What Is Inheritance Tax And Why Sam Pitroda's Statement Has Sparked A Row

Indian Overseas Congress Chairperson Sam Pitroda backed the idea of inheritance tax and said that the push for redistribution of wealth is in the favour of public. The comments came days after Prime Minister Narendra Modi attacked the Congress party over its manifesto and said that the party was "looking to survey earnings and wealth of people, including their vehicles, property, and houses to redistribute it in line with a communist ideology that INDIA wanted to implement in the country".

As the statement stirred a major row, the Congress party quickly distanced itself from the statement of Pitroda. Congress General Secretary Jairam Ramesh took to X and said that the party has no plans to impose an inheritance tax in the country. He wrote, "The Congress has no plan whatsoever to introduce an inheritance tax. In fact, Prime Minister Rajiv Gandhi abolished Estate Duty in 1985." Ramesh countered BJP's claims by saying that former finance minister Arun Jaitley had also floated the idea of inheritance tax.

What Is Inheritance Tax?

Inheritance tax is levied on the assets inherited from a deceased person. It was imposed on the inheritance of ancestral land in the country between 1953 and 1985. The tax was collected at the time of transfer of assets post the death of an individual. For the calculation of tax, the market value of the property at the time of a person's death was taken into consideration. The rates under the taxation regime went up to as far as 85 per cent for properties valued over Rs 20 lakh. Known as the estate tax or duty, the Rajiv Gandhi government had abolished it in 1985. The then finance minister VP Singh had said that the tax failed to bridge the gap between the poor and the rich.

The finance minister had also said that the administrative cost for implementing it was more than the yield from the tax itself. "While the yield from estate duty is only about Rs 20 crore, its cost of administration is relatively high. I, therefore, propose to abolish the levy of estate duty in respect of estates passing on deaths occurring on or after 16th March, 1985," he said during the budget speech for financial year 1985-86.

Inheritance tax can also be imposed on other forms of assets apart from real estate. Pitroda believes India needs to discuss the issue once again because of the wide gap in the wealth of the rich and the poor in India. He said in an interview to ANI, "In America, there is an inheritance tax. If one has $100 million worth of wealth and when he dies he can only transfer probably 45 per cent to his children, 55 per cent is grabbed by the government. That's an interesting law...In India, you don't have that. If somebody is worth 10 billion and he dies, his children get 10 billion and the public gets nothing...So these are the kinds of issues people will have to debate and discuss."

Reacting to the statement, Prime Minister Narendra Modi told people in a rally on Wednesday that Congress was planning to "snatch assets from children". The idea of increasing taxation proposed by Pitroda has sparked the row. However, inheritance tax is common in many developed nations.

Is Inheritance Tax Applied Anywhere Else In The World?

Major developed economies like Japan, United States, United Kingdom, France and South Korea have inheritance tax regime. Japan has the highest inheritance tax across the world at 55 per cent. While the United States has an inheritance tax, it's only applied in six states out of the total 50. An estate tax is also levied by the federal government of the United States.

Interestingly, famous billionaire investor Warren Buffett had backed the idea of inheritance tax in an interview to CNBC in 2017. While talking about proposed reforms of the system which removed estate tax, he said, "If they pass the bill they’re talking about, I could leave $75 billion to a bunch of children and grandchildren and great-grandchildren. And if I left it to 35 of them, they’d each have a couple billion dollars. Is that a great way to allocate resources in the United States?"

The debate over inheritance tax often comes along with a discussion on the increasing inequality between the poor and the rich. A recent report by World Inequality Lab had found that 22.6 per cent of the national income went to the top one per cent Indians, which was the highest level recorded since the start of the data series in 1922.

The report also revealed that the share of top 10 per cent Indians had also increased from 36.7 per cent of national income in 1951 to 57.7 per cent in 2022. However, it isn't clear whether inheritance tax is able to bridge the gap between the rich and poor given the history of India's own tax regime and the example of United States.

Despite the country having such a mechanism in place, albeit in only few states, the share of top one per cent in the national income of United States stood at 30 per cent according to recent estimates.