corporate law
Inheritance Tax is a levy imposed on individuals who receive assets from the estate of a deceased person.
Wills of Succession: This traditional method allows a deceased individual to designate an heir for their assets through a legal document.
Inheritance by Nomination: Here, an individual can nominate someone to receive their assets, granting that nominee legal ownership and entitlement to benefits derived from these assets.
Inheritance through Joint Ownership: In cases where assets are co-owned, the surviving joint owner(s) can manage those assets after the death of another owner.
In India, there is currently no Estate Duty or Inheritance Tax. However, Estate Duty was introduced in 1953 and subsequently abolished in 1958 during the Rajiv Gandhi Government. Estate Duty was a tax applied to an individual's total property value at death, payable only when property transferred to successors.
From 1957 to 2015, India also enforced a Wealth Tax, which was retracted due to high administration costs and compliance challenges in its enforcement.
The then Finance Minister V.P. Singh noted the failure of Inheritance Tax to effectively reduce wealth inequality. Both Inheritance Tax and Estate Duty were operational from 1953 until 1985, after which they were abolished due to inefficient implementation and low collection yields.
The Income Tax Act of 1961 stipulates that no tax is imposed on inherited assets, whether movable or immovable. However, if the new owner decides to sell these assets, taxes will apply. For instance, selling movable assets such as mutual funds, gold, or shares will incur tax liability, whereas simply inheriting them does not.
In 2014, there was an inclination from the Finance Minister to reintroduce the Inheritance Tax in some capacity. Reports from 2017 indicated that the government was considering the potential reinstatement of Inheritance Tax, especially in light of concerning income disparities. Data showed that the wealth distribution was heavily skewed, with the top 10% earning 56% of national income.
The reimplementation of Inheritance Tax could serve to generate revenue, address economic inequalities, and enhance fiscal efficiency. Given the ongoing economic strain from the pandemic, a careful analysis of such tax law could be vital.
Amid the pandemic and subsequent national lockdown, the Income Tax Department of India proposed a 10-point initiative aimed at boosting tax revenue. This includes the potential reintroduction of an Inheritance Tax levied at rates as high as 55% to broaden the tax base, augment revenue, and lessen wealth concentration.
While the imposition of Inheritance Tax could help address wealth inequalities, it should be accompanied by a corresponding gift tax to prevent wealth from being transferred without taxation. Recent trends show a significant wealth concentration in India, where untaxed inheritances can exacerbate inequality.
In the landscape of wealth taxation, it’s essential to balance the need for equitable redistribution with the potential adverse effects on wealth creation in India. Concerns also exist regarding the lack of a public social security net, which raises questions about taxing inheritances.
Several countries, including the USA, UK, Netherlands, Spain, and Belgium, impose Inheritance Taxes, with maximum rates reaching up to 80%. These tax systems are supported by robust social security structures.
In the USA, an estate tax applies to the total value of a deceased individual's estate, regardless of its location. The current estate tax rate is 40%, with a 2017 exemption of $5.49 million per individual, doubling for married couples. Furthermore, several states may impose additional estate taxes.
In the UK, an individual's tax liability is determined by their domicile or residential status. Tax is levied on the worldwide estate of a domiciled individual upon their death. The standard inheritance tax rate stands at 40%, with an exemption threshold of £325,000, which increases to £425,000 when the estate is passed to children or grandchildren.
In conclusion, while the Inheritance Tax can play a crucial role in mitigating wealth inequality, it is essential to ensure that it remains fair and does not deter investment or prompt asset relocation abroad. Establishing an exemption threshold paired with a fixed percentage tax on amounts exceeding that threshold could facilitate a balanced approach. The success of the Inheritance Tax will rely on comprehensive strategies that promote equitable wealth distribution while encouraging wealth generation.