Inheritance Tax

Inheritance Tax

GS-3: Tax System

(IAS/UPPCS)

Relevant for Prelims:

Inheritance Tax, Progressive Tax, Wealth Tax, Gift Tax, Wealth Duty Act-1953, Income Tax Act-1961.

Relevant for Mains:

About inheritance tax, Its advantages and disadvantages, Conclusion.

25/04/2024

Source: IE

 

Context:

In recent times, inheritance tax is in discussion between Congress and BJP in the country. Sam Pitroda, former advisor to Rajiv Gandhi and aide to Rahul Gandhi, described the inheritance tax implemented in the United States as an "important law".

• This article comprehensively discusses the use of inheritance tax as a tool for redistributing wealth to address income inequality, covering the advantages and disadvantages of inheritance tax.
• According to financial experts, in India, someone's created wealth and ancestral property gets transferred to his legal heirs like children, grandchildren or related people after his death. Inheritance tax is levied on this inheritance in many countries including America.
• The inheritance tax implemented in America means that if someone has property worth $100 million, then after death only 45 percent of his property can be transferred to his children. The government takes 55 percent of the total property. This law says that you created wealth in your generation and now you are leaving, in such a situation you should leave your wealth to the public – not all, but half.

Global tax proposals and applicable rates:

• There is a growing demand to tax billionaires globally to create a more equitable society. There has been discussion of a proposal to impose a minimum corporate tax rate globally and a minimum 25% tax on taxpayers with assets above $100 million in the US.
• France and Brazil have pushed for a G20 announcement to tax the super-rich by July.
• The Narendra Modi government announced in the Budget 2015-16 the abolition of wealth tax and replacing it with a surcharge on the super-rich.
• According to Source “Family Business Coalition”, Japan collects the highest inheritance tax in the world.
• Currently, inheritance tax laws are not applicable in these countries: India, Russia, Portugal, Sweden, Hong Kong, Hungary, Singapore, Norway

 

 

Ranking	Country	Inheritance Tax rate
1 2 3 4 5 6 7 8 9 10	Japan South Korea France  United Kingdom America   spain   Ireland Belgium  Germany  Chile	55% 50% 45% 40% 40% 34% 33% 30% 30% 25%

 

Source: “Family Business Coalition

                                

About Inheritance Tax:

• Inheritance tax, also known as estate tax or death tax, is a tax that is levied on the transfer of property or assets from the deceased to their heirs.

Inheritance Tax in India:

• India once had an inheritance (or death) tax. This tax, introduced in 1953, was known as wealth duty.
• In the year 1953, the Property Duty Act, 1953 was enacted to determine the property tax. This Act was amended in the year 1958 to amend taxes.
• This tax was abolished in the year 1985 under the leadership of Rajiv Gandhi's government.
• India also had a wealth tax and a gift tax, which were abolished in 2015 and 1998 respectively.
• The wealth duty abolished in India was inheritance tax with a limit of Rs 1 lakh, and progressive tax rates ranging from 5% to 40% on the value of property above Rs 20 lakh.

About tax on inherited property in India:

• According to the Income Tax Act, 1961, property acquired through will or inheritance will not be subject to tax. Once you become the owner of the inherited property, you will have to bear its profits and losses. In case of profit, you will have to pay capital gains tax. This capital gain will be determined by the time period of possession of the property. If you have inherited a property from your father in 2022 and you want to sell it in April 2024, then you will have to pay capital gains on this profit. If you and your father have held this property for more than 2 years, then it will be considered as long term capital gain and you will have to pay tax accordingly.

Advantages and Disadvantages of Inheritance Tax:

• It is a highly debated topic due to its advantages and disadvantages.

Advantages:

• Revenue Generation: One of the main reasons for the existence of inheritance tax is to generate revenue for the government. This revenue can be used to fund different projects, such as infrastructure, healthcare, education, and so on. Inheritance tax can also help to reduce the budget deficit in the long run.
• Promotes Fairness: Inheritance tax can promote fairness by preventing the concentration of wealth in a few families. It can also help to reduce income inequality, as the revenue generated from inheritance tax can be used to fund programs that benefit the less fortunate.
• Encourages Charitable Giving: Inheritance tax can encourage charitable giving by providing tax breaks to those who donate to charities. This can help to increase philanthropy and can benefit society as a whole.

Disadvantages:

• Double Taxation:  Inheritance tax is often seen as a form of double taxation. This is because the assets that are being inherited have already been taxed when they were earned by the deceased. Therefore, the heirs are being taxed on something that has already been taxed.
• family businesses: Inheritance tax can have a negative impact on family-owned businesses. This is because the heirs may have to pay a large amount of tax on the assets that they inherit, which can lead to the liquidation of the business. This can have a ripple effect on the local economy and can lead to job losses.
• Excessive cost of collecting taxes: According to research, the purpose of countries which have removed estate or inheritance tax is twofold. Firstly, removing these two taxes makes you more progressive and secondly, there is a huge cost in collecting such taxes. Apart from this, estimating the value of someone's property is also a very complex task. Inheritance tax is not applicable in countries like India, Russia, Macau, Portugal, Slovak Republic, Sweden, Hong Kong, Hungary, Singapore, Austria and Norway.

Conclusion:

Inheritance tax is a complex issue with both advantages and disadvantages. While it can generate revenue for the government and promote fairness, it can also lead to double taxation and have a negative impact on family-owned businesses. It is important to weigh the pros and cons before making a decision on whether or not to support inheritance tax.

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Mains Question:

What is inheritance tax? Critically examine its advantages and disadvantages.