Inheritance Tax

Context:

Talks of reintroduction of inheritance tax  as a part of political conversation in the present Lok Sabha election cycle is catching up.

More on News: 

• A prominent political leader of India’s opposition party has expressed interest in the proposed legislation on inheritance tax in the United States
  • The Biden Administration has proposed legislation for a ‘Billionaire Minimum Income Tax’ of at least 25% on taxpayers with wealth over $100 million.on their full income, including unrealised gains.

Inheritance/ Estate Tax: 

• Definition: It is a tax levied on the total value of money and property of a deceased person before it is distributed to their legal heirs. 
  • The tax is typically calculated based on the value of the assets left behind after any exemptions or deductions
• India had an inheritance (or estate tax) introduced in 1953 but was abolished in 1985. 
  • The duty had a threshold of Rs 1 lakh, and progressive rates from 5% to 40% on the principal value of the estate exceeding Rs 20 lakh.
• Purpose: Inheritance tax is levied as a tool for redistribution of wealth to address income inequality. 
• Methods of inheritance tax
  • Will of succession: It is a document in which the deceased person has pre-declared the lawful owner of his/her assets.
  • Inheritance by nomination: A person can declare a person of his/her choice as the nominee. The nominee then becomes the lawful owner of an asset and the benefit it generates.
  • Inheritance by joint ownership: If any asset lies under the joint ownership of two or more people, the survivor(s) get to manage the asset post death of the other owner(s).
• India also had a wealth tax and a gift tax, which were abolished in 2015 and 1998 respectively.
• Reason for abolishing Estate Duty/ wealth Tax and Gift Tax:
  • Procedural harassment: Taxpayers were being unduly harassed with the existence of two separate taxes on property ie. wealth tax (before death) and estate duty (after death) 
  • Unmet objectives: There was no reduction in the unequal distribution of wealth whereas, the tax did not assist states in financing their development schemes significantly either.
  • Economies of scale: While the yield from estate duty is only about Rs 20 crore in 1985, whereas its cost of administration and collection was relatively high. 
  • Tax Evasion: High rates of taxation often results in flight of capital and investment to tax havens or tax jurisdictions with favorable tax rates 
• Comeback: 
• • Wealth Tax: Wealth tax was replaced  with an additional surcharge of 2% on the super rich with a taxable income of over Rs 1 crore
  • Gift Tax: It was reintroduced in 2004 with gifts from unrelated persons above the threshold of Rs 25,000 (later raised to Rs 50,000) only being taxable as income. Gifts from blood relations, lineal ascendants and descendants, and gifts on occasions like marriage are exempt.

Global Scenario: 

• Inheritance Tax across the globe: Japan has the highest inheritance tax rate with 55 per cent  in the world followed by South Korea with a rate of 50 per cent. 
  • Inheritance tax plays a significant role in shaping economic policies and social welfare systems, influencing decisions on wealth transfer and intergenerational equity.
• A case for a Global Minimum Corporate Tax Rate: 
  • 140 countries plus have agreed  to implement a new global tax agreement  proposed by the Organisation for Economic Co-operation and Development (OECD), which imposes a minimum effective rate of 15% on corporate profits.  
    • The deal intends to remove the incentive for nations that operate as tax havens for corporate giants with the OECD estimating  the Global Minimum Tax (GMT) policy to  reduce under-taxed profits by around 80%.
• Calls to tax billionaires: A proposal in the US to levy a minimum 25% tax on taxpayers with wealth over $100 million. France and Brazil have pushed for a G20 declaration on taxing the super rich by July.

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