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Introduction:

The debate on reintroducing inheritance tax in India is a complex one, intersecting economic, social, and administrative dimensions. Historically, India abolished inheritance tax in 1985 due to its ineffectiveness and administrative challenges, but with growing wealth inequality, the discourse around its reintroduction has gained traction.

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Potential Benefits

• Redistribution and Social Equity: One of the primary arguments for inheritance tax is its potential to address wealth inequality. By taxing large inheritances, funds can be redistributed through social programs, which could lead to enhanced social mobility and reduced wealth concentration, as observed in countries like France and the UK, where progressive tax structures are employed​​.
• Increased Government Revenue: Properly implemented, inheritance taxes could significantly boost government revenues, which could be allocated towards public goods such as education, healthcare, and infrastructure, enhancing overall societal welfare​.
• Promoting Economic Productivity: By taxing inherited wealth, particularly large estates, there could be an incentive for the next generations to engage in productive economic activities rather than solely relying on inherited wealth. This can foster an entrepreneurial spirit and innovation​​.

Potential Drawbacks

• Administrative Challenges and Costs: Historical and international experiences highlight the significant administrative burden associated with enforcing inheritance taxes. High compliance and management costs, combined with the difficulty in valuing estates accurately, often lead to inefficiencies and a diminished tax base​​.
• Economic Disincentives: High inheritance taxes might discourage investment by reducing the post-tax returns on investments. This could lead to capital flight, where wealthy individuals transfer their assets overseas to evade taxes, ultimately harming the domestic economy​.
• Equity and Fairness Concerns: Inheritance tax can sometimes be seen as a form of double taxation since the assets would have already been taxed during the original owner’s lifetime. Moreover, the tax could impose undue hardships on heirs who might be cash-poor but asset-rich, forcing them to liquidate assets to meet tax obligations​.
• Cultural and Familial Implications: In a country like India, where family-owned businesses are prevalent, inheritance tax could disrupt these enterprises’ continuity. Additionally, it could lead to familial disputes and complicate the smooth transition of assets across generations​.

Learning from Global Practices

Countries like Japan and South Korea have high top rates for inheritance taxes, yet they also offer significant exemptions to mitigate the impact on middle and lower-income families. These practices might serve as a model for India, should it choose to reintroduce an inheritance tax, focusing on high-value estates to minimize the tax’s societal impact​.

Conclusion:

While the reintroduction of an inheritance tax in India could serve as a tool for social justice by redistributing wealth and funding public services, the potential economic drawbacks and administrative challenges cannot be overlooked. The decision to implement such a tax must be carefully balanced, taking into account both the economic implications and the broader societal values. Drawing lessons from other nations and tailoring the tax system to India’s unique socio-economic landscape will be crucial in achieving the desired outcomes without unintended consequences.