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Interest in Inheritance Tax Legislation Grows Among Indian Opposition Leader

Context:

A prominent political leader from India’s opposition party has recently expressed interest in proposed legislation regarding Inheritance Tax. This move comes amidst ongoing discussions about utilizing inheritance tax as a means to address income inequality and facilitate wealth redistribution in the country.

Relevance:

GS III: Indian Economy

Dimensions of the Article:

  1. Inheritance Tax: Overview
  2. Advantages of Implementing Inheritance Tax in India
  3. Challenges in Implementing Inheritance Tax in India

Inheritance Tax: Overview

  • A tax paid on inheriting property or assets from a deceased person, levied on the value received by the beneficiary.
  • Paid by the beneficiary, with rates varying by country, sometimes as high as 55%.
  • Inheritance can be received under a Will or personal law of the deceased.
  • In India, the concept of inheritance tax currently does not exist.

Determination of Total Asset Value

  • First step involves assessing the deceased’s assets: real estate, investments, bank accounts, vehicles, and personal belongings.
  • Consideration of outstanding debts or liabilities.
  • Applicability of inheritance tax depends on estate value and jurisdictional laws.
  • Some beneficiaries may be exempt or receive reduced rates, such as spouses or children.

Reasons for Abolishing Inheritance Tax

  • Taxpayer harassment due to pre-death wealth tax and post-death estate duty.
  • Inadequate impact on wealth distribution or state financing.
  • Estate duty yielded low revenue compared to administration costs.
  • High tax rates can lead to capital flight to tax havens or jurisdictions with favorable rates.

Examples of Inheritance Tax Worldwide

  • Widely levied in Europe, America, and Africa.
  • Top nations with inheritance tax include France (60%), Germany (50%), UK (40%), Spain (33%), and Hungary (18%).
  • Other countries with notable rates include Japan (55%), South Korea (50%), Ecuador (37%), Chile (25%), South Africa (25%), and Taiwan (20%).

Advantages of Implementing Inheritance Tax in India

  • Addresses staggering wealth inequality in India, where the top percentile holds a disproportionate share of national wealth.
  • Promotes social mobility by redistributing excessive wealth and preventing its concentration within a few families.
  • Generates additional revenue for the government to fund social sector programs and welfare schemes, aiding in public welfare initiatives.
  • Acts as a progressive tax, placing a higher burden on wealthy individuals, contributing to a fairer tax system.
  • Potential to reduce basic income tax liability for economically weaker sections, fostering entrepreneurship and economic participation.

Challenges in Implementing Inheritance Tax in India

  • India’s already complex tax system may face further complications with the introduction of inheritance tax, leading to compliance and enforcement challenges.
  • Requires a robust administrative infrastructure for effective enforcement and administration, which may be lacking.
  • Resistance from wealthy families who stand to lose a portion of their inherited wealth, posing political and social challenges for implementation.
  • Implications for family-owned businesses, particularly in sectors reliant on succession planning.
  • Collection of accurate wealth and asset data poses challenges, especially in rural areas with prevalent informal economies.
  • Potential for tax avoidance or evasion by high net worth individuals through trusts, offshore accounts, or asset gifting.
  • Agricultural land, culturally and economically significant, presents challenges in imposing inheritance tax due to resistance from agricultural communities and concerns about land fragmentation.

-Source: The Hindu


May 2024
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