Inheritance tax (also known as estate tax) was abolished in India in 1986. However,
it has been reported that the government is mulling re-introduction of the estate tax in 2019. There is a strong case for reintroducing inheritance tax in India. It is a tax levied upon the death of a person, so it does not hinder that person from enjoying the fruits of their estate.
A rumour doing the rounds in corporate circles is that Lee Kun-Hee, chairman of the South Korea-based Samsung group, died back in 2014, but is being kept alive using ventilators because his heirs are not yet ready to pay the inheritance tax that is leviable in South Korea at 50 percent of the value of wealth. Some Korean newspapers have speculated this while the reports remain unverified. This may be just some tittle-tattle, or may not be. Official position remains that Lee is ailing since his admission into Samsung Medical Center in 2014.
Inheritance tax is a direct tax and is considered as the most progressive of major tax systems. Among the major economies of the world, Japan taxes inherited estates at 55 percent of the estate of the deceased, while the tax rates in South Korea and the United States of America are 50 percent and 40 percent respectively. Inheritance tax is levied on a small minority of the population of a country, as it is levied only on wealth in excess of a threshold. However, the revenue for the treasury of the country is significant. For instance, the heirs of Lee will have to shell out an estimated $5.3 billion as inheritance tax when they inherit his estate.
Inheritance tax is levied on a small chunk of the population, but with the additional revenue coming in, the finance ministry can reduce income tax rates. Secondly, there is no income tax on agriculturists in India. Attempts made to bring agricultural income into the tax net have remained unsuccessful as it’s a politically sensitive issue. Thus, uber-rich landlords having massive estates get away without paying any tax on their agricultural income. Inheritance tax will aim to bring them into the tax net.
Thirdly, passing on excess wealth to one’s heirs on the event of death has many social repercussions. This leads to concentration of wealth in the hands of a few families, and perpetuation of inequality. In a country like India, where economists worry about rising inequality, inheritance tax will bridge the gulf between the rich and the poor to an extent. India has the third largest number of billionaires in the world, while it ranks 142 on the list of countries as per gross domestic product per capita at nominal values.
Inheritance of excess wealth without any levies goes against the principles of equality of opportunity, as those inheriting windfall wealth will have a definitive edge over those who do not. Thus, estate tax has a symbolic value for youth from the middle class and labour class backgrounds, and it will play an essential role in reducing disillusionment and discontentment.
Inheritance tax also benefits the inheritors of excess wealth, a phenomenon referred to as the ‘Carnegie effect’. Carnegie effect refers to an observation that an heir who knows that they will be inheriting enormous wealth will lead a less worthy life than they otherwise would.
Studies have found that imposing inheritance tax on estates of significant size increases the propensity of giving charities among the superrich by 6 percent to 12 percent (usually money donated for charity are exempt from inheritance tax).
Critics of inheritance tax argue that this tax disincentivises entrepreneurs. Taxes of all kinds, by their very nature, are disincentives. The question is whether it has a significant impact on entrepreneurial behaviour. Studies conducted in countries that have inheritance tax have come up with mixed results: some studies conclude that inheritance tax is a disincentive for entrepreneurs, while others have found that it improves entrepreneurial zeal. Quite counter-intuitively, the introduction of inheritance tax is good for entrepreneurs. The government can afford to reduce income tax when it levies inheritance tax; thus, an entrepreneur will have higher after-tax income in her lifetime and will be motivated to work more.
The authors are officers of the Indian Revenue Service. The views expressed in the article are personal.