Inheritance Tax-The India Perspective
Tara Patwardhan
BSc TY (2022-25)
Reading Time: 4 minutes
The article discusses a tax that is implemented worldwide but not in India. It delves into its nature, its history with our country, and why it has a slim chance of being implemented here.
Inheritance tax or estate tax, as the names explain, is levied on a person when he/she inherits property under a will or the succession laws of a particular place.
Now, it’s important to know that the demography and cultural fabric of a place widely influences taxation. You see, inheritance is a thing of pride, a thing to kill for in the whole wide world, but more so in India. We are taught to have an emotional connection with our inheritance, and that connection is established irrespective of the strata we belong to. Whether you are a prince whose ancestral palace is worth thousands of crores and is connected to your pride; or you are a farmer’s son whose small piece of land reminds you of your forefathers: it’s a part of you. Luckily, the inheritance tax is only for immovable assets and not assets like gold, which are commonly owned by Indian households. Imagine having to pay tax on your grandmother’s ancestral jewellery with every generation! It will become a political fight between the opposition and the centre.
Some of you might be thinking, isn’t it fair to tax the rich for something they didn’t work for? I agree with it. However, it’s not all hunky dory for them.
Let’s say the inherited property is given on rent, then the income received from the rent needs to be declared and taxed. The government need not treat everyone’s inheritances the same way, it can always set tax slabs. So has the government even given this tax a thought?
Yes, it was not only thought of but also implemented a long time ago. In 1953, the Estate Duty Tax was introduced. However, the tax faced public opposition, mainly because of its high rates. It also led to court disputes regarding valuations of inheritances. Simply put- it just wasn’t worth it. Most of the valuations were so low that the resultant tax collected was very poor. It didn’t fit the administration cost incurred on behalf of the government in actually processing it as a direct tax. Thus, the Estate Duty Act was finally abolished in 1985 and wasn’t discussed until recently.
Lately, this tax has been mentioned a few times in parliament. The most recent was a statement by Sam Pitroda pointing out that taxing inheritance will be a good measure to redistribute income in the country which is one of the major objectives of public finance.
The logic behind bringing it up is that India is so much more different today, people have become richer, and strict rules regarding valuations can be set. So what’s stopping us??
You see, every year, our Finance Minister proposes a Finance Bill for changes in taxes. When both Lok Sabha and Rajya Sabha approve of these changes, it is signed by the President of India and becomes the Finance Act. It’s easier said than done, especially for an inheritance tax. The biggest problem is convincing the people. Think about this: if the recent change in the long-term capital gains tax (one that already exists) can become such a big issue, imagine the ruckus taxing people’s inheritance can create!
Add all of this to the income divide in our country. A poor farmer can’t be expected to pay for the only asset he inherits. For someone who can barely cover the cost of living, this tax is burdensome. Even if we exclude the economically weaker sections and focus on the rich like businessmen and politicians…they simply won’t let it come into effect. Not because they feel bad for those who can’t afford it, but for their self-interest.
If the idea of it seems so bad, why are so many countries like the US, the UK, and Germany still levying an inheritance tax?
In countries where the scope of collecting a substantial amount of inheritance tax is possible,it helps boost government revenues. Increased government revenue can mean reduced deficits and/or increased spending on subsidies. It can also help reduce dependence on other direct taxes as a source of revenue. Such a tax also helps prevent the accumulation and hoarding of a resource like land which is already scarce.
Inheritance tax might be a common practice in other countries, however; the deep connection to our inheritance, political opposition, and income inequality are just a few of the several reasons why it may not see the light of the day in India!