Image used for representational purposes only.
Image used for representational purposes only. Express illustrations

Inheritance tax: An economic blunder

Anant Merathia

The belief of leaving behind an inheritance or legacy for one’s progeny has remained in the human psyche for time immemorial. However, opinions differ based on how accumulated wealth over a lifetime should be distributed after an individual’s lifetime.

Recently, Sam Pitroda, the Chairman of the Indian Overseas Congress, has spoken in favour of introducing an “inheritance tax” in India. Citing the US as an example, he highlighted how a significant percentage of wealth is taxed by the government, and the rest is inherited by an individual’s descendants.

Pitroda spoke in favour of leaving a portion of one’s wealth to the public. This proposition has not just sparked controversy across the country.

What is inheritance tax?

Inheritance tax refers to the transfer of property or assets to heirs upon the demise of their previous owner. This process is governed through legal frameworks and norms which differ from country to country. In France, the same is governed under droits de succession law. In this, French citizens that inherit properties pay between 5 and 60% in inheritance tax, while additionally having 100,000 Euros as an allowance for direct descendants and lower amounts for indirect descendants.

In the US, different states have different rates of inheritance taxes. This is greatly debated in the US itself, in which individuals on the conservative side of the political spectrum, feel that such taxes cause double taxation: the wealth accumulated had already been taxed, and now is being taxed once again when being inherited by the descendants, thus disincentivizing people in the lower and middle classes of society, who have worked tirelessly to accumulate the property that they have.

This has also been protested by small businesses and farmer’s unions, such as the National Farmers Union, that has been advocating for the simplification of the estate tax. Their worry is that even after death, a percentage is taken away once again by the government, leaving a small part of the initial property or asset.

Inheritance Tax: A bane on the Indian economy

The re-introduction of a probable inheritance tax in India is concerning, as there is a complex interplay of multiple variables that must be taken into account. While proponents in favour of an inheritance tax argue that it will create a more equitable distribution of wealth from the rich sections of society to the economically weaker sections of society, the potential consequences of this cannot be ignored. Considering the unique socio-economic and political landscape of India, such a tax, will adversely affect the accumulation of wealth amongst the aspirational middle-class families in India and if one could include the families a little below and above it typically referred to as “upper-middle class” or otherwise. Any thoughts of reintroducing such laws, therefore, would be nothing short of being regressive.

In 1985, the administration under Late Rajiv Gandhi’s government argued and abolished the Estate Duty Act of 1963, which was as high as 85% due to low revenue generation, high administrative costs and failure to reduce socio-economic inequality.

Just to draw a leaf out of the ancient Indic wisdom that we often tend to forget; Kautilya’s Arthashastra, argues that taxation must be limited, and minimal so as to not prevent the growth and productivity of a land.

Impact on Entrepreneurship and Wealth Acquisition in India

The concept of inheritance tax would be suicidal for a country like India, as there is already certain amount of discontent amongst the honest taxpayers that they do not get any significant benefits like some of the western countries and further they rarely use the facilities provided by the Government; in effect indicating that tax collected from them is used for benefits and schemes for other segments of the society.

Now coming to the wealthier sections of the society; if “inheritance tax” is thrust on them, it is certainly going to deter their entrepreneurial spirits; investments and we would certainly be headed for a capital flight and loss of smart and skilled talent as they might seek to relocate to other jurisdictions to secure and manage their wealth better.

It would also, in a way, push people to more favourably look at offshore and low-tax jurisdictions, which would be a significant detriment for a growing India which is on its way to becoming the third largest economy globally in the span of 3 to 4 years.

The other concern with “inheritance taxes” would further be non-declaration of wealth, evasion of taxes and ultimately the introduction of a parallel economy in the country. All the efforts of the present government, right from demonetisation to digitisation of the economy, would go for a toss and hence this would be “regressive” in true sense.

Way forward & Conclusion

In a fast developing economy like India, where infrastructure and social security systems are still evolving, incentivizing private investment and entrepreneurship should take precedence over imposing additional taxes on wealth transfer. The creation and growth of the wealth over the past few years is also attributable to the economy doing extremely well, being consistent amidst a pandemic, multiple wars and also, to a reasonable extent, the exceptional performance of the corporate sector and the associated capital markets. Economic suppression of the middle class, which is doing well on merit under the garb of “redistribution of wealth,” would be a huge economic blunder if attempted.

Anant Merathia is a corporate lawyer who specialises in corporate disputes in New Delhi & Chennai. He has also authored the book “Defaulter’s Paradise Lost”