited wealth might be more feasible with fewer of the problems that arise with an inheritance tax. In either case, the decisions that are made in India have to ensure fairness and generate revenues for the government alongside preserving and fostering economic growth in the country.