Impact of Inheritance Tax on India’s economy

Inheritance tax has been in the talks lately after Indian Overseas Congress chairman Sam Pitroda recently commented on it. There are conflicting opinions on this topic; and for good reasons. The inheritance tax was abolished in India in 1985, but imagine if it were to be implemented again. What will be the consequences? How will today’s youth take this and how will it impact our country’s economy where most people believe in saving rather than spending?

Let us start with a quick introduction to inheritance tax.

What is Inheritance Tax?

Inheritance tax, or estate tax, is imposed on the entire value of money and property owned by a deceased individual before it’s passed down to their heirs. This tax is usually computed using the assets’ value after allowable exemptions and deductions. Its aim is often to generate government revenue and redistribute wealth. 

The topic of Inheritance tax has surfaced before. In 2019, there were discussions about reintroducing inheritance tax during the Lok Sabha election cycle.

At present, India does not levy any specific tax on inherited property or assets received by legal heirs, nominees, or beneficiaries. However, Indian tax laws do apply to any income earned from inherited assets or property. For instance, if you inherit shares of stock, you are not subject to inheritance tax, but if you sell the inherited stocks for a capital gain, you will be subject to tax on the profit made from the sale.

The Wavering Mindset

When it comes to this debate, the main issue boils down to whether introducing such a tax could lead to fairer wealth distribution in India. Some believe that inheritance tax in India will not be the right step. Various economic and social factors come into perspective, be it its potential impact on family businesses or concerns about double taxation. This tax will discourage people from saving and working hard for success. 

This perspective raises concerns about the potential adverse effects on national progress. It is suggested that such a tax might demotivate people, particularly in the middle class, from saving and consequently from actively seeking to increase their earnings. This shift in mindset could ultimately impede the country’s long-term development.

In the words of Mumbai-based investment and tax expert, Balwant Jain, inheritance tax can disincentivize hard work and could regress the country.

What has changed?

The inheritance tax in India was abolished in 1985 for specific reasons. Despite its intended purpose, the tax was found to be ineffective in reducing economic inequality within society and did not make a substantial contribution to government revenue. As a result, policymakers decided to repeal the inheritance tax, recognizing its limitations and the need for alternative approaches to address economic disparities and revenue generation.

According to research conducted by the Organization for Economic Co-operation and Development (OECD), exemptions, carve-outs, and substantial lifetime donations have rendered inheritance and estate taxes a relatively minor revenue source in many countries. This situation often exacerbates inequality. In a populous country like India, the effectiveness of this approach may not align with its intended purpose.

Does the cost justify the idea?

Looking at budget documents from the early 1980s, it is evident that the Government of India collected only Rs 2-4 crore annually from this tax, representing approximately 0.02% of total tax revenue. If we apply these figures to the present time, the revenue generated would be around Rs 600 crore. 

To put this in perspective, the annual cost of collecting direct taxes exceeds Rs 10,000 crore. Even if the costs associated with administering this complex tax were not added to this expenditure, the revenue generated from it would barely cover the administrators’ expenses for a month. 

The youth and their Ideas

In India, there is a strong inclination among individuals to save money diligently. In the current era of innovation and economic productivity, there is a significant risk that individuals will seek loopholes to preserve their hard-earned wealth if this tax is introduced. 

Implementation of such a tax could potentially prompt high-net-worth individuals to relocate to countries that do not impose this tax. Consequently, not only would these affluent individuals move their capital out of India, but they might also take their entrepreneurial talents, critical for sustaining India’s ambitious growth trajectory, to more tax-friendly jurisdictions.

CONCLUSION

In conclusion, the implementation of an inheritance tax in India poses complex challenges and potential consequences. This tax could impact the mindset toward savings and hard work, potentially discouraging individuals from striving for success. Moreover, in a country where saving is deeply ingrained, introducing such a tax may lead to individuals seeking ways to preserve their wealth rather than contributing to economic growth. As discussions on inheritance tax continue, it remains critical to assess its potential impact on economic incentives and long-term development goals within the Indian context.

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