Inheritance Tax has Potential to Reduce Wealth Inequality in India

India is listed as a country that has not been taking measures to bridge the gap between the rich and the poor as per the Oxfam Report October 2018. India stands at 147th rank globally in the commitment it has towards reducing inequality. This can be summarised stating that the wealth and consumption in India have been rising year-after-year.

The Global Wealth Report 2018 states that about 91% of the adult population has wealth below USD10,000. On the other hand, about 0.6% of the adult population has a wealth worth over USD100,000.

It is speculated that most of this wealth is accumulated and inherited from the ancestors. Wealthy people are getting wealthier due to the economic impact on inherited assets, while the state of poor people is not seeing a shift in their status irrespective of their hard work and government schemes.

Inheritance Tax

There is a concept called ‘Inheritance Tax’ that makes it mandatory for the heir to pay taxes on the properties and assets inherited from parents, grandparents, or anybody for that matter. The taxation varies based on the value of the inherited property/asset.

The inheritance tax was in force in India in the past and was scrapped in 2009 because of the low revenue generated. There are talks about this tax getting reintroduced shortly to curb the difference in wealth accumulation among citizens in recent times.

Estate Tax

An estate tax is a tax payable based on the net value of the property owned by a deceased person at the time of death. This tax was abolished in 1985 as the cost accrued for administration was higher than the tax collected.

Also Read: Budget 2019 Impact: Super Rich to Pay Higher Taxes

How Effective Can Inheritance Tax Be?

At a time when the government is trying to raise more funds for the country’s developmental process, introducing inheritance tax can be rewarding. Inheritance tax can be considered as an additional source of revenue generation. It can be a way to fund the farmer loan waivers, healthcare services for the poor, infrastructure development, and many more programmes the government implements.

The cause for discontinuing inheritance tax would not repeat at this point in time as information technology has seen steady growth over the years. It would not be as expensive and difficult to administer the inheritance tax department in the present-day scenario. 

Introducing this tax may be effective in reducing ‘benami’ properties and Hindu undivided families creating trusts only to evade tax. Tax evaders may also utilise the concept of ‘gift’ ing properties just to skip inheritance tax. Therefore, care must be taken in framing the terms and conditions. The government must also tighten the escape routes with the gift tax, wealth tax, and other possible methods.

The tax rates must be chosen such that it does not turn out to be a burden the poor. In other words, a person who has more than two properties for himself and inherits another property, he must pay more tax than a person who inherits a small property/asset that is essential for his livelihood. The tax regulations must serve the purpose of bridging the gap between the rich and the poor and should not be the other way round.

Another important aspect here is having a close eye on tax evaders. The cases must be regularly checked and any intentional miscalculations must be penalised. Like income tax, inheritance tax must have its own well-defined framework in terms of rate slabs, penalties, and online portal to provide information to citizens.

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