This article is written by Tanya Srivastava, a student of Jindal Global Law School.
Inheritance tax can be defined as the fiscal imposition that is calculated on the total value of a property that is held by a person at the time of his/her death. The tax is supposed to be paid by the receiver of such property, after it is passed on to them, depending on how the law is framed. Regarding the tax as a fiscal imposition, it may be considered either as a fee or as a tax -as a payment in return for benefits received, or as a public contribution according to the ability of the taxpayer.
Several countries have recognised the inheritance tax, however, there are a lot of different names used for it, such as estate duty, transfer tax, succession tax and even Death tax. Some countries currently levying such a tax are the United States of America, the United Kingdom, South Korea and Japan. While these countries have different variations of laws regarding this tax, one factor that is similar everywhere is that such a tax is triggered by the death of a person. The inheritance tax is usually either bequeathed according to relationship or depending on the monetary value of property passed.
The main objective behind the employing of such a tax is considered to be two-fold, to help solve the problem of economic inequality and to contribute more revenue to the government. This article aims to analyse the effects of such a tax and assess whether it should be reintroduced in a country like India.
Estate duty in India
Estate duty was introduced in India in the year 1953 and the Inheritance tax regime in India lasted till the year 1985. Estate duty was considered to have an important role in the Indian fiscal system not only from the standpoint of revenue but also as an instrument for reducing inequalities in wealth. However, the Estate Duty Act, 1953 (see here) was repealed in the year 1985, the reasons cited at the time were the high litigation that comes with the existence of such a tax, the higher administration costs and its failure in bringing equilibrium in the society. In the last few years, the gap between the rich and the poor has only increased in India and there has been widespread speculation that such a tax may make a comeback to help bridge this gap.
Such taxes are usually paid on a slab basis, the slab ranged from 7.5% to 40% for estate duty before this tax was removed, this amount was charged on the principal value of the estate. The Estate Duty Act contained several provisions to counter the attempts of evading the tax. An example of such a provision was that the gifts that were given by a person “in contemplation of death” as defined in the Indian Succession Act, 1945 (see here), were treated as passing on death of such individual. Gifts made for the purposes of public charity within 6 months of the death, as well as gifts made for other purposes within 24 months of the death, were treated as passing on death.
There was an exemption limit set on these gifts, for gifts given for the purposes of charity the exemption limit was of Rs. 2500 in case of gifts for other purposes the limit was of Rs, 1,500. If the individual had “transferred any property to a controlled company and derived any benefits from it, a part of the assets of the company were deemed to be property passing on his / her death, in the same proportion as the benefits derived by him / her during last 3 (three) accounting years of the company bearing to the income of the company in those years”. However, despite these measures and provisions, people came up with clever ways to evade this tax.
Inheritance tax in other nations
While the inheritance tax was abolished in India, it still continues to exist in various countries. The taxation rates for all of these countries are different. For the United States the tax rates range from 24% to 40%, however, the United States pairs its incredibly high tax rates with high tax exemptions, as a result, it raises very little revenue and applies to very few households, if the monetary value of the gift or estate inherited is less than $5646683, an individual is exempted from paying the tax.
The United Kingdom, on the other hand, has a fixed tax regime, which means that all tax classes and all tax amounts are under the same marginal tax rate of 40%, With regards to the U.K., the wealthy either give away vast amounts of wealth during their lifetimes or create trusts thus evading the tax. A great example of this is Hugh Grosvenor, 7th Duke of Westminster, a British aristocrat, an individual who did not pay a single penny of taxes because his father’s £9 billion estate was held in a trust. This is also a very good example of how the wealthy come up with creative ways of not paying taxes. Inheritance taxes can get even more complex, several countries have different exemption limits depending on how the deceased person and the successor are related. The complexity of such a tax is not as big of an issue for the government as it is for the people paying it.
In general, revenue from inheritance taxation only accounts for a small portion of the total tax revenues of these countries. For many nations, the prime objective of estate duty is the collection of more revenue. Many wealthy individuals are able to evade such taxes but even the persons that end up paying the tax make up a very small percentage of the total population of the country that they reside in. For the period 2017-2018 the revenue from inheritance and gift taxation as a share of GDP for the United Kingdom was 0.3%, United States of America was 0.1%, Japan was 0.4% and Ireland was 0.2%.
Owing to high exemption rates and ease of tax avoidance a very little percentage of the total estate passed after death is subject to taxation in these countries. For example, In the period of 2017-18, only 3.9% of all UK deaths resulted in an inheritance tax charge. If such a small percentage of people pay the tax, and the tax is such a small part of the total GDP, it is ineffective.
As revenue diminishes gradually in size, the fiscal benefits of the imposition to the government are eventually outweighed by the administrative, political, and economic costs of levying a tax on a narrow base, and the abolishment of such a tax becomes a more and more viable option. India opted to abolish its estate duty act in the year 1985 for these reasons.
However, India was not the only country to repeal such a tax, 11 nations and 2 tax jurisdictions repealed their estate or inheritance taxes after the year 2000. Taxes on bequests were abolished in Austria, Czech Republic, New Zealand, Norway, Portugal, and Sweden. The latest abolition of the inheritance tax took place in Norway. It was argued that such a tax is not fair to middle-class income families. In addition to this, the Norwegians contended that after inheriting an estate, paying taxes can still be very burdensome, this is because while there is an increase in the fixed assets of an individual, the position with liquidity remains the same.
Norway repealed its inheritance tax in the year 2014. The inheritance tax regime was considered complicated and ineffective and by contrast countries like Australia, Canada, and Ukraine never implemented an official inheritance and gift tax.
Should it be reintroduced in India?
The inheritance tax is not particularly successful or effective in the developed countries that it is levied in, but if it is levied in a developing country like India, multiple complications and problems can occur. Firstly, it will be difficult to decide an exemption limit and in addition to this, a number of groups will have to be exempted from such taxation, such as single women, widows and minors. Such exemptions have already made the inheritance tax system ineffective in the United States of America and many other nations. In India, less than 4% of taxpayers pay 60% of the tax income, which makes it evident that Inheritance tax will not be able to be levied without extremely high exemption rates.
Secondly, the inheritance tax will not be able to address the problem of liquidity. Even if the government gives a break period of six to twelve months for payment of the tax on the estate inherited, there is no guarantee of the individual being in a position to pay the estate duty within the set time limit. In such scenarios, the urgent sale of assets at a lower price may happen. An additional problem that comes with the lack of liquidity is that in the case of more than one inheritor within a family, there may be disputes, some members may not be able to pay the tax and may have to sell their share at an unfair price. The issue of lack of liquidity was one of the reasons that Norway cited while deciding to repeal their IHT system.
Thirdly, a significant factor that eventually led to the repealing of Estate duty back in 1985 was the high costs and time that was involved in the administration of the collection of estate duty, this ended up being lower than the actual estate duty collected. With high exemption limits, different exemptions groups are bound to be issues with administration and time. If the reasons for the abolishment of the Estate Duty Act (1953) are still valid, the tax can not be reintroduced. Complications arising in the administration of such taxes is something that is still faced even by developed countries like the USA and UK and even such economies are debating the existence of Inheritance tax.
Fourthly, The economy is currently going through a strain, India has officially entered a recession period and the situation is only worsening, therefore we need more investment in India. As a consequence of the inheritance tax, wealthy people will begin to move their assets abroad. So even if there is a small percentage of revenue collected by the method of inheritance tax, the economy will still suffer and the growth will slow down, this will further increase the gap between the rich and the poor. At the moment, India can simply not afford this. With India being a developing country, keeping capital intact in the hands of the wealthy and the middle-income individuals may represent a more efficient investment for economic development.
Fifthly, such a tax can often create the problem of double taxation. Even otherwise, to be able to introduce such a tax, other taxes will have to be reduced. With normal tax rates, the rich already try to evade taxes. If tax rates are very high or if a particular group is taxed excessively, there may be more tax evasion. The government will have to consider altering the existing system of taxation if certain taxes will have to be reduced and it is not ready to take such a risk.
Sixthly, Few estates pay the tax. The wealthiest tend not to because there are so many loopholes that they can exploit. This was also observed when a British aristocrat inherited his father’s £9 billion estate without paying inheritance tax because this estate was held in a trust. In such a scenario, at most the upper middle-class Indians will pay estate duty, that is, if they are not exempted from payment. It was observed in 1985 that the Estate Duty Act, 1953 was already very complex, in such a scenario it will be very difficult to tie loose ends to ultimately prevent all kinds of inheritance tax evasion from happening.
The richest ten per cent of individuals in our country have about seventy per cent of the country’s wealth. The bottom sixty per cent, which is the majority of our population, owns less than five per cent. The richest 1% own 51.5%. There is a huge gap between the rich and the poor. Many countries choose to levy taxes like gift tax, wealth tax, inheritance tax to help bridge such a gap. However, it is important to understand that inheritance tax or estate tax only sounds good in theory. The concept of an Estate tax has been implemented in different ways in different countries but there has hardly been any success in these countries. Nations like India also place a very high emphasis on family, placing a tax on gifts or estate inherited by passing of family can be insensitive. The best reason for not reintroducing the tax is that it is not good at what it is meant to do, it is not well suited for a country like India and it definitely creates more problems than it solves.
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