The Congress has no plan whatsoever to introduce an inheritance tax. In fact, Rajiv Gandhi abolished estate duty in 1985,” Congress’s Jairam Ramesh tweeted as it attempted to douse the political firestorm after Sam Pitroda advocated a “US-like inheritance tax” in India.
The concept of an inheritance tax is, however, not new to India. Such a tax, known as estate duty or “death tax” in some countries, was very much prevalent in India around four decades ago before it was abolished in 1985.
Since then, the idea of bringing back such a tax has been floated by both the erstwhile Congress-led UPA government and the NDA regime.
Former finance minister P Chidambaram, on several occasions between 2011-2013, mentioned imposing inheritance tax to shore up government resources. Similarly, during the first term of the NDA government, former Minister of State for Finance Jayant Sinha was an ardent advocate of the idea.
The inheritance tax was introduced in 1953 under the Estate Duty Act in a bid to reduce economic disparity. In 1953, the government found that there were glaring inequalities of wealth and thus the idea of such a tax was conceived.
Moreover, it was also a means to tax the super-rich who passed on a huge amount of wealth to the next generation.
In simple terms, estate duty was imposed on the total value of the property held by an individual at the time of his/her demise. The tax had to be paid when the property was passed on to the heirs.
The duty was imposed on all immovable property as well as on all movable property situated in India or outside.
However, the tax was unpopular among the people as estate duty rates were as high as 85 per cent on properties whose value exceeded Rs 20 lakh. The levy started for properties worth at least Rs 1 lakh, with a rate of 7.5%.
The total worth of the property was calculated as per the market value at the time of the death of the individual.
WHY WAS INHERITANCE TAX ABOLISHED?
While the law was brought to increase state revenue and reduce the stark economic disparity, it came under fierce criticism from the opposition as well as other sectors throughout the 30 years it was in force.
There were multiple factors that eventually led the tax to be abolished in 1985 by then finance minister VP Singh.
The law had different valuation rules for different kinds of property, making it a complex legislation. This resulted in a huge amount of court litigation amid disputes over the valuation of the property. This resulted in a significant administration cost.
An audit revealed that the estate tax collection was a negligible percentage of the total direct tax collected by the Centre.
According to a report in The Economic Times, the total tax collected in 1984-85 under the Estate Duty Act was Rs 20 crore. However, the cost of collection was very high.
The collection remained meagre as individuals started finding ways to circumvent paying the tax. Apart from illegally concealing inherited properties, the practice of holding benami properties also gained traction.
Moreover, a separate estate tax on top of an income tax was seen as double taxation, leading to resentment among the public.
WHEN CONGRESS, BJP MULLED IMPOSING INHERITANCE TAX
The idea of bringing back an inheritance tax has been floating around in political circles for over a decade.
The idea of reimposing such a tax was first mentioned by Home Minister P Chidambaram in 2011 during a Planning Commission (now Niti Aayog) meeting chaired by then Prime Minister Manmohan Singh. Chidambaram was the finance minister during the first four years of the UPA-I government.
Chidambaram had mooted the idea in a bid to raise tax resources and shore up the declining tax to GDP ratio.
A year later, he raised the matter again at a National Institute of Public Finance and Policy event. Chidambaram said it was high time for an inheritance tax while flagging the accumulation of wealth in the hands of a few.
“Have we paid little attention to accumulation of wealth in a few hands? I am still hesitant to talk about inter-generational equity and therefore inheritance tax,” he said.
The idea made a comeback in 2013, when Chidambaram presented the last full Budget of the UPA-2 government. In fact, Chidambaram was convinced that an inheritance tax could raise revenue while serving the UPA’s political purpose.
However, not everyone in the Cabinet as well as stakeholders were convinced of the logic of an inheritance tax, and it never made its way to the Budget.
The matter went into cold storage as the Narendra Modi-led NDA government won the 2014 Lok Sabha elections.
The same year, Jayant Sinha, then Minister of State for Finance, had publicly vouched for the introduction of inheritance tax. Sinha had said such a tax would take away some of the advantages that dynastic business people had and help in levelling the playing field.
In 2017, there were reports that the government was going to re-introduce inheritance tax.
In 2018 too, then Finance Minister Arun Jaitley advocated it, saying hospitals and universities in developed countries received large endowments due to factors like inheritance tax.
Jaitley further said the endowments received by major hospitals in the US and Europe ran into billions of dollars and were provided by people and patients who benefitted from them.
“I was analysing why that condition doesn’t exist in our country. And one of the reasons I found out was that those societies have very large inheritance taxes. Since we don’t have that inheritance tax in India, our charities are not in terms of such endowments,” the veteran BJP leader had said.
