Any inheritance tax in India risks flight of wealth from the country, says economist Ashwani Mahajan

Any inheritance tax in India risks flight of wealth from the country, says economist Ashwani Mahajan

India’s ongoing national elections are witnessing an intense political debate over inheritance tax and wealth redistribution triggered by a comment on April 24 by Sam Pitroda, the chairman of the Indian Overseas Congress, an arm of the Indian National Congress.

Weighing in on this debate, economist Ashwani Mahajan says India may lose wealth to foreign countries if such a tax is imposed on the super-rich, which would consequently discourage investment and entrepreneurship.

“Finance is highly mobile in nature. In anticipation of inheritance tax if people transfer their wealth abroad to avoid high taxes on their offspring on inheritance after their death, then we shall be losing national wealth to foreign countries. That will be the worst scenario,” Mahajan told Moneycontrol in an interview.

India did in fact have an inheritance tax, which was introduced in 1953, but after over three decades in existence it was abolished in 1985 under the Congress government led by Rajiv Gandhi.

According to Mahajan, when the duty was in existence an increase in tax evasions was noticed. And given that India has largely been able to tackle the menace of tax avoidance in the last few decades, a return to such a duty would undo that progress.

Comparison with the West

Mahajan added that India cannot follow the footsteps of the UK and the US when it comes to taxing the rich given that India both economically as well as culturally is different from the West.

“We cannot compare India to countries like the US and the UK that have some form or the other of an inheritance tax. They are developed countries but India is looking to become a developed nation by 2047 so we need to encourage entrepreneurship, savings and capital formation, in a bid to reach the goal of ‘Viksit Bharat’ and a measure like inheritance tax does not help with that goal,” the economist said.

Congress leader Praveen Chakravarty echoes the same sentiment on this issue.

“Given that we are still a developing economy, the tax proceeds from an inheritance tax will not be large. Therefore, it is not worth taking the risk of slowing down investment for a very small tax revenue gain. I understand, in a developed country it is a good idea because they don’t have as much shortage of capital, and they have more advanced capital markets and capital raising capacity, Charkravaty said.

Therefore, inheritance tax will not work in the Indian economy as it currently stands, the Congress leader told Moneycontrol.

While in the US there is a tax of up to 40 percent on estates valued at over $13 million, which is levied in 13 states, the inheritance duty is imposed by a fewer number of districts on property or other assets when the person dies and passes it on to the next in line.

And, the British government puts a tax on the value of the deceased’s net estate at the time of death at the rate of 40 percent above a threshold, which is currently at £325,000.

Both Mahajan and Chakravarty feel that for now India needs to focus more on encouraging investments rather than taxing the rich.

Redistribution of wealth

Mahajan goes a step further and terms the very idea of redistribution of redistribution of wealth as a bad idea.

“If there is an unequal distribution of income, wealth and consumption it is not because of a single regime. Over the years since 1991 inequality in distribution is visible. But taking away wealth from the rich and redistributing it to the poor is not going to solve the problem. As per my understanding, there is nothing wrong if poor people in India are fed through free food grain schemes, especially when we have a surplus, but in the long run we need to make people capable of earning from themselves, so that their dependence on the government reduces,” Mahajan said.

The economist said that the whole world is facing the challenge of keeping up with distributing welfare money, including rich nations like Europe and the UK.

“We cannot have a system where people are made overly dependent on the public exchequer. Giving cash or free electricity or travel aren’t sustainable measures. In the last few years the current government has focused on welfare schemes such as access to houses, LPG connections, toilets, water connections, and access to skilling that makes them self-sufficient and empowers them towards a livelihood. There is a difference between entitlements and freebies. Giving people basic entitlements is the duty of the government, but taking away the money from the rich to distribute it to the poor isn’t,” Mahajan added.

For Mahajan, perhaps the biggest demerit of any variation of an inheritance tax in a country like India is that it ends up becoming an emotional tax for the people of the country.

“India has an emotional relationship with inheritance. People want to stay in their parents’ house, they want to retain it. India’s relationship with inheritance is unique and therefore templates used by nations with a different relationship with property cannot be implemented here,” he said.