s the recent general election campaign heated up, a controversial idea was thrust into the spotlight – the reintroduction of inheritance tax. Sam Pitroda’s suggestion to implement such a tax modelled after the United States sparked a political firestorm, with Prime Minister Narendra Modi accusing the opposition of planning to reimpose the levy.
Amid vehement denials and political mudslinging, a complex issue with far-reaching implications was reduced to a mere electoral gambit.
The debate is one that transcends partisan politics. At its core lies a fundamental question: how can societies balance the pursuit of equity with economic pragmatism? This presents a complex problem that has puzzled policymakers worldwide for centuries.
A Long and Winding History
Tracing its origins to ancient Egypt in the seventh century BC (Joulfaian, 2019), the concept of inheritance tax has changed and evolved over time due to the various shifts and changes in global socio-economic conditions. John Stuart Mill, an influential 19th century English political economist, was a powerful proponent of limiting inheritance.
Post-World War I, Italian philosopher Eugenio Rignano proposed pioneering ideas on structuring inheritance tax, inspiring the United States to introduce it in the 1930s (Erreygers and Bartolomeo, 2007). Over the ensuing decades, rates in the US gradually rose to a staggering 70% in the 1970s before the nation gradually dispensed with the levy in the 1980s, reflecting a shift in economic ideologies.
Germany and France followed suit, imposing similar taxes during this period, reflecting a broader global trend toward wealth redistribution and social equity.
The Contemporary Landscape
Today, several economies have inheritance tax, ranging at the top level from 55 per cent in Japan, 50 per cent in South Korea, 45 per cent in France, 40 per cent in the UK, 34 per cent in Spain, 33 per cent in Ireland, and 30 per cent in Belgium and Germany (Frontline, 30 April 2024). The Portuguese pay an ‘Imposto de Selo’ (stamp tax) of 10% on inherited assets.
As debates rage over the tax’s impact on wealth distribution, some jurisdictions have abolished wealth taxes, while others including the United States are contemplating their re-introduction (Anderwald, 2022).
India’s Tryst with Inheritance Tax
Although there is no history of imposing inheritance tax per se, estate duty prevailed between 1953 and 1985. The Estate Duty Act of 1953, modelled after the British Finance Act of 1894, aimed to augment government revenues and reduce income and wealth inequalities. However, the low threshold and progressively high duties led to evasion and avoidance, rendering it futile, as the yield from the tax was lower than the cost of its administration (Nandy et al, 2022). It was eventually abolished in 1985.
The Goan Paradox
Despite the abolition of wealth tax in 1985, Goans are not entirely spared from a form of inheritance tax. Section 455 of the Goa Succession Special Notaries and Inventory Proceeding Act imposes a 1% stamp duty liability on the value of the inheritance. This quasi-inheritance tax applicable to Goans raises questions about its continued relevance and alignment with the broader policy stance, moreso, given the Prime Minister’s categorical rejection of an inheritance tax regime in India.
The Case for Reintroducing
Inheritance Tax
Arguments in favour of reintroducing inheritance tax include addressing widening income and wealth inequality (Nandy), promoting inter-generational equity (Walundari, 2022), reducing the gap between the richest and the rest, and potentially decreasing tax evasion. Inheritance tax can contribute to wealth redistribution, ensuring that the benefits of economic growth are more equitably shared (Belan, 2022).
In course of constitutional bench hearings on scope of private property under Article 39 (b), His Lordship the Chief Justice remarked that our concept of property has evolved beyond extreme capitalist or socialist views. We now see property as a trust for future generations and the wider community. This embodies sustainable development and inter-generational equity, where today’s property is preserved for the future of our society (verdictum.in, 25 April 2024).
The Case against Inheritance Tax
While the discourse on inheritance tax underscores the complexity of wealth redistribution mechanisms and their varied impacts on wealth inequality across different economies, the case against its reintroduction in India is compelling. India’s experiment with estate duty in the past offers a sobering lesson on the challenges of implementing such a tax regime, with evasion, avoidance, and administrative costs overshadowing the intended benefits.
Re-imposition of an inheritance tax could potentially stifle entrepreneurship and discourage wealth creation, as individuals may be disincentivised from accumulating assets that could be subject to substantial taxation upon their demise.
A Nuanced Path Forward
In this intricate tapestry of wealth, inequity and governance, the inheritance tax debate emerges as a crucible for testing our collective resolve to forge a more equitable society. Even though the aims of redistributing wealth and fostering social equity are praiseworthy, the approaches to achieve them must undergo rigorous scrutiny based on factual evidence and a nuanced grasp of our socio-economic environment. Only through a balanced approach can we forge a path towards a more equitable distribution of wealth while preserving the engines of economic growth and prosperity.
(The author is a practicing advocate, and a research scholar at IIULER, Goa)
