Imagine you belong to a very rich family (just imagine) and you get wealth worth say, ₹50 crores passed onto you. Now, what if the government comes knocking at your door saying that you owe 50% of this money to them?
This is exactly what Inheritance Tax is and recently, there has been a lot of buzz around it. While the reasons for this tax being in the spotlight are political, let us try to understand how it can impact a country.
And don’t worry, we do not have an inheritance tax in India…as of now.
The concept of inheritance tax is simple. Whenever someone passes on wealth to their legal heirs, be it their children or grandchildren, the receivers of such wealth will have to pay a share of it to the government.
Now, according to a paper published by the OECD (Organisation for Economic Co-operation and Development), there are some benefits of having such a tax. It says that this can help in reducing the concentration of wealth and promote equality of opportunity. How?
See consider two families: one with a lot of money and the other not so well-off. When the elder member of each family passes away, the rich family’s heir inherits all the wealth without having to work for it. On the other hand, the heir from the not-so-rich family might inherit very little and have to work really hard to get ahead. This means the rich keep getting richer while the other family struggles to get by.
Now, if the government took 50% of the rich heir’s inheritance as taxes, they could use it to help out folks who need it more. Plus, this taxation would compel the wealthy to work harder to maintain their wealth, thereby further contributing to the economy.
These could be some of the reasons why some countries like the UK, Japan, South Korea, Singapore and a few states of the US have some form of inheritance tax as a part of their laws with tax rates ranging from 7% to as high as 55%.
It could either be in the form of inheritance tax which is levied when someone inherits wealth, estate tax which is taken as a portion from a deceased person’s wealth or even wealth tax which is levied on the rich based on their net worth.
All of this seems ideal but, there are some counterarguments too. Like, if the government takes a portion of rich people’s wealth, they’ll be left with less to invest in their businesses. This can lead to lower job creation and affect economic growth. Moreover, nobody would want to give a chunk of their wealth just like that. Plus, people would somehow start finding loopholes in the system and transfer their wealth in other forms while they are alive to escape these taxes. And if all of this doesn’t work out they may even move their businesses to countries where these laws do not exist.
Coming back to India, we also had an ‘estate tax’ as a part of the curriculum back in the day along with wealth tax and gift tax. But, these were all later abolished. The reasons were mainly because,
- One, they contributed less than 0.25% to the tax collections,
- Two, high administration & compliance costs and,
- Three, double taxation due to the co-existence of wealth and estate tax.
But, these were the problems when not much of India’s population was super rich and the tax laws were hazy.
But what about the current times, should these taxes be restored in some form? What is your take on it?
(Super rich are already taxed more than 50% as an Income Tax)