Inheritance tax or estate duty is a form of taxation that is levied against assets gained as part of inheritance. When someone’s property and assets pass on to their legal heirs, the latter must pay inheritance tax for inheriting such property or assets. While this is the norm in many countries, India scrapped the law in 1985 due to implementation issues. It was riddled with loopholes that allowed the unscrupulous to play the system and slip through the cracks.
There was a brief attempt to revive the taxation, just four years after it was taken down. The Wealth (Inheritance) Duty Bill, 1989 aimed to tax property that passed on after one’s death. It was widely believed that this act was more practical and feasible than its earlier avatar. Even the rate of tax, 10 percent at its highest, was seen as moderate but Parliament was dissolved and the Bill slipped into obscurity, never to be heard from again.
The world is waking up to the benefits of this kind of taxation because of the growing awareness of the extreme disparity that exists. Such high levels of inequality have contributed to a plethora of global crises, not excluding the subprime mortgage crisis of 2008. Andrew G Berg and Jonathan D Ostry, both IMF economists, have demonstrated through their research that if an economy exhibits high levels of inequality, it is unlikely to sustain a high growth path in the future. A major cause of this inequality is the wealthy top percentile, who acquire their riches primarily through inheritance. In fast-developing economies such as India, this gulf is even more pronounced.
First, it will allow for a more efficient dispersion of wealth. In India, wealthy families from different walks of life have one thing in common—inherited wealth. This is not only unhealthy from an economic perspective, but also restricts social mobility. A proper implementation of inheritance taxes can remedy this malaise to a considerable extent.
Second, this approach to public finance also aligns with the egalitarian ideals enshrined in the Constitution of India. The Right to Equality is one of the chief guarantees of the Constitution, and equitable wealth taxation is an important step in that direction.
Third, most of India’s tax revenues accrue from indirect taxes, which have further intensified on the economically weaker sections. More direct taxes are the need of the hour, and inheritance tax is an important part of this. It can raise a significant quantum of revenue for the exchequer.
Fourth, by this additional tax revenue accrued, the Government of India would have the liberty of reducing the basic income tax liability on the economically weaker sections of the country. This could help combat the high barrier to entry to starting more entrepreneurial ventures.
The writer is co-founder, True Beacon and Zerodha
First Published: Jan 13, 2022, 14:42
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