What is an Inheritance Tax or Death Tax?
The government of India is looking at the possibility of levying tax on inheritance, as in countries like the US, where an inheritance tax is applicable. Different countries have different tax rates ranging from 10-50%.
Inheritance tax is a tax imposed on a person for the assets inherited from deceased. In many countries, it is also known as death tax. Such a tax is levied on the transfer of the estate of a deceased person.
Earlier, the Estate Duty Act, which came into effect 1953, was discontinued in 1985 and hence the practice of levying inheritance tax was abolished in India.
How does it work?
The government will evaluate the total asset including cash and investment left behind by the deceased after deducting his debt/liabilities. If the value of total assets exceeds the threshold limit set by the government, the person who inherits will have to pay tax as per a rate fixed by the government.
This imposition is mainly to redistribute income as children of rich stay rich. By imposition of the tax some of the money will go into government coffers, which would help in reducing India’s fiscal imbalance.
Earlier, estate tax was abolished as it had not met twin objective with which it was introduced, namely, to reduce unequal distribution of wealth and assist the states in financing their development schemes.
What are the pros and cons of such tax?
A compelling factor behind it is that without such a tax, one perpetuates inherited wealth and children of the rich stay rich. Inheritance tax results in redistributing income, since a part of the wealth goes to the government, which is used for the benefit of all the citizens.
The argument against it is that when the deceased has already paid income-tax on income earned and possibly wealth tax every year for possessing the assets, to pay tax on it again is harsh and may result in multiple taxation. Industry chambers like FICCI and CII believe that inheritance tax is a phenomenon of the western world, which is struggling to boost growth.
Why is the government contemplating an inheritance tax?
On concerns of a widening fiscal gap and attempts to bridge the same raising tax revenues.
What would be the possible rate of such a tax?
Reports suggest that it would be at par with the income tax rate. So, it could be 30%, which currently is the highest income tax rate.