[Answered] What is inheritance tax? Do you think it is need of the hour in India? Discuss various pros and cons of inheritance tax.

Demand of the question
Introduction. Define inheritance tax
Body. Discuss income inequality in India and need of Inheritance tax. Various pros and cons.
Conclusion. Way forward.

The World Inequality Report 2018 released by the World Inequality Lab says that income inequality in India has increased since economic liberalisation. It is in contrast to the earlier decades when inequality dropped under socialist policies.

Need

  1. Increasing inequalities- Wealth and income inequality is high and is rising in India, particularly post-liberalisation. According to Credit Suisse 2018 Global Wealth Report, the richest 1% own 51.5%. In contrast, the bottom 60% of the population owns only a meagre 4.7% of it. The Gini wealth coefficient, in India has also gone up from 81.3% in 2013 to 85.4% in 2017, indicating a worsening of wealth inequality.
  2. Non inclusive growth- Per capita income of Indians has been rising since liberalisation, but growth is not inclusive. An inheritance tax coupled with associated tax reforms, can help in reducing the concentration of income and wealth in the hands of a few promoting and can address the distributional gaps.
  3. Income inheritance- According to an Oxfam survey in 2018, the wealth of the richest 1% of the population increased by ₹20.91 trillion, equivalent to total budget of the central government in 2017-18. Moreover, 37% of Indian billionaires have inherited family wealth, and control 51% of the total wealth of billionaires in the country. The survey points out that 51 of a total of 101 billionaires are more than 65 years old and collectively own ₹10.54 trillion. If rising inequality is not properly monitored and addressed it can lead to various sorts of political, economic and social catastrophes.

Pros

  1. Revenue- The biggest advantage of an inheritance tax is the revenue it provides for federal and state governments. Inheritance taxes provide revenue, which in turn government can use to fund projects various socio-economic schemes. An inheritance tax also allows governments to offer income tax breaks. This takes some of the tax burden off workers without forcing the government to cut spending or reduce services.
  2. Reduce fiscal burden- If implemented well, can potentially help the government exchequer at a time when it has been scouting for additional sources of revenue to bridge the persistent gap between fiscal targets and outcomes. Recent policies on farm loan waivers, bank recapitalisation, universal health insurance, and the expansion of other social sector programmes will pose significant challenges in maintaining fiscal prudence.
  3. Progressive in nature- Inheritance tax is a progressive tax. This means that it places a higher tax burden on wealthy individuals only. Thus it in a way help government to redistribute income in an economy reducing income inequalities.

 Cons

  1. Difficult to evaluate- Exact and justiciable tax value is not easy to achieve. It need proper data, study and market information to get a proper evaluation of assets. The costs of bringing in inheritance tax will also be higher per when compared to any other tax revenues. This is because the government incurs large levels of expense in the valuation of property and collection of the revenues.
  2. Can cause closure of businesses- Losing businesses may close under burden of inheritance tax and inability to pay. Further it will create extra pressure on less profitable businesses and small businesses.
  3. Reduces available capital- Even if a business is able to survive the inheritance tax, the amount that is owed will severely limit the amount of liquid cash the heirs will have available. This could force a potential bankruptcy or drive the company out of business over time because of the tax liabilities. In some cases, it could even be said that some of the income being taxed has already been taxed through other methods, creating a situation that is only beneficial to the government.
  4. Economic Impact- One potential drawback of an inheritance tax is its ability to discourage savings and increase consumerism. Taxpayers may spend more and amass less in response to the higher tax rate. This will lead to inflation and difficult to manage. Further no one would be interested in creating assets and capital that would hamper economic growth.
  5. Secondary Tax- Inheritance taxes fall under criticism for being a double tax. This is because much of the property or money inherited has already been taxed as earned income. Levying a second tax on the same property may appear unfair, especially in the case of estates that include little or no investment income.
  6. Loopholes- Inheritance taxes may encourage taxpayers to search for loopholes to reduce or eliminate their tax burden. These loopholes may include gifting property in small amounts over an extended period of time or setting up joint ownership of property and bank accounts with family members. For governments that count on inheritance tax for revenue, these loopholes can present a gap between expected and actual revenue, contributing to a budget deficit.

Way forward

The rich and the middle class control a major share of the world’s resources, which consequently is not available to the poor. They enjoy higher incomes from better jobs and investments.  There is no inheritance tax in India, whereas the poor face high taxes on certain basic consumption goods. But Government needs to tread with caution and take a systemic approach. It have to look beyond taxes and ensure social goods — education and healthcare — for all in order to level the playing field. There requires imaginative public policy and a steady governance. Progressive taxation is essential to finance public investments in education or health for everybody but it is just a mean and not the end.

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