In a recent paper by Nitin Kumar Bharti, Lucas Chancel, Anmol Somnchi and Thoms Piketty-a new tax justice proposal has been forwarded to tackle the inequality crisis in India. In a previous study by these four, it was revealed that economic disparities in India have reached historical highs.[2] The proposal involves the introduction of both a Wealth Tax and an Inheritance Tax, which are currently absent in the country. The authors argue that these taxes would not only generate substantial revenues for the government, but also reduce the extreme inequality and social exclusion that plague the Indian society. In this article, we will examine the main features and implications of the proposal, and the challenges and opportunities for its implementation.

Wealth Tax

The proposed wealth tax is an annual 2% tax on net wealth exceeding Rs 10 crore. Net wealth is defined as the total value of all assets (including financial, real estate, business, and personal assets) minus the total value of all liabilities (including mortgages, loans, and debts). The authors estimate that this tax would affect only 0.04% of the adult population, who collectively own about 39% of the total wealth in India. The rationale behind targeting the ultra-wealthy is that they have benefited disproportionately from the economic growth and liberalisation in the past three decades, while paying very low effective tax rates. The authors also argue that the wealth tax would help to curb the excessive concentration of wealth and power at the top, which undermines the functioning of democracy and social justice.

Inheritance Tax

The proposed inheritance tax is a 33% tax on estates exceeding Rs 10 crore in valuation. The tax would be levied on the beneficiaries of the estate, not on the deceased. The authors estimate that this tax would affect only 0.04of the adult population. The rationale behind introducing the inheritance tax is that it would reduce the intergenerational transmission of wealth and privilege, which perpetuates the caste and class hierarchies in the Indian society.

There are graded proposals for tax justice packages-Baseline, Moderate and Ambitious. The following is the way they propose how different percentages levied on wealth-as wealth tax and inheritance tax, and how it will result in how much percentage of GDP.

Source: Nitin Kumar Bharti et al., 2024, Towards Tax Justice and Wealth Redistribution in India, The India Forum.

Revenue Generation

The authors estimate that in a baseline scenario, the wealth tax and the inheritance tax would generate a massive 2.73% of Gross Domestic Product (GDP) in revenues. The authors claim that this would raise phenomenally large tax revenues while leaving 99.96% of the adults unaffected by the tax. They also suggest that the revenue estimates are conservative, as they do not account for the potential behavioural responses of the taxpayers, such as increased compliance, voluntary disclosure, and asset valuation, along with those who might have assets in foreign nations. As the governments show initiative to tax the same and very tiny amount of population more, they will have huge increase in revenues to fill the gaps that have been persistent in terms of investment in important sectors like education and health.

Redistributive Policies

The authors emphasize that the taxation proposal should be accompanied by explicit redistributive policies to assist the poor, lower castes, and middle classes, who have been largely left behind by the economic growth and liberalization. They propose that the revenues from the taxes should be used to not just finance Direct Benefit Transfers but also spending on other social sector needs. They also propose that the revenues should be used to increase the public spending on education, health, and social protection, which are essential for human development and social mobility. For example, the baseline scenario would allow nearly doubling the current public spending on education, which has stagnated at 2.9% of GDP over the past 15 years. The authors argue that these policies would not only reduce poverty and inequality, but also ensures that the benefits of globalisation.

The proposal also notes that these two branches of tax will mitigate the inequalities that have been exacerbated by the inherent class inequalities in the society, thus any policy aiming to reduce income inequalities will have a positive impact and by extension “a small role in weakening the rigid link between social and economic inequalities in India.”

Conclusion

Article 38(2) of the Indian Constitution states that the state shall strive to minimise the inequalities in income, and endeavour to eliminate inequalities in status, facilities, and opportunities, not only amongst individuals but also amongst groups of people residing in different areas or engaged in different vocations.

Article 39(c) of the Indian Constitution states that the State shall in particular direct its policy towards securing that the operation of the economic system does not result in the concentration of wealth and means of production to the common detriment.

This is not to say that this proposal should be taken at its face value and implemented. Legitimate criticism of all economic proposal only strengthens the economic plan that the country will adopt. For example, former RBI governor and leading economist-Raghuram Rajan has criticised the proposal by stating that no country has collected inheritance tax enough to make a difference, and “despite the efforts to tax wealth, the actual collection remains minimal”- Business Today reported. While Raghuram Rajan’s criticism of Piketty’s proposals and wealth redistribution and taxing the ultra-rich is not new, it presents a more acceptable form of engagement with the idea of inheritance tax or wealth tax to tackle inequalities rather than branding the proposal as some sort of political blasphemy. Measures at reducing concentration of wealth or inequalities are not some radical measures that a new leftist cabal is pushing forward in the Indian Polity but are Directive Principles of State Policy enshrined in the Constitution. Therefore, a discussion with the aim of realising Constitutional Goals rather than panic ridden rhetoric over taxing the ultra-rich will do better for India’s progress.

(The author is a legal researcher with the organisation)

[1] Nitin Kumar Bharti, Chancel, L., Piketty, T. and Anmol Somanchi (2024). Towards Tax Justice and Wealth Redistribution in India. [online] The India Forum. Available at: https://www.theindiaforum.in/economy/towards-tax-justice-and-wealth-redistribution-india [Accessed 24 Jun. 2024].

[2] Bharti, N.K., Chancel, L., Piketty, T. and Somanchi, A., 2024. Income and Wealth Inequality in India, 1922-2023: The Rise of the Billionaire Raj.

Related:

Inheritance Tax-Beyond the rhetoric

Kuch ka saath aur Cronies ka Vikas

The post Tax Justice proposal: what are leading economists proposing on Wealth Redistribution in India appeared first on SabrangIndia.

The last week has brought back into the limelight a long-lost discussion of wealth and redistribution back into popular discourse. After Independence, the redistribution of wealth and land was not a point of discussion but an inevitability that merely needed a plausible way. The communists and the Congress—the two largest political groups post-independence—were principally in agreement as far as land redistribution was concerned. The era of such land redistribution ended in the 1980s, and before it could begin again, liberalisation arrived, followed by Hindutva Politics. However, with Congress leader Rahul Gandhi advocating a Caste Census and a wealth survey, and with Prime Minister Narendra Modi reacting to this narrative, the discussion of wealth redistribution has once again been reignited.

On April 24, news agency ANI quoted Indian Overseas Congress Chairman Sam Pitroda’s interview clip and tweeted from its official handle—the remark made by Mr. Pitroda explaining how inheritance tax works in America. Later throughout the day, in what looked like a massive case of headline-management and people jumping onto the outrage bandwagon, liberals and others alike responded to this remark by saying that an Inheritance tax is not good for India, etc. Some have welcomed the idea too.

The whole issue and discussion on inheritance tax should be more than a mere poll time debate that will wither down after the next big headline makes its way, there are two main issues that those who are decrying over the issues seem to have missed.

1. The Congress has not promised—in its manifesto—that they will conduct a wealth survey or that they will levy an inheritance tax. They have only stated in their Manifesto—titled Nyay Patra—that they will bring in suitable policy measures to tackle the inequalities in the country. It was Rahul Gandhi who mentioned the survey in a speech.
2. Sam Pitroda too stated the issue of inheritance tax as an example of legislation that looks to curb the concentration of wealth and when seen in the context, his remark about inheritance tax is nothing more than an example he used to put his point forward.

However, the discussion on Inheritance Tax offers insight into the responses from different strata of Indian society. To enhance the quality of discourse around Inheritance Tax, we need better information than a banal and random tweet saying ‘the government is coming for your house and car’ or a speech by the PM, a man good at scare mongering.

Let us talk about Inheritance Tax without the scaremongering.

India’s legal system doesn’t levy an inheritance tax. This means you can inherit property or assets from a deceased individual, regardless of your relationship, without owing any tax to the government. However, this wasn’t always the case. Until 1985, an “estate duty” similar to an inheritance tax existed. It was ultimately abolished due to two key factors: the administrative costs of collecting the tax outweighed the revenue it generated, and its complex nature frequently resulted in legal disputes. This tax applied to the total value of inherited assets, including movable and immovable property like land and investments, with exemptions for smaller inheritances and specific regions. While it covered assets both within and outside India if the deceased was an Indian resident, its high tax rates, reaching up to 85%, coupled with administrative costs, led to its discontinuation as observed by Finance Minister V.P. Singh in 1985.

Origins

Emperor Augustus of Rome is said to be the pioneer in establishing an inheritance tax in Rome, in 6 A.D to fund military pensions. With the decline of the Western Roman Empire, the inheritance tax system too disappeared. It could have existed in Egyptian Civilisations too—the practice of levying fees on property left in succession.[1] In the feudal era, when the tenancy rights passed onto the next generation, the feudal lord would ask for a levy for that transition to happen. The famous 18th-century philosopher-economist, Adam Smith argued that inheritance tax takes away/diminishes the capital value of the property, and tends to diminish the funds that would have been used for productive labour. He essentially said—let the money go to the private entity which will put such money to better use than the government “which maintains any but unproductive workers.”[2] English Philosopher Jeremy Bentham proposed that inheritance tax should be levied at a higher rate as the inheritance gets passed down to distant relatives but should not be levied on inheritance to close relatives.[3] Later, it took many forms and many governments have adopted it.

What is the rationale for inheritance tax?

While governments in the medieval period may have used the revenues from taxes to fund conquests etc, the governments of today are more overarching in terms of the work they do—from supporting infrastructure creation and security of the country to the welfare of the people. Irrespective, inheritance tax is a source of revenue for the government, like any other tax.

Some argue that there is an inherent inequality in not levying inheritance tax. How? If a person receives earnings over a certain limit, she will have to pay income tax. Then, why is the person receiving inheritance of a certain high value—exempt from paying tax over such receipt?[4]

A second argument is that inheritance or the lack of it, translates into inequality of opportunity and therefore, inheritance tax provides a way of neutralising inequality in wealth inheritance to achieve greater equality of opportunity.[5]

Some argue that this is a double taxation of sorts since the inheritance which is being passed down already would have been subjected to tax and then it will again be subjected to tax if inheritance tax is levied. However, one should note that taxing doubly is not the same as sending a person to jail twice for the same crime. Tax is not a punishment. The only bar is that the tax levied is sensible, yields greater benefit and does not overtly cripple the taxpayer.[6]

How does the world engage with Inheritance Tax today?

While inheritance taxation is associated with countries with a communist government, the countries which fall into the categories of ‘liberal democracies’ list are the ones who levy high inheritance taxes. Out of the 27 EU Countries, 19 levy income tax but only 2 countries—Belgium and France—revenues from inheritance, estate and gift taxes form more than 1% of total taxation.[7] The lesser portion of inheritance taxes out of the total taxations is because there is a difference between the tax rates when the wealth is passed down to close relatives such as spouse, children, parents, grandchildren etc and when it is passed down to distant heirs with the former being lesser. For example, in Brussels-Capital Region, Belgium, the tax rate for a linear heir inheriting wealth of value of over 500,000 Euros is 30%, but for a brother or sister, the tax rate is 65% for receiving a net share valuing over 250,000 Euros.[8]

In France, the Taxable Proportion of assets of a deceased person are arrived at by deducting the personal allowances which are different for different relatives with it being a 100,000 Euros for Children, Father or mother and almost 8000 Euros for a nephew or niece. Once these allowances are deducted, the inheritance tax varies according to the amount received by the heir with the higher being 45% for a share valuing over 1,808,677 Euros. In the United Kingdom, Inheritance tax is charged at 40% above a threshold, currently set at £325,000.[9]

In Japan, the rate of inheritance tax varies from 10% to 55% depending on the sum received by the heir. However, an amount of 30 million Yen +6 million Yen per heir is exempted from total taxable assets. This means, the threshold is 30 million Yen +6 million Yen per heir after which the inheritance tax begins to apply.[10]

Is inheritance tax harmful to the middle class?

This question can only be answered with a definite understanding of who the middle class in the country are. According to a report by Knight Frank, if one has a net worth of Rs. 1.44 Crore, then she is among the top one percent of individuals in India. Inheritance Tax, even in any policy maker’s assumption will not be levied on anyone who is giving their savings to their children to start a business or to get a better life. It gets triggered only after a threshold. For example, take Belgium—if the share of heir is more than Rs.4.45 Crore, the tax rate applicable to her is 30%. Similarly in France, if heir is receiving more than Rs. 16.16 Crore in inheritance, a 45% of inheritance tax is levied. Therefore, inheritance tax, when levied with a threshold—as it is done as a principle—is not impactful on the middle class at all, in India.

Conclusion

Inheritance Tax, or a caste census are not some magic bullets to solve the inequality problem in India. However, they present interesting and strong case for adoption in a country where welfarism and capital asset creation are the two most important needs. The Modi government has normalised the tax cut regime for corporates by slashing corporate tax to 22% in 2019 and announced the National Monetisation Pipeline—a roadmap for monetisation of government assets to raise an estimated Rs. 6 Lakh Crore from FY 2022 to FY 2025. This unsustainable way of raising money was to be countered by a more sustainable way of raising revenue for the government expenses such as taxation. The counter has not happened yet but if it does happen through inheritance tax, it would not have an adverse effect on the middle and poor classes in the country.

(The author is part of the organisation’s legal research team)

[1] Hunter, M.H., 1921. The inheritance tax. The Annals of the American Academy of Political and Social Science, 95(1), pp.165-180. Available at: https://journals.sagepub.com/doi/pdf/10.1177/000271622109500109 [Accessed 25 Apr. 2024]

[2] Smith, A., 1776. The Wealth of Nations, Book V, Chapter 2. Available at: https://www.adamsmithworks.org/documents/chapter-ii-of-the-sources-of-the-general-or-public-revenue-of-the-society  [Accessed 25 Apr. 2024]

[3] West, M., 1893. The theory of the inheritance tax. Political Science Quarterly, 8(3), pp.426-444. Available at: https://www.jstor.org/stable/2139827 [Accessed 25 Apr. 2024]

[4] Murphy, L. and Nagel, T., 2002. The myth of ownership: Taxes and justice p:142 . Oxford University Press. Available at : https://books.google.com/books?hl=en&lr=&id=osgTDAAAQBAJ&oi=fnd&pg=PR7&dq=The+myth+of+ownership+liam+murphy&ots=qHg2OT6dAm&sig=6LFgwzeINdU_WlLlc4lWkj1fcI0 [Accessed 25 Apr. 2024]

[5] Prabhakar, R., Rowlingson, K. and White, S., 2008. How to defend inheritance tax (Vol. 623). Fabian Society. Available at: https://oro.open.ac.uk/31364/  [Accessed 25 Apr. 2024]

[6] Brown, R.C., 1935. When Is a Tax Not a Tax. Ind. LJ, 11, p.399. Available at: https://heinonline.org/hol-cgi-bin/get_pdf.cgi?handle=hein.journals/indana11&section=41 [Accessed 25 Apr. 2024

[7] Yanatma, S. (2024). Inheritance tax across Europe: How do the rules and rates vary? [online] euronews. Available at: https://www.euronews.com/business/2024/04/16/inheritance-tax-across-europe-how-do-the-rules-rates-and-revenues-vary [Accessed 25 Apr. 2024].

[8] FPS Finance. (2020). Calculation and payment. [online] Available at: https://finance.belgium.be/en/private-individuals/family/death/inheritance-tax/brussels-wallonia/calculation-payment#q2 [Accessed 25 Apr. 2024].

[9] Seely, A., Masala, F. and Keep, M. (2024). Inheritance tax: Current policy and debates. [online] House of Commons Library. Available at: https://commonslibrary.parliament.uk/research-briefings/sn00093/#:~:text=Inheritance%20tax%20is%20paid%20on,currently%20set%20at%20%C2%A3325%2C000. [Accessed 25 Apr. 2024].

[10] National Tax Agency (Japan) (2023). No.15001　Cases where inheritance tax is imposed. [online] Nta.go.jp. Available at: https://www.nta.go.jp/english/taxes/others/02/15001.htm [Accessed 25 Apr. 2024].

The post Inheritance Tax-Beyond the rhetoric appeared first on SabrangIndia.