Inheritance tax is suddenly among the hottest topics this election season.
It was first introduced in 1953, but ground into dust nearly four decades ago in 1985. But thanks to the now raging row over it, inheritance tax -- variously called as estate duty, or succession duty, or death tax -- seems to have escaped the undertaker's notice with both Congress and BJP accusing each other of reviving it from the boneyard.
Given all the fuss around the inheritance tax, what's surprising is that it didn't actually deliver a hunk of meat. As against the government's estimate of Rs 4 crore collections during the first year of its rollout in 1954-55, revised collections stood at an unspeakable Rs 1.26 crore. And by the time it was scrapped in 1985, estate duty collections turned in just Rs 20 crore, which critics will conclude as crumbs from the rich man's table.
Moreover, the tax faced public opposition due to its steep rates, starting from 7.5% for properties valued at Rs 1 lakh and reaching up to 85% for properties valued over Rs 20 lakh. Bowing to criticism and considering that the cost exceeded tax collections, the Rajiv Gandhi government eventually abolished it.
Interestingly, both the UPA and NDA governments wanted to take a second bite at the cherry and have sounded off the idea and the need to reintroduce inheritance tax in the past decade and a half. If P Chidambaram, as Home Minister and Finance Minister, spoke in favour of the death tax between 2011 and 2013, Arun Jaitely carried the torch for it through 2017-2018.
However, the pitchmen on both sides are now disowning the very idea they once proposed as if it's some junk in the trunk. In fact, none of the party manifestos make even a mention of the infamous inheritance tax.
Perhaps, they all fear getting bad rap from voters, who are smart enough to know that some or other trap lies in wait. For, not all promises in the manifestos are fulfilled. Likewise, what's never mentioned during electioneering may sooner or later find its way into taxpayers' wallets. So at this point, the death tax's greatest political value is in being the bad guy and the intensity with which each party abandons the proposal will gain that much voter goodwill goes the belief.
What's the fuss about?
It all started with comments from Sam Pitroda, Chairman, Indian Overseas Congress, who advocated a US-style inheritance tax policy in India. Citing the US inheritance tax policy, he said, "Probably 45% of a US citizen's wealth can be transferred to his children, 55% is grabbed by the government. That's an interesting law."
Reacting to Pitroda's remarks, Prime Minister Narendra Modi charged head-first, alleging that Congress would impose such a tax if voted to power. Criticizing Modi's allegations of Congress redistributing citizens' wealth among Muslims, Pitroda said his party would frame a policy through which the wealth distribution would be better.
Strangely, Pitroda's suggestions were vehemently dismissed by his party itself led by none other than Congress President Mallikarjun Kharge, followed by general secretary Jairam Ramesh who clarified, "I would like to categorically state that Congress has no plan on the inheritance tax. Pitroda is a very distinguished professional and has expressed his views in the American context, which has no relevance for us. He does not speak on behalf of the Congress."
Further, Ramesh said it was Rajiv Gandhi who abolished Estate Duty in 1985 and alleged that it was the Modi government that has wanted to impose the tax, citing various instances from 2014, 2017, and 2018 when then Finance Minister Arun Jaitley talked about it.
But the Prime Minister maintained that it was Rajiv Gandhi who abolished the inheritance tax in 1985, not because of taxpayer interest, but to prevent the government from grabbing family wealth.
Addressing a rally in Madhya Pradesh's Morena last week, he said, "Listen with your ears wide open about the sins that the Congress has committed. I want to put forth an interesting fact. When sister Indira Gandhi passed away, there was a law under which half the portion of the wealth used to go to the government. There was a talk then that Indiraji willed her wealth in her son Rajiv Gandhi's name. To save the money going to the government, then PM Rajiv Gandhi abolished the inheritance tax."
What's a death tax?
As Modi quipped, it's a 'zindagi ke saath bhi, zindagi ke baadh bhi', levy on individuals. The tax is imposed on the total value of assets left behind by a deceased person, and the heirs were required to pay a certain percentage of the value as tax to the government. These assets included movable and immovable property owned by the deceased in India and outside, which were passed on to a successor, if the person died in India. If not, estate duty was levied only on immovable property in India and all movable properties. Immovable properties outside India were not taxed. The Act was later amended in 1960 to exclude properties in Odisha, West Bengal and Jammu and Kashmir and further in 1968, 1982 and 1984 to include amendments made by other Finance laws.
Separately, India also previously had a wealth tax and a gift tax, which were done away with in 2015 and 1998, respectively.
Governments believe that both inheritance and gift tax are progressive, i.e., the greater the amount inherited, the higher the tax rate.
But unlike other countries, in India, as per the Income Tax Act of 1961, no tax is levied on the inherited assets, whether movable or immovable, irrespective of whether the transfer of assets happen through a will or by succession. However, tax will be levied if the new owner decides to sell the property. In case of movable assets like mutual funds, gold, shares, etc., the new owner is not liable to pay any tax until they decided to sell.
In contrast, most European, American and African nations levy inheritance tax, and according to PwC, depending on the country, the rate of tax varies at a maximum of 60%. While France imposes 60% tax, Germany has a 50% tax rate, and UK at 40%. Likewise, Asian countries too levy the tax with Japan imposing 55%, South Korea 50%, and Taiwan 20%.
India also tried its hand at what's called a Gift Tax passed in 1958, imposing a duty on any gift, including movable or immovable property transferred from one person to another without considering its monetary in a given financial year. All taxable gifts were imposed a 30% duty, but this was scrapped in 1998. It was reintroduced in 2004 and any cash gifts above Rs 50,000 and any gifts in kind like immovable property above Rs 50,000 in value are taxable. Exceptions include donations, inheritance and gift money received during weddings.
Besides inheritance tax and gift tax, India also imposed a separate wealth tax. Rolled out in 1957, the government levied a 1% duty on individual earnings of over Rs 30 lakh in a financial year. Besides, tax was imposed on all assets of Indian citizens and only Indian assets of non-residential Indians. These include gold, silver and platinum ornaments, transport vehicles like private aircrafts, ships, and cars, property apart from one's residential home and any cash above Rs 50,000 with some exceptions. This wealth tax too was abolished in 2015 due to high execution costs.
Who's for and against inheritance tax?
In 2011, then Home Minister P Chidambaram batted for higher taxes on luxury products and re-imposing inheritance tax. Again in 2013, prior to the Union Budget, he said, "Non-debt revenue should be increased; therefore, the rich must be prepared to pay more tax."
At another event in 2013, he called for a debate on the need for inheritance tax and questioned the accumulation of wealth by a few individuals.
Yet, Jairam Ramesh claimed that the Congress has no plan whatsoever to introduce an inheritance tax. He took to social media platform X to assert his views:
"Fact one: Jayant Sinha, then Minister of State for Finance, publicly stated that he wanted to introduce Inheritance Tax in 2014.
Fact two: In 2017, reports emerged that the Modi Sarkar was going to re-introduce inheritance tax.
Fact three: In 2018, the Finance Minister Arun Jaitley praised Inheritance Taxes for "spurring large endowments to hospitals, universities in the West."
Fact four: News reports emerged that Modi Sarkar would introduce an Inheritance Tax in Union Budget 2019.
Over to you Prime Minister Modi -- what is your party's stance on this issue?"
Based on news reports in 2017, Jaitley seems to have toyed with the idea of taxing inherited wealth on any property or cash above Rs 50,000 received or inherited by a person as an income from other sources. Later in 2018, he claimed that inheritance tax was the reason for large endowments to hospitals, universities, and other institutions in the West. Though there was no official word, speculation was rife about the potential reintroduction of the inheritance tax during Finance Minister Nirmala Sitharaman’s first Budget in 2019.
Five years later, Sitharaman has, following the Prime Minister's lead this election season, emphasized that the country's progress in the last ten years will go to "zero" if inheritance tax was implemented.
Although there are several papers on the topic, there's no consensus in the literature about whether inheritances increase or decrease wealth inequality.
Notably, as securities lawyer Sandeep Parekh wrote on X, "There's no one country in the past 100 years, which has distributed wealth and yet survived, leave alone becoming prosperous. Pushing inheritance is a guaranteed means of exporting your wealth creators, or at least the wealth creation out of the nation. The debate can wait till we are a rich nation."
