New Delhi: Indian Overseas Congress Chairman Sam Pitroda calling for a discussion on whether India needs an “inheritance tax” has brought the issue back into the political limelight, with the Congress party distancing itself from his statement, and the BJP launching scathing attacks over it.
However, India’s history with such a tax has been an unsatisfactory one, with the tax yielding neither equitable distribution of wealth nor adequate resources for the states — both of which were the stated objectives of the tax when it was introduced.
Implemented in the form of an Estate Duty in 1953, this tax — levied on the value of property that passes from the owner to somebody else at the time of the owner’s death — was abolished in 1985. Since then, it has not made a comeback in legal form, only periodically finding mention by Union ministers such as P. Chidambaram and Arun Jaitley.
Speaking to ANI, Pitroda said that in the US, inheritance tax is levied in such a way that “if one has $100 million worth of wealth and when he dies he can only transfer probably 45 percent to his children, 55 percent is grabbed by the government”.
He added that this was an “interesting law” and that India does not have such a law and “these are the kind of issues people will have to debate and discuss”.
Hitting back against Pitroda’s statement, Prime Minister Narendra Modi, speaking at rally in Chhattisgarh, said the mantra of the Congress was “loot zindagi ke saath bhi, zindagi ke baad bhi” (loot during the lifetime and after).
The Congress, meanwhile, distanced itself from Pitroda’s statement, with party leader Jairam Ramesh posting on X that “the Congress has no plan whatsoever to introduce an inheritance tax”.
Pitroda himself took to X to clarify his words, saying that he had mentioned the US’ inheritance tax only as an example and had pointed out that these are the kind of issues people will have to discuss and debate.
“This has nothing to do with the policy of any party, including the Congress,” he wrote.
I mentioned US inheritance tax in the US only as an example in my normal conversation on TV. Can I not mention facts ? I said these are the kind of issues people will have to discuss and debate. This has nothing to do with policy of any party including congress.
— Sam Pitroda (@sampitroda) April 24, 2024
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Congress imposes tax…
The history of the Estate Duty in India has played out almost entirely when the Congress was in power.
In 1952, the year before the tax was implemented, then minister of finance C.D. Deshmukh introduced the Estate Duty Bill in the Lok Sabha and said such a tax was justified not only on social grounds but also on economic grounds.
“The social justification for the measure is that it is one of the positive [steps that] could take in the direction of reducing the existing inequalities in the distribution of wealth, and thus arriving at a more acceptable social order by correcting a certain amount of mal-distribution,” Deshmukh said in his speech introducing the Bill in 1952.
“The economic justification is that it would go some way towards assisting the States in the financing of their development schemes,” he added.
The Bill was passed in 1953, and was to come into effect from the financial year 1954-55.
According to the law, a duty would be imposed on the value of property that passes on to a successor after the death of the owner. The rate of this duty increased progressively from 7.5 percent on the value of the estate exceeding Rs 1 lakh but less than Rs 1.5 lakh to 40 percent on the value that exceeded Rs 20 lakh.
Over time, the rate was increased to as much as 85 percent. About 80-90 percent of the proceeds from the tax were to be transferred to the state governments.
The law was a long and complex one, as it aimed to comprehensively curb evasion and detail out the exemptions. However, what this also meant was increased litigation and administrative costs.
Concerns were also raised about double taxation, as assets were subject to both estate duty and wealth tax. Reports also emerged that, despite the best intentions of the Act, evasion and the illegal concealment of assets was rampant, which not only led to the fledgling birth of the black economy, but also much lower revenues for the Centre.
…finds it’s not working
As it turns out, Deshmukh’s hopes were quickly dashed on both the social and economic fronts. Neither was the revenue enough to justify the relatively high cost of collection, nor were the proceeds enough to reduce inequality in the country. In fact, people simply found ways to get around the system.
In the very first year of its implementation, the financial year 1954-55, the government estimated that it would receive Rs 4 crore from the tax. The next year, it revised this down significantly.
“The estimate of Rs 4 crore from Estate Duty taken in the original budget has proved optimistic and I now expect only Rs 1.26 crore from this source during the current year,” Deshmukh said while speaking about the revised estimates for 1954-55, while presenting his Budget for 1955-56.
Undeterred by this poor start, he budgeted a revenue collection of Rs 3 crore from Estate Duty for 1955-56. Again, this fell short, with the actual revenue from the tax coming in at Rs 1.8 crore that year. This was just 0.4 percent of the total tax revenue collected that year, according to the Budget documents of those years.
By 1958, the government had come to the conclusion that widespread tax evasion was taking place and that steps must be implemented to curb it. The solution at the time, however, was not to do away with an idea that was not working, but to instead double down on it with a Gift Tax.
“The transfer of properties through gifts to one’s near relations or associates is one of the commonest forms of avoidance of not only the Estate Duty but also of Income Tax, Wealth Tax and even the Expenditure Tax,” Jawaharlal Nehru, then prime minister and briefly finance minister, said in his Budget speech in 1958.
“The only way of effectively checking this practice is to levy a tax on gifts,” he added.
The Gift Tax was to have the same rate as the Estate Duty, so that whatever a person did with their property — bequeath it, gift it, or do nothing — their successor would be taxed.
…and finally disposes
The Gift Tax remained in place till 1998. The Estate Duty, however, was abolished a little earlier than that.
In 1985, then finance minister V.P. Singh, under PM Rajiv Gandhi, abolished the Estate Duty. In his Budget speech that year, Singh said the duty had not only failed to achieve the twin objectives it was brought in for, but had also resulted in other undesirable consequences.
“As both wealth tax and estate duty laws apply to the property of a person, the former applying to his property before death and the latter after his death, the existence of two separate laws with reference to the same property amounts to procedural harassment to the taxpayers and the heirs of the deceased who have to comply with the provisions of two different laws,” Singh said.
“Having considered the relative merits of the two taxes, I am of the view that Estate Duty has not achieved the twin objectives with which it was introduced, namely, to reduce unequal distribution of wealth and assist the States in financing their development schemes.”
Singh said that the yield from Estate Duty, which had by then only grown to Rs 20 crore, was not high enough to justify a “relatively high” cost of administration.
He moved a bill to abolish the levy of tax in respect of estates passing on deaths occurring on or after 16 March, 1985, which was passed that year.
The tax rears its head again
Over the last two decades, the spectre of an estate tax has reared its head periodically, for various reasons.
For example, in 2011, it was reported widely that then home minister P. Chidambaram — who had also been finance minister in 1996-97, 1997-98, 2004-08, and later in 2012-2014 — had spoken up during a Planning Commission meeting about the need for re-imposition of inheritance tax.
“We are really underestimating our capacity to raise resources, especially tax resources,” he reportedly said. “Since non-plan expenditure is difficult to contain, the tax-GDP (gross domestic product) ratio must be raised especially by taxing conspicuous consumption and imposing inheritance tax.”
His suggestion was not taken up, but in his first budget on returning as finance minister, in 2013, he imposed a 10 percent surcharge on annual income above Rs 1 crore.
Meanwhile, then entrepreneur and philanthropist and subsequent minister in the Modi government Jayant Sinha also spoke in favour of the inheritance tax in 2013.
“We need an estate tax where we take away at least 50-55 percent of the advantage that dynastic business people already have right now,” Sinha said at the Forbes India Philanthropy Awards 2013. He was managing director of the Omidyar Network at the time.
According to Sinha, estate tax would not only level the playing field between new entrepreneurs and “dynastic capitalists”, but would also force business people to think harder about succession planning, and about their philanthropic efforts.
“When I talk about estate tax in India, I’m going to say that it will actually encourage a lot more philanthropy and a number of other advantages which will enable us to create a more vibrant entrepreneurial capitalism in India, which we very much require,” he added.
In 2018, then finance minister Arun Jaitley had spoken about the benefits of an inheritance tax, saying that this is what allowed hospitals and educational institutions in the US to receive large endowments.
“So I was analysing that why that condition doesn’t exist in our country,” Jaitley said in a December 2018 speech delivered at the All India Institute of Medical Sciences.
“And one of the reasons I found out was that those societies have very large inheritance tax,” he added. “Therefore, a lot of people in their old age prefer to go for charitable donations in order to get around that inheritance tax. Since we don’t have that inheritance tax in India, our charities are not in terms of such endowments.”
Inheritance tax in other countries
India isn’t the first country to come up with the idea of a tax on inherited wealth. Several developed countries have already implemented such a tax, with mixed results.
In the US, for example, an inheritance tax is levied by some states. As of 2021, six states were imposing such a tax, ranging from 1 percent to 20 percent of the value of inherited property and cash over and above a certain threshold.
The country, however, has noted a high level of evasion of the tax, with the US Senate Committee on Finance releasing a report in 2017 titled ‘Estate Tax Schemes: How America’s Most Fortunate Hide Their Wealth, Flout Tax Laws, And Grow the Wealth Gap’.
The report pointed out that the estate tax has been in place in the country for over 100 years in an attempt to narrow income inequality in the US, and serve “as a brake on the build-up of dynastic wealth”, which it said were “the kind of extraordinary fortunes that let the powerful distort our democracy and increase the tax burden on our hardworking middle-class”.
However, the same report also highlighted the great discrepancy between the ideal and the reality.
“By any measure, it is clear that the current estate tax has been undermined by lobbyists and teams of sophisticated tax lawyers and accountants,” it noted. “The wealthy and well-connected use elaborate trusts and secretive shell companies to dodge the tax, undermining our tax base and our democracy.”
Similarly, a March 2024 report published by the UK House of Commons Library showed the significant pushback the country’s own inheritance tax has faced. In the UK, inheritance tax is charged at 40 percent above a threshold, currently set at 325,000 pounds.
“Inheritance tax is the most unpopular tax in the UK, according to polling, despite less than 5 percent of estates being liable for the tax,” the report noted. “This has led several commentators to propose abolishing the tax.”
It went on to say that numerous arguments have been mooted in favour of abolition. The first is that inheritance tax represents double taxation (an argument that came up in India as well), is unfair, and hinders economic growth.
“Many also point to the inefficiency of the tax, since the wealthiest people have several options to avoid it,” it added. “Some researchers believe that the gift system should be reformed, so that vast wealth that is distributed during someone’s lifetime can be taxed effectively, rather than escaping inheritance tax entirely.”
France takes a different approach to the inheritance tax. Under French law, the rate of inheritance tax is determined not by the value of the property but by the inheritor’s proximity to the donor.
The tax rate varies from 0-60 percent, with different rates applying depending on whether the successor was the spouse, child, or step-child of the deceased.
(Edited by Nida Fatima Siddiqui)
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