Active Stocks
Fri Apr 12 2024 15:57:45
  1. Tata Steel share price
  2. 163.50 -1.00%
  1. NTPC share price
  2. 362.00 -0.32%
  1. ITC share price
  2. 430.10 -1.56%
  1. HDFC Bank share price
  2. 1,518.90 -1.10%
  1. State Bank Of India share price
  2. 766.75 -1.57%
Business News/ Opinion / Columns/  Opinion | The inheritance tax is an idea whose time has come

Opinion | The inheritance tax is an idea whose time has come

Such a tax can potentially prevent the concentration of income and wealth in the hands of a few

Photo: MintPremium
Photo: Mint

If recent news reports are any indication, there is a possibility that more than three decades since estate duty was abolished in India, we may see its re-introduction in the upcoming budget, albeit in a slightly different avatar. Policymakers have been intermittently toying with the idea of an inheritance tax in India, imposed on those who inherit assets from a deceased person. The rate of this tax generally depends on the value of the property received by the heir and his relationship to the decedent. An estate tax, in contrast, is based on the net value of the property owned by a deceased person at the time of death. It is collected only if the value exceeds the exemption limit under the law. The estate duty was abolished in 1985 on the rationale that net benefits accruing from the tax were negative, as the government found itself trapped in innumerable litigation, and the yield from the tax was markedly lower than the cost of its administration. Notwithstanding the history, this is an opportune time to introduce its variant, the inheritance tax, on the following considerations.

First, wealth, income, and consumption inequality is high and has been rising in India, particularly in the post-liberalisation period. Economists Lucas Chancel and Thomas Piketty, analysing the dynamics of income inequality between 1922 and 2014, found that income inequality in India is at its peak since 1922, when income tax was first introduced here. In the 1930s, the top 1% of earners in India accounted for less than 21% of total income. This dropped significantly to 6% in the 1980s. However, it thereafter steadily increased to a historical high of 22% in 2014.

Wealth inequality in India has also been alarming. According to Credit Suisse 2018 Global Wealth Report, the richest 1% own 51.5% and the richest 10% account for 77.4% of the nation’s wealth. In contrast, the bottom 60% of the population owns only a meagre 4.7% of it. The Gini wealth coefficient, where 100% represents maximal inequality, in India has gone up from 81.3% in 2013 to 85.4% in 2017, indicating a worsening of wealth inequality. A recent working paper from the World Inequality Lab, authored by Rishabh Kumar, shows that the wealth-income ratios in the India of the 21st century are approaching the same disproportionate size that was seen during sharp economic downturns in interwar colonial India.

Thus, while the per capita income of Indians has risen since liberalisation, growth has failed to be inclusive. An inheritance tax, coupled with associated tax reforms, can potentially prevent the concentration of income and wealth in the hands of a few, reduce intra-generational inequality, promote inter-generational equity, and serve a meaningful purpose to address the distributional gaps that exist in India today.

Second, an inheritance tax, if implemented well, can potentially help the government exchequer at a time when it has been scouting for additional sources of revenue to bridge the persistent gap between fiscal targets and outcomes. Recent policies on farm loan waivers, bank recapitalisation, universal health insurance, and the expansion of other social sector programmes will pose significant challenges in maintaining fiscal prudence. Tax revenues, on the other hand, have remained less buoyant with the tax-gross domestic product (GDP) ratio at only 17.8% in 2016-17. According to the latest data released by the Controller General of Accounts, collections of direct and indirect taxes for 2018-19 fell short of their targets by 74,774 crore and 93,198 crore respectively.

Juxtapose the above with this. According to an Oxfam survey in 2018, the wealth of the richest 1% of the population increased by 20.91 trillion, equivalent to total budget of the central government in 2017-18. Moreover, 37% of Indian billionaires have inherited family wealth, and control 51% of the total wealth of billionaires in the country. The survey also points out that 51 of a total of 101 billionaires are more than 65 years old and collectively own 10.54 trillion. Thus, even a moderate inheritance tax of 10-15%, benchmarked to other Asian countries such as the Philippines, Taiwan and Thailand, can potentially act as a stable and significant source of revenue for the government.

Third, there has been a discernible improvement in the government’s tax administrative capacity, drawing upon the strengths of the information technology revolution. Project Insight of the Central Board of Direct Taxes and the application of Big Data analytics to improve tax compliance have strengthened tax administration. This, along with the thrust towards a digital economy, could potentially reduce the marginal cost of administering and monitoring compliance of an inheritance tax.

However, the government needs to tread with caution and take a systemic approach while implementing the tax. To ensure effectiveness, corresponding changes in other related or complementary taxes, such as the gift tax and wealth tax need to be looked at again. This assumes importance in India, where “benami" property is rampant and there is increasing evidence of the creation of family trusts such as the Hindu Undivided Family (HUF) by high net-worth individuals for tax avoidance purposes.

India’s inheritance tax must not be used as a symbolic tool, marketed as a Robin Hood tax, for populism. Rather, the intent should be grounded in the substantial distributional inequities that exist in the country today.

These are the authors’ personal views

Amarendu Nandy & Abhisek Sur are, respectively, assistant professor and doctoral candidate at IIM, Ranchi

Unlock a world of Benefits! From insightful newsletters to real-time stock tracking, breaking news and a personalized newsfeed – it's all here, just a click away! Login Now!

Catch all the Business News, Market News, Breaking News Events and Latest News Updates on Live Mint. Download The Mint News App to get Daily Market Updates.
More Less
Published: 04 Jul 2019, 12:27 AM IST
Next Story footLogo
Recommended For You
Switch to the Mint app for fast and personalized news - Get App