Inheritance Tax: If implemented, who will bear the brunt – HNIs alone or middle-class too?

Inheritance Tax: If implemented, who will bear the brunt – HNIs alone or middle-class too?

The debate over inheritance tax—a tax imposed on the transfer of property and assets from a deceased person to their beneficiaries—has refused to die down ever since technocrat-turned-Congress leader Sam Pitroda raised this issue just after the first phase of the Lok Sabha polls.

With only two rounds of polls over and another five to go, the debate around inheritance tax seems to be intensifying as the top leaders of the ruling BJP are not leaving any chance to criticize the Congress over Pitroda’s remarks. However, Congress has already distanced itself from Pitroda’s comment.

Kicking off a row, Pitroda called inheritance tax an “interesting” idea. “If one has $100 million worth of wealth and, when he dies, he can transfer probably 45% of it to his children, 55% is grabbed by the government. That is an interesting law. It says you, in your generation, made wealth, and you are leaving now, you must leave your wealth for the public—not all of it, half of it, which to me sounds fair.”

Amidst the ongoing intense debate over inheritance tax in the country, Mukul Bagla, Chair of the Direct Tax Committee at the PHD Chamber of Commerce and Industry (PHDCCI), shared his insights with financialexpress.com. Bagla addressed some pertinent questions that have arisen regarding this tax.

Q. Why is there so much concern regarding inheritance tax now, and what impact do you think this tax would have on India’s socio economic landscape if imposed?

Ans: It is a levy charged on the total value of the deceased’s estate, including real estate, investments, and personal belongings before the assets are distributed to the heirs. The primary purpose of this tax is to ensure a fair redistribution of wealth and prevent the concentration of wealth within a few families over generations.

In India, wealth tax was applicable for the rich assessees whose wealth was more than Rs 30 lakh. The aforesaid wealth tax was abolished in FY 2015–16. Subsequent to the abolishment of the Wealth Tax Act, there were concerns with the HNIs that the wealth tax would soon be replaced by the inheritance tax. This led to extensive planning by way of the formation of family trusts and other similar mechanisms to shelter against the expected inheritance tax.A

The primary reason for such a debate is due to India’s growing wealth inequality (with the top 1% of the population owning roughly 40.1% of the wealth) and the potential impact such a tax could have on India’s socioeconomic landscape. In a country where family wealth is often passed down through generations, the introduction of an inheritance tax could significantly affect the intergenerational transfer of assets and the ability of individuals to build and maintain their financial stability.

Q. Do you think India can effectively implement an inheritance tax without disproportionately burdening the middle class?

Ans: India being a poor country, it can absorb the inheritance tax. One thing is very clear that in case the inheritance tax is introduced in India in whatever form, it will be applicable only to HNIs and not to the middle class or the lower middle class as India being a poor country, the implication of inheritance tax on middle class and the poor class would be very high and would not be justifiable under any circumstances.

Q. Do you believe inheritance tax proponents make a valid point about its role in addressing wealth inequality?

Ans: The main proponents of inheritance tax argue that it is a fair and effective way to reduce wealth inequality and ensure that the rich pay their fair share of taxes, by taxing the transfer of large sums of wealth from one generation to the next. Also, the revenue generated from inheritance tax can be used to fund important public services and social programs that benefit the wider population, thereby helping in breaking up the concentration of wealth and power that can occur when wealth is passed down through generations.

Despite the potential benefits of an inheritance tax, there are several concerns against its implementation in India such as it could discourage savings and capital accumulation, as individuals may be less inclined to pass on their wealth to their heirs if a significant portion is taxed. This could have negative implications for economic growth and investment in the long run. There are also concerns that an inheritance tax could lead to increased tax evasion and avoidance, as individuals may seek to find ways to shield their assets from the tax.

Q. Do you think the implementation of an inheritance tax would impact India’s already strained tax infra?

Ans: The inheritance tax would lead to administrative complexity and burden on the already overburdened tax infrastructure. Tracking and accurately assessing the value of inherited assets across a diverse population with varying wealth levels would require substantial resources and robust data collection mechanisms that India’s tax system may currently lack. Unless the legislation is meticulously designed and enforced, the inheritance tax could become a target for exploitation, undermining the purpose for which it was intended. In some cases, the rich may transfer it while they are alive if such taxes are lower than what their children will have to bear when they are gone. Otherwise, it may be moved to some form of a tax-exempt trust that will make the transfer easier.

Another loophole which may be exploited is that the rich can park their wealth in tax havens by choosing to lose their citizenship and buy a passport in a country that does not go after their wealth. This will lead to flight of wealth from the home country too. Furthermore, the implementation of an inheritance tax would require a robust and reliable property valuation system, which is currently lacking in many parts of India.

Q. How do you think the government could effectively prevent the avoidance of inheritance tax through the creation of family trusts?

Ans: It is also to be seen that in case the inheritance tax is introduced then how the government would block the avoidance of inheritance tax by creation of family trust. One school of thought also says that in case the inheritance tax is introduced then any transfer of assets by an individual to its family trust post implementation of the inheritance tax can be brought to Inheritance Tax at the time of transfer.

To understand the adversity caused due to the incidence of inheritance tax, the classic example is the case of the South Korean conglomerate Samsung. On the death of its chairman in October 2020, it was slapped a massive amount of inheritance tax. The inheritance tax rate was 50% in South Korea and the tax burden on the family was 8.6 billion which was to be paid over a span of 5 years and to make payment of the Inheritance Tax, the shares of Samsung group are being sold on year-to-year basis by the promoters to make such tax payment. This has resulted in the fall in shareholding of the Lee family in the Samsung group.

Q. How do you perceive the Indian government’s stance on inheritance tax?

Ans: The debate around inheritance tax in India remains a complex and nuanced issue. The Indian government’s stance has been largely against the adoption of an inheritance tax which can be evidenced in Prime Minister Narendra Modi’s recent interview in which he said that what BJP intends to do has been clearly mentioned in its manifesto and that its ideology is very clear and doesn’t include Inheritance tax as a part of it.