Source: Sam Pitroda controversy: How inheritance tax works (The Hindu, April 26, 2024)
A comment by Sam Pitroda, a close associate of the opposition Congress party, sparked a debate in India about inheritance tax. Prime Minister Narendra Modi accused Congress of planning to snatch property from inheritors, while Congress denied the claim. Inheritance tax is a tool to reduce wealth inequality and has been used in various forms around the world.
India itself had an inheritance tax called estate duty, abolished in 1985 due to low revenue and high administrative costs. The debate now centers on whether to reintroduce such a tax, with discussions about its effectiveness and potential drawbacks.
Inheritance Tax and Wealth Redistribution
- History in India: India once had an inheritance tax called estate duty, from 1953 to 1985. Wealth and gift taxes existed too, but were abolished in 2015 and 1998 respectively.
- Recent Discussions: During the 2019 Lok Sabha elections and subsequent budget talks, there were talks about bringing back inheritance tax in India.
Global Efforts for Wealth Redistribution
- Growing Calls: Around the world, there are increasing demands to tax billionaires for fairer societies.
- Proposals: There are talks of a global minimum corporate tax rate and a US proposal for a minimum 25% tax on wealth over $100 million. France and Brazil aim to get a G20 declaration on taxing the super rich by July.
Taxing Wealth: Different Approaches
- Taxing Income and Wealth Flow: Wealth can be taxed in various ways. One approach is to tax income generated from wealth or assets. Another way is to tax wealth during its transfer or at specific times, based on the value of owned assets.
- Types of Wealth Taxes: There are several types of wealth taxes, including capital levy on income from assets, transfer taxes like wealth tax, inheritance tax, estate tax, or gift tax at the time of wealth or asset transfer.
- Combining Income and Wealth Taxes: Some governments combine income and wealth taxes. For example, the Biden Administration proposed a ‘Billionaire Minimum Income Tax’ of at least 25% on their entire income, including unrealized gains.
Taxation in India: Past and Present
- Estate Duty: The estate duty, which was essentially inheritance tax, had rates ranging from 5% to 40% on estates exceeding Rs 20 lakh, with a threshold of Rs 1 lakh. Amendments were made to the Estate Duty Act in 1958, adjusting definitions and thresholds.
- Continued Discussions: Even after its removal, talks about inheritance tax persisted. Former Finance Minister Arun Jaitley mentioned its absence in India compared to developed nations, where institutions benefit from large endowments due to such taxes.
- Replacement of Wealth Tax: In 2015-16, the Narendra Modi government replaced wealth tax with a surcharge on the super-rich. Previously, wealth tax was 1% on assets over Rs 30 lakh (excluding certain assets), but it only collected Rs 1,008 crore in 2013-14. The new surcharge, 2% on individuals earning over Rs 1 crore, aimed to generate revenues of Rs 9,000 crore.
Taxation and Revenue Trends
- Impact of High Tax Rates: Wealthy taxpayers may move their money to places with lower taxes. If the cost of collecting taxes is high and the revenue isn’t, it doesn’t make sense to have high tax rates.
- Estate Duty Challenges: When estate duty started in 1954, the money collected was less than expected. In the first year, only Rs 8 lakh was collected instead of the planned Rs 25 lakh. The next year, only Rs 13 lakh was collected instead of Rs 21 lakh. High collection costs and double taxation led to estate duty being abolished.
- Wealth Tax Issues: Wealth tax faced similar problems. It cost a lot to collect, but didn’t bring in much money. In 2015-16, the wealth tax was replaced with a 2% surcharge on super-rich people earning over Rs 1 crore.
- Abolishing Gift Tax: Gift tax was stopped in 1998 because it didn’t bring in much money and didn’t stop tax evasion. But it was brought back in 2004 to prevent money laundering. Gifts over a certain amount from unrelated people were taxed as income. Gifts between family members or for special occasions were exempt.
Global Tax Trends
- Declining Wealth Tax Rates: The IMF noted in March 2024 that wealth tax rates have decreased worldwide over the years. This decline includes corporate income tax rates in many countries.
- Wealth Tax Trends in OECD: In 1990, 12 OECD countries had wealth taxes. But now, only three countries (Switzerland, Spain, Norway) still have broad-based wealth taxes.
- Tax Avoidance by the Wealthy: Research shows that wealthy individuals often pay very low tax rates. The EU Tax Observatory found that global billionaires pay effective tax rates as low as 0-0.5% due to using shell companies to avoid taxes.
- Impact of Loopholes: The IMF mentioned that wealthy taxpayers use loopholes to lower their average tax rates. Studies show that the richest Americans face an average tax rate of only 3.25%, while the top 400 families face a rate of 9.4%.