In the past few years, India has witnessed historic levels of economic inequality. Today India is counted amongst one of the most economically unequal countries in the world. According to the Oxfam report of 2020, the richest 1% own 42.5% of the country’s wealth and the richest 10% of Indians own 74.3% whereas the bottom 50% owns just 2.8%. In addition to this, the COVID-19 Pandemic is likely to act as a catalyst in enlarging the gulf of inequality. The International Labour Organisation (ILO) warned India that the pandemic may sink about 40 crore workers into poverty. Amidst the lockdowns from April to July when the working class was struggling with hunger, unemployment, migration, and was barely able to make ends meet, the billionaires of India increased their wealth by 35%, as per the Billionaires Insights Report 2020 published by UBS and PwC.
When people and sitting MPs ask the incumbent government about its strategy to reduce such humongous economic equality, it gives typical, vague, and dubious answers by listing all the social security schemes from Jandhan Yojna to Swach Bharat as measures to empower the poor; while at the same time, it does not break its silence on taxing the rich. Moreover, amidst the pandemic, the government revenue has declined substantively. The fiscal deficit has more than doubled (135%) of what was targeted form April to November, in lieu of which the government reduced its expenditure which is otherwise extremely crucial for social security endeavours during such a crisis. Overall, it won’t be wrong to conclude that the vicious cycle of inequality is spurring like never before.
In order to tackle monstrous inequality, the panacea for Indian economy at this point of time is the Inheritance tax also known as the estate tax or death tax. As the name suggests, it is a tax levied by the government on inherited wealth which the legal heirs get from their progenitor (mostly deceased). Under the ambit of this tax, the government can progressively tax the richer segment of population and generate substantive revenue which can be spent on welfare schemes. In India, an individual is obliged to pay certain income tax on whatever he earns by virtue of his skills, labour and time. Ironically, one can inherit an enormous amount of wealth just by virtue of birth and need not to pay a single penny in tax. Hence, from a comparative perspective, inheritance tax is indeed fairer, egalitarian and just than income tax.
Across the world, about 50 countries including the U.S.(40%), U.K. (40%), Japan(55%), South Korea (50%), France (45%) and Germany (30%) have levied Inheritance tax. Here, it is noteworthy that all the aforementioned countries are typically considered pro-capitalism; whereas, India does not have any such measures despite working on the principles of socialism that espouse economic equality.
Another key benefit of adequate inheritance tax is that it promotes charity and philanthropy. One may take the word of former finance minister Arun Jaitley on this. In December 2018, while addressing an event at AIIMS, he asserted, “Most hospitals internationally have some of the largest endowments. Most educational institutes have some of the largest endowments. … So, 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. Therefore, a lot of people in their old age prefer to go for charitable donations in order to get around that inheritance tax. Since we don’t have that inheritance tax in India, our charities are not in terms of such endowments,“.
Prima facie, the inheritance tax looks like a lucrative solution to solve a number of socio-economic problems. However, we shouldn’t forget that the Government of India did levy an estate duty in 1953 which was eventually withdrawn. While presenting the Budget of 1985-86, the then finance minister VP Singh said, “I am of the view that estate duty has not achieved the twin objectives with which it was introduced, namely, to reduce unequal distribution of wealth and assist the States in financing their development schemes. While the yield from estate duty is only about Rs. 20 crores, its cost of administration is relatively high. I, therefore, propose to abolish the levy of estate duty”.
Accordingly, the parliament repealed the Estate Duty act under which legal heirs of a dead person had to pay as high as 85% of the value of inherited wealth/property in form of taxes. Subsequently, in the Indian context, the notion of estate duty was labelled as a fiasco. However, this earlier failure does not necessarily mean that it was the failure of the concept of inheritance tax; it was rather the government’s inability to implement it effectively.
Back in 1953 when the Nehru government decided to impose estate duty, it ab initio opted a flexible, experimental approach. The then Finance Minister CD Deshmukh while concluding the debate regarding the estate duty bill in Lok Sabha said “Now, although we have tried to make our law as perfect as possible, none of us is under the illusion that the law now enacted will remain unchanged for all time to come. It is a characteristic of all tax laws, including our own, that they keep on changing, not necessarily because the laws are imperfect but because the financial and economic considerations keep on changing and also because unfortunately, tax evaders develop new methods of dodging their liability”. Successive governments did make some changes to it: for example, the introduction of gift tax, changes in slab rates, and exemptions. Albeit, due to structural constraints, the tax wasn’t successful. Finally, Rajiv Gandhi’s government decided to give up and scrapped the estate duty rather than trying to fix it.
Estate Duty was a comprehensive idea which we implemented in the wrong manner at the wrong time. Nonetheless, today it seems as if the time has come to accept the idea of an inheritance tax. In the past few decades, we have witnessed an information & communication technology revolution in governance. Today, almost all states have digitised land records. Stocks/equity transactions have been completely digitalised. Many curbs on cash transactions have been imposed. Banking & financial services are comparatively much more transparent, trackable, and regulated. Arbitrary powers of officials and authorities have reduced significantly which has to an extent reduced corruption & favouritism. Overall, technology & legal reforms have increased state capacity to regulate, monitor and collect taxes. Hence, the government is now in an adequate position, like never before, to enforce such a tax stringently.
Furthermore, as mentioned before, the government is in a deep fiscal crisis, especially the state governments. Inheritance tax would potentially open a new source of revenue for the states(estate duty revenue used to fall into share of state governments). Most importantly, inheritance tax will promote a new wave of philanthropy and charity which will help in social upliftment & building world class medical and educational institutions.
Critics of Inheritance tax argue that such liabilities dis-incentivise entrepreneurial ventures, adversely impact foreign investments, and are against principles of free market. However, we should not forget that most rich western countries, like the USA or UK, had levied such taxes more than a century ago, i.e. 1916 & 1894 respectively. Such inheritance taxes didn’t hamper their growth trajectory at all; it rather substantially contributed in their development. Hence, India should also reimpose inheritance tax before it gets too late.
Notwithstanding this, it’s imperative to note that the government needs to opt a pragmatic approach to enforce inheritance tax successfully. As the legendary jurist & economist Nani Palkhivala said once, “The health of our economy will not improve until we inject the ‘S’ factor into our fiscal laws, and make them Sane, Simple and Stable.” For instance, it was just not wise to have 85% tax rate slab in estate duty act. There is no way on earth that the super rich of the country were going to pay 85% tax to the government to inherit their own ancestral wealth.
Taxes need to be viable. An inheritance tax could be somewhere around 30 – 40% as recommended by Oxfam in a policy report published in 2017. Since it is always better to get a small slice of a big pizza rather than a big slice of a small pizza, a small cut doesn’t antagonise taxpayers which broadens the tax base while reducing tendency of tax evasion. Hence, the inheritance tax needs to be plausible which taxpayers find payable, simple, & stable so that we have minimal loopholes. However it needs to have strict provisions of penalty when it comes to evasion. The imposition of inheritance tax at the earliest would also provide the government a peculiar opportunity to reconstruct its image as pro-poor. With regard to inheritance tax, we are in a situation where we have nothing to lose but everything to gain, hence, there is no plausible reason on earth why the government should not impose it anytime soon.
Shubham Khatri is a second year Undergraduate student at Ashoka University