A recent study by Wealth Inequality Lab proposed that India needs to impose a 2 per cent tax on net wealth exceeding Rs 10 crore and a 33 per cent inheritance tax to deal with the problem of rising inequality in the country.
Experts say inheritance tax or wealth tax is not a practical approach to eliminate wealth inequality. What are the challenges associated with imposing these taxes in India?
A recent study by Wealth Inequality Lab proposed that India needs to impose a 2 per cent tax on net wealth exceeding Rs 10 crore and a 33 per cent inheritance tax to deal with the problem of rising inequality in the country.
The report titled 'Proposals For a Wealth Tax Package to Tackle Extreme Inequalities in India' suggested tax changes to ‘bring down the massive concentration at the very top of the wealth distribution’ and called for the creation of a valuable fiscal ecosystem for significant social sector investments.
It noted that the tax overhaul would only impact 0.04 per cent of the population (370,000 adults) leaving out 99.96 per cent of the adults unaffected.
But can imposing an inheritance tax and wealth tax on the ultra-wealthy tackle the wealth inequality problem of India? “This could theoretically reduce wealth inequality by redistributing wealth from the ultra-wealthy to the broader population. The effectiveness of these taxes, however, depends on robust implementation, effective monitoring, and the ability to prevent tax evasion. A well-designed tax framework could address loopholes and ensure compliance, making this a plausible approach,” says CA Sakchi Jain, a financial educator.
In the last few months, while the Lok Sabha election campaigning was in full swing, the issue of introducing an inheritance tax in India gained prominence after Sam Pitroda, the chairperson of the Indian Overseas Congress, said inheritance tax, as it existed in the United States (US), is an "interesting idea". It was followed by a major political row with debates weighing the pros and cons of such a tax regime.
“Any wealth which is generated from Tax Paid Income should not be taxed again by the way of inheritance tax as it will lead to the imposition of double taxation on family,” says CA Ashish Niraj, Partner, A S N & Company, Chartered Accountants.
Niraj adds: “As per Indian Income Tax Laws, a surcharge of up to 25 per cent is levied over and above tax rate on those having income more than 50 Lakhs. By this regulation, they are already paying tax rates higher than those having lower incomes. The Present Maximum Marginal Rate of Tax in the New Regime is 39 per cent in India. We must not punish those showing their correct income and making wealth out of it. Just because they are transferring property to their kids post-death, it does not mean it should be taxed again.”
“The country has some history with inheritance taxation,” Jain notes. India used to impose another form of inheritance tax known as the estate duty, introduced in 1953.
The estate duty was levied on the market value of all immovable properties in India, as well as on all movable property passed on to successors upon the death of an individual. “However, a large number of litigations and high tax administration costs led to its scrappage by the Rajiv Gandhi government in 1985. This historical context raises concerns about the feasibility and efficiency of reintroducing similar taxes,” Jain informs.
“Despite its potential benefits, I believe that these measures (as suggested by the World Inequality Lab) may not be very effective due to prevalent issues like corruption and tax evasion,” Jain says.
In a podcast, former RBI governor Raghuram Rajan challenged the effectiveness of traditional redistributive tax measures like wealth and inheritance taxes. He says that the wealthy can easily circumvent these measures.
“High Networth Individuals (HNIs) most of whom are from business backgrounds can easily bypass these through tax avoidance means,” Niraj seconds the thought. “If there is inheritance tax, the HNIs may plan to transfer the property during their lifetime. We must not forget that Wealth Tax was already applicable in India but was abolished later in 2015 as collection was not adequate. The cost incurred for recovering Wealth taxes was more than the benefit derived so it was ineffective in the past too,” he says.
Niraj and Jain highlight large-scale drawbacks and challenges of imposing inheritance/wealth tax in India:
Tax Evasion: The wealthy would often find ways to minimize their tax liabilities through legal loopholes, offshore accounts, or trusts, which can substantially reduce the potential revenue from these taxes. They might also relocate to countries with more favourable tax regimes, leading to a potential loss of both tax revenue and investment.
Benami Assets: Inheritance tax will promote Benami Assets acquisitions. People will start buying Assets in the name of their relatives and friends etc. As most wealthy people are in business they can create artificial income also in the name of those through which they are doing Benami Transaction.
Economic Impact: An inheritance tax could discourage savings and increase consumer spending, potentially leading to higher inflation rates. This tax might also dampen the spirit of capital asset creation, which is essential for economic growth.
Market Cost: It could discourage investment and entrepreneurship, as the ultra-wealthy might be less inclined to invest in long-term projects or start new ventures, knowing that a significant portion of their wealth will be taxed upon inheritance.
Double Taxation: Another concern with inheritance tax is the issue of double taxation. The property or money inherited has already been taxed as earned income during the lifetime of the individual, and taxing it again can seem unfair.
Distress Sales: An inheritance tax can create extra pressure on the recipient of the property, as they may not have the money available to pay the tax. This could lead to situations where the recipient is forced to sell the inherited property quickly, often at a lower price, resulting in distressed sales.
Fiscal Burden: Implementing an inheritance tax would require the government to incur substantial expenses and expertise in valuing properties and collecting revenues. The high administrative costs and complexities involved in managing such a tax system could pose a significant challenge for the entire nation.
"Show me one country which has collected serious wealth taxes anywhere and I would challenge Piketty on that," Rajan spoke in a podcast in response to the WIL report.
“India’s Family Values cannot be compared to Western countries,” Niraj states. While India can draw lessons from the experiences of countries like France, Norway, Switzerland, the UK, and the US, ‘most countries with these taxes are developed nations,’ Jain highlights.
Jain says that the legal and financial systems in developed countries are more advanced, and equipped to handle the complexities of tax evasion and compliance. India's systems may not be as robust, leading to challenges like tax evasion and underreporting.
The public acceptance and political will for such taxes differ between developed countries and India. In developed nations, there is often greater acceptance due to a stronger social safety net and a culture of wealth redistribution. ‘However, in India, resistance and backlash could be significant if people perceive these taxes as unfair or poorly managed,’ Jain mulls.
“In foreign countries, data is easily accessible, this is not the case with India. Although inheritance tax is applicable in some western countries, it’s not very successful in the top 10 countries according to population like China, US, etc.’ Niraj adds.
The WIL report claims that economic disparities in India have peaked at ‘historical highs’ since the early 2000s. The link between extreme inequalities and social injustice can no longer be ignored. “The income and wealth share of the top 1 per cent population has risen to 22.6 per cent and 40.1 per cent, respectively, in 2022-23,” the report states.
The study highlights the inclusion of explicit redistributive policies to support the poor, lower castes, and middle classes in addition to the taxation proposal. “Implementation of these taxes alone may not be sufficient to effectively address social welfare and economic disparities in the country,” Jain confirms.
“While wealth and inheritance taxes can play a role in addressing economic disparities, they should be part of a broader policy framework that includes measures to improve education, healthcare, and employment opportunities for all segments of society,” she adds.
Niraj on the other hand says that inheritance tax or wealth tax is not a practical approach to eliminate wealth inequality. “In my view Assessment of wealth is necessary and it should be screened whether it’s through legal means or not. Still, there is a big volume of Benami Assets in the country. The government should take strict measures to check this.”
He concludes that the Centre can impose high taxes with additional penalties if wealth is made from black money or entire wealth generated from black money can be confiscated and redistributed by making a proper structure. “This will generate more revenue for the Government than this much-debated inheritance tax.”