The Subject Matter Pure Politics

Should India Introduce an Inheritance Tax? Amidst Political Turmoil, the Debate Intensifies!

Sam Pitroda's proposal to emulate the tax system seen in the United States has sparked a debate on whether implementing an inheritance tax could promote more equitable wealth distribution.

Bhupendra Chaubey and Syed Hassan Kazim
New Update

Recent remarks by Indian Overseas Congress chairman Sam Pitroda regarding the potential implementation of an "inheritance tax" in India have ignited a political showdown between the ruling Bharatiya Janata Party (BJP) and the opposition Congress during the election season. 

Pitroda's proposal to emulate the tax system seen in the United States has sparked a debate on whether implementing an inheritance tax could promote more equitable wealth distribution. However, the Indian National Congress (INC) quickly distanced itself from Pitroda’s comments, stating that his views do not reflect the party's official position. Party leader Jairam Ramesh tweeted, "The Congress has no intention to introduce an inheritance tax. In fact, Rajiv Gandhi abolished estate duty in 1985."

Sam Pitroda himself issued a clarification stating that his statements were misinterpreted and were not related to the Congress party.

The BJP accused the Congress party of aiming to confiscate and redistribute the wealth of Indians.

Prime Minister Narendra Modi, addressing an election rally in north Chhattisgarh's Ambikapur, stated, "They (Congress) want to take away your assets and the rights of your children."

The previous day, the Prime Minister took aim at the opposition party, suggesting that if the Congress were to come to power, they might distribute the nation’s wealth among "infiltrators."

So, what is much talked about “inheritance tax”, how is it levied, what is its history in India and which are the countries where it has been implemented? 

The notion of an inheritance tax, also referred to as estate tax or death duty, entails imposing taxes on assets passed from a deceased individual to their heirs. Advocates view it as a tool to tackle wealth inequality, while opponents raise concerns about its potential effects on family-owned businesses and the risk of double taxation.

Inheritance Tax: Differences Among Global Taxation Systems

Inheritance tax is incorporated into the taxation systems of countries such as the United States, United Kingdom, France, Germany, Japan, Canada, and Australia. However, the details of its imposition and its historical background differ from one country to another.

Country

Tax Name

Description

United States

Estate Tax

Imposed on the transfer of property upon death by the federal government. Certain exemptions and thresholds apply. Some states also have their own estate or inheritance taxes.

United Kingdom

Inheritance Tax

Levied on the estate of a deceased person above a certain threshold. Exemptions and reliefs are available, and the tax rate may vary based on the relationship between the deceased and the beneficiary.

France

Inheritance Tax (Droits de Succession)

Imposed on the transfer of property from a deceased person to their heirs. Tax rate depends on the value of the estate and the relationship between the deceased and the beneficiary.

Germany

Inheritance and Gift Tax (Erbschaftsteuer und Schenkungsteuer)

Levied on the transfer of property between living individuals and from a deceased person to their heirs. Tax rates depend on factors such as the value of the inheritance and the relationship between the deceased and the beneficiary.

Japan

Inheritance Tax (Sōzokuzei)

Imposed on the transfer of property upon death. Tax rates vary based on the value of the inheritance and the relationship between the deceased and the beneficiary.

Canada

Probate Fees/Estate Administration Taxes

While Canada does not have a federal inheritance tax, some provinces impose probate fees or estate administration taxes on the value of the estate. Additionally, certain types of income earned by the deceased before death may be subject to tax.

Australia

Probate or Estate Duty

Australia does not have a national inheritance tax, but some states impose duties on the transfer of property upon death, known as probate or estate duty.

 

Comparing Inheritance Tax Systems: Perspectives from the United States and India

Exploring the U.S. Model

In the United States, the concept of inheritance tax is intricately intertwined with the state tax framework. Unlike the federal estate tax, which is levied on the estate itself, the inheritance tax is paid by the beneficiary upon receiving money or property from the deceased's estate.

As of 2021, only six states in the U.S. impose an inheritance tax: Iowa, Kentucky, Maryland, Nebraska, New Jersey, and Pennsylvania. Tax rates and exemptions vary by state, with some states providing exclusions for specific classes of heirs or applying lower tax rates to transfers made to close family members.

Inheritance tax rates in the U.S. can range from less than 1% to 20% of the inherited property or cash value. However, the tax is typically calculated on the portion of the property or money exceeding a specified threshold.

Sam Pitroda's advocacy for inheritance tax in the U.S. sheds light on the existing system, where inheritors may retain only a portion of the deceased's wealth while the government claims the remainder.

The Historical Context of the Absence of Inheritance Tax in India

Unlike the United States, India does not currently impose a tax on inheritance.

The concept of inheritance tax is not new to India. Known as estate duty, the tax was introduced in India in 1953 but was abolished approximately four decades ago by then-Prime Minister Rajiv Gandhi in 1985. Gandhi's decision aimed to simplify the tax structure and encourage investment and savings.

Former finance minister P Chidambaram, on multiple occasions spanning from 2011 to 2013, proposed the implementation of an inheritance tax to increase government revenue. Similarly, during the initial tenure of the NDA government, former Minister of State for Finance Jayant Sinha actively supported the idea.

In 2018, then Finance Minister Arun Jaitley also endorsed the idea of an inheritance tax. He highlighted that hospitals and universities in developed nations received significant endowments, partly due to the presence of inheritance tax. Jaitley emphasized that major healthcare and educational institutions in the United States and Europe amassed billions of dollars in endowments, thanks to contributions from individuals and patients who had benefited from their services.

Elon Musk and Warren Buffett: Contrasting Perspectives on Inheritance Tax and Wealth Redistribution

American business tycoons hold diverse opinions on the inheritance tax. In 2021, Elon Musk, CEO of Tesla and SpaceX, expressed his support for the inheritance tax, regarding it as a commendable levy. He argued that it is fair for individuals to allocate a portion of their wealth to benefit the broader public.

Elon MuskElon Musk

In contrast, Warren Buffett, the revered investor and chairman of Berkshire Hathaway, adopts a unique strategy for managing his wealth after his passing. While Musk supports wealth redistribution through inheritance tax, Buffett emphasizes practical investment strategies and philanthropy as means to achieve lasting positive impact.

Warren BuffetWarren Buffett

A report published by UBS Global Wealth Management in 2023 revealed that a significant proportion of newly minted billionaires have acquired their wealth through inheritances rather than through their own entrepreneurial pursuits or labor. Out of the 137 individuals who attained billionaire status within a year, 53 inherited a total of $150.8 billion from their families. This inheritance sum exceeds the combined wealth creation of $140.7 billion by 84 individuals who became billionaires through self-made means during the same period.

Despite Sam Pitroda issuing a clarification and the Congress party distancing itself from his remarks, the debate over the implementation of an inheritance tax in India continues to be highly contentious, particularly amid ongoing political developments.

BJP Congress P. Chidambaram Sam Pitroda Inheritance Tax UBS Global Wealth Management Rajiv Gandhi