India Maintained its Own Inheritance Tax Until 1985. However, it was Subsequently Abolished.

Sam Pitroda sparked controversy by countering the Prime Minister’s claims of Congress intending to redistribute national wealth. He cited a US inheritance tax law example to bolster his argument.

Inheritance Tax
Poor implementation and loopholes in tax collection helped people avoid paying Estate Duty.

New Delhi: the recent comments by Sam Pitroda, the chief of Indian Overseas Congress, regarding the inheritance tax in the US, have stirred up a political storm in India, especially amidst the ongoing Lok Sabha elections.

Mr. Pitroda ignited a significant controversy by rebutting the Prime Minister’s accusations that Congress intends to redistribute the nation’s wealth, drawing on a US example of inheritance tax legislation.

Mr. Pitroda highlighted that in the US, if a person possesses property valued at US dollars 10 million, upon their demise, 45 per cent of the property is inherited by their children, while the remaining 55 per cent is claimed by the government. He underscored that such a law does not exist in India.

He added that it’s crucial to discuss such matters. The focus should be on policies that benefit the people as a whole, not just the wealthy.

What is the Inheritance Tax law in US?

Initially, it’s important to note that inheritance tax is not widespread in the US; it’s only applicable in six out of the 50 states. This tax is levied on recipients who inherit assets from a deceased individual. The specific taxation rules vary depending on the state in which the deceased person resided or owned property.

A significant distinction exists between Estate Tax and Inheritance Tax in the US. Estate Tax is imposed on the estate itself before distribution, whereas Inheritance Tax is levied solely on the beneficiaries.

Inheritance taxes are collected by six US states: Iowa, Kentucky, Maryland, Nebraska, New Jersey, and Pennsylvania.

Key factors involved and how it is calculated

It’s important to note that inheritance tax is not a Federal tax in the US. Instead, it is levied based on the inheritor’s relationship with the deceased individual and the value of the inherited property. This tax is applied only to the portion of the inheritance that surpasses the exemption limit. Beyond this threshold, the tax is typically calculated on a sliding scale, with rates ranging from single digits to as high as 18%.

For example in Pennsylvania, The tax rate is 4.5% for transfers to direct descendants (lineal heirs), 12% for transfers to siblings, and 15% for transfers to other heirs.

In Iowa, no tax is due on property valued at less than $25,000 (Rs 20.83 lakh). Similarly, in Maryland, inheritances from estates smaller than $50,000 (Rs 41.66 lakh) are also exempt from taxation.

To summarize, the closer an inheritor is to the asset owner, the lower the tax rate would be levied. In all six states, spouses of the owner are exempted. 

In the United Kingdom, a 40% inheritance tax is levied on assets worth over 325,000 pounds (Rs 3.37 crore).

Japan has a high inheritance tax rate, with the highest current rate reaching 55%. This rate is calculated based on the amount received by each statutory heir. Similarly, South Korea imposes a 50% inheritance tax rate. For instance, in 2021, the family of the deceased Samsung Electronics chairman Lee Kun-hee announced that they would pay over 12 trillion won ($10.78 billion) in inheritance taxes for his estate.

Did India Ever Have An Inheritance Tax?

In India, an inheritance tax law was in effect until former Prime Minister Rajiv Gandhi abolished it in 1985. Known as Estate Duty, this tax was assessed upon an individual’s death and was introduced under the Estate Duty Act of 1953. It was applicable only if the total value of the inherited property exceeded the exclusion limit. In India, the tax rate could be as high as 85% on properties, with those valued at least ₹1.5 lakh being taxed at a rate of 7.5%. The objective of this tax was to reduce income inequality, but it was discontinued in 1985.

Former Prime Minister VP Singh, who served as Finance Minister in Rajiv Gandhi’s Cabinet, addressed the issue of procedural complexities and taxpayer harassment arising from the coexistence of wealth-tax and estate duty laws. Singh highlighted that having two separate laws pertaining to the same property led to administrative burdens for taxpayers and heirs, necessitating compliance with provisions from both laws. After assessing the relative merits of wealth tax and estate duty, Singh concluded that estate duty failed to achieve its intended objectives of reducing wealth inequality and aiding states in financing development schemes. This assessment contributed to the decision to abolish the estate duty law in 1985.

Singh further elaborated that despite generating only about ₹20 crore in revenue, the administrative costs associated with estate duty were disproportionately high. Consequently, he proposed the abolition of estate duty for estates passing on deaths occurring on or after 16 March 1985. He assured that suitable legislation would be introduced to effectuate this proposal in due course.

According to a report by the Economic Times, India’s inheritance tax was repealed in 1985 primarily due to its failure to effectively address economic inequality and its limited contribution to government revenue. In the fiscal year 1984-85, the total tax collected under the Estate Duty Act amounted to ₹20 crore. However, the high cost of collection was attributed to the complex calculation structure of the tax, which resulted in numerous litigation cases. As a result, the government decided to abolish the inheritance tax to streamline tax administration and reduce the burden of litigation.

For example, according to the 1980-81 regular budget, the gross tax revenue in the 1979-80 period was ₹ 11,447 crore, out of which the Estate Duty contributed only ₹ 12 crore which was later revised to ₹ 13 crore, i.e 0.1% of the total gross tax revenue. In the budget, the Estate Duty collection was projected to be the same, ₹ 13 crore.

In the 1978-79 budget, the Tax revenue in the previous budget was ₹ 10.75 crore of the total revenue of ₹ 9,005.46 crore. The projection for the 1978-79 budget was ₹ 11 crore out of ₹ 9,636 crore, i.e. 0.1% of the total tax revenue.

Poor implementation and loopholes in tax collection helped people avoid paying Estate Duty.

 

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