INHERITANCE TAX

• Inheritance Tax is a direct tax levied on individuals who inherit assets or property from a deceased person. 
• It is imposed on the beneficiary (the inheritor), not on the estate of the deceased.
• This tax is different from Estate Tax, which is imposed on the total value of the estate before distribution to heirs.

Key Points:

• Levied on heirs receiving property, not on the estate itself.
• Also known as “death duty” in some countries.
• Tax rates usually vary depending on the relationship between the deceased and the heir (e.g., lower for children, higher for distant relatives).

Countries where Inheritance Tax is applied:

• Japan, South Korea, United States, United Kingdom (in form of estate tax), Germany, France, etc.

Potential Benefits of Inheritance Tax

Increased Government Revenue:

• Helps generate additional public revenue from high-net-worth individuals.
• Can be used for welfare schemes and public infrastructure.

Reducing Wealth Inequality:

• Prevents intergenerational accumulation of vast wealth.
• Ensures a more equitable distribution of resources in society.

Promotes Intergenerational Equity:

• Ensures that each generation earns its wealth, rather than benefiting unduly from inherited fortunes.
• Aligns with the principle of economic fairness.

Encourages Meritocracy:

• Reduces reliance on inherited wealth.
• Encourages individuals to work hard and succeed based on their own merits.

Challenges and Implications of Inheritance Tax

Potential Tax Evasion:

• High-net-worth individuals may hide or transfer assets to avoid tax.
• Encourages use of complex legal and financial loopholes.

Discourages Savings and Investment:

• People may avoid accumulating wealth if it is to be heavily taxed after death.
• Could lead to a reduction in long-term investment and economic activity.

Double Taxation Concerns:

• Assets may have already been taxed when earned or transferred.
• Taxing again at the time of inheritance can be seen as unfair double taxation.

Administrative Burden:

• Requires a strong legal and tax infrastructure for valuation, assessment, and collection.
• May lead to legal disputes and litigation over valuation of inherited assets.

History of Inheritance/Estate Tax in India

• India currently does not have an inheritance tax. However, it once had similar taxes in the form of Estate Duty, Gift Tax, and Wealth Tax.

Estate Duty in India:

• Introduced: In 1953 under the Estate Duty Act.
• Purpose: To tax the transfer of wealth upon death.
• Rates: Very high – went up to 85% in some cases.
• Abolished: In 1985, due to:
  • Administrative difficulties
  • Low revenue realization
  • Encouragement of tax evasion
  • Strong public opposition

Gift Tax:

• Introduced: In 1958 under the Gift Tax Act.
• Abolished: In 1998, due to limited scope and poor revenue.
• Reintroduced Indirectly: In 2004, via Income Tax Act (Section 56):
• If gifts received > ₹50,000 in a financial year (from non-relatives), it is taxed as income from other sources.
• Exemptions: Gifts received from:
  • Close relatives
  • On the occasion of marriage
  • Through inheritance or will
  • Under certain prescribed circumstances

Wealth Tax:

• Levied on: Net wealth of individuals, HUFs, and companies.
• Abolished: In 2015, due to:
  • Complexity in administration
  • Low revenue collection
  • Substantial compliance burden

Is India Considering Reintroducing Inheritance Tax?

• While some economists and policy think tanks have recommended the reintroduction of inheritance or estate taxes to tackle inequality, there is currently no active proposal by the Government of India to impose inheritance tax.
• It remains a contentious policy issue, balancing equity v/s ease of doing business and wealth creation.