1. INTRODUCTION
1.1 Wealth in India has surged massively in the past few decades. The number of Indians with net wealth exceeding USD 1 (One) billion rose from 1 Indian in 1991 to 162 Indians in 2022.1 This rise in wealth makes succession a more prominent issue in the current times than in the past and any likelihood of imposition of inheritance tax makes succession an even more significant concern.
2. HISTORICAL PERSPECTIVE
2.1 According to the Blacks' Law Dictionary, inheritance tax, is defined as "a tax on the transfer or passing of estates or property by legacy or intestate succession; not a tax on the property itself, but on the right to acquire it by descent or testamentary gift."2
2.2 Inheritance tax, as a concept is not something new to India. India had introduced inheritance tax, soon after independence, based on the model in United Kingdom ("UK"). 3 A brief historical perspective of inheritance tax in India is described below:
(a) Estate Duty Act, 1953 – This Act levied tax on principal value of all property4 whether settled or not settled. Property taken as a gift made in contemplation of death was also deemed to pass on donor's death. Gift made inter-vivos whether by way of transfer, delivery, declaration of trust, settlement upon persons in succession, or otherwise, and not made bona fide two years or more before the death of the deceased was deemed to pass on the death of the deceased.
Initially, estate duty was levied on agricultural land as well, however, in 1984, estate duty on agricultural land was abolished subject to some conditions. As far as the rate of inheritance tax under this law is concerned, no tax was levied where the principal value of the estate did not exceed INR 1.5 lakhs (Indian Rupees One Lakh Fifty Thousands). The maximum rate of tax was imposed in cases where the principal value of the estate exceeded INR 20 lakhs (Indian Rupees Twenty Lakhs), which was, INR 6,65,000 (Indian Rupees Six Lakhs Sixty Five Thousands) plus 85% (eighty-five per cent) of the amount by which principal value of the property exceeds INR 20 (Indian Rupees Twenty Lakhs) lakhs. Estate Duty Act, 1953 was repealed in 1985.
(b) The Wealth-Tax Act, 1957 – This Act levied tax in respect of net wealth corresponding to the valuation date for every individual, Hindu Undivided Family and company. It was applicable where net wealth of an individual exceeds INR 2.5 lakhs (Indian Rupees Two Lakhs Fifty Thousands) (highest tax slab was above INR 30 lakhs). No wealth tax was levied on property held under trust or other legal obligation for any public purpose of a charitable or religious nature in India. This tax was abolished in 2015.
(c) Gift Tax Act, 1958 – This Act levied tax on gifts made by a person. This was however, abolished in 1998. Currently, tax is levied on gifts from non-relatives under the Income Tax Act, 1961.
2.3 The revenue collection from estate duty was not very cost efficient. The revenue from estate duty in 1983- 84 was INR 19 crores (Indian Rupees Nineteen Crores) out of approximate INR 20,000 crores (Indian Rupees Twenty Thousand Crores) of total gross revenue.5 Thus, tax collection in the form of estate duty comprised only 0.095% of the total revenue collection.
2.4 Some reasons as cited by the government to abolish estate duty in the year 1985 are:
(a) Both wealth tax and estate duty apply to the property of a person. Wealth tax applies to property before death, and estate duty applies after death of a person. The existence of two separate laws with reference to the same property amounts to procedural harassment to the taxpayers and the heirs of the deceased who are required to comply with the provisions of two different laws.
(b) Estate duty has not achieved the twin objectives with which it was introduced, namely, to reduce unequal distribution of wealth and assist the states in financing their development schemes.
(c) While the yield from estate duty is only about INR 20 crores (Indian Rupees Twenty Crores), its cost of administration was relatively high.6
3. INHERITANCE TAX IN THE UK AND UNITED STATES ("US")
UK Model
3.1 The inheritance tax in India heavily relied on the model in UK. Therefore, it becomes crucial to understand the intricacies of the law on inheritance tax in the UK.
3.2 Inheritance tax was introduced in UK around 1694 to finance a war against the French. There were multiple legislations governing the succession of wealth around this time. The Finance Act, 1894 was enacted to have a common legislation governing each of these aspects. Estate duty was also imposed through this legislation, and this continued till 1965 until a new law in the form of capital transfer tax was introduced.
3.3 The law on capital transfer tax imposed a tax on lifetime transfer of property (for instance, gifts) other than certain exempt transfers as well as tax on estate at the time of death. The tax on estate at the time of death was imposed as if immediately before death, deceased has transferred his estate at fair market value of each respective asset. Additionally, transfers made within 3 (three) years of transferor's death were taxed at lower rates than transfers made through deceased's Will or intestate succession.
3.4 In 1986, the capital transfer tax was replaced by inheritance tax. This new law changed the law on inheritance tax. Gifts made within 7 (seven) years of death were taxed at a lower rate, however, gifts made within 3 (three) years of death were taxed at full rate. At the same time, no inheritance tax was imposed on gifts through trusts. If the inheritance was within the prescribed threshold, there was nil rate of inheritance tax imposed. For situations where inheritance is beyond the prescribed threshold, a single rate of 40% (forty per cent) on the amount exceeding the threshold shall be applicable.7 Currently, the threshold prescribed under the Act is GBP 3,25,000 (Great Britain Pounds Three Hundred Twenty Five Thousand).
US Model
3.5 The US is one of the largest economies of the world and has been implementing inheritance tax since decades. A look at the US model can provide further guidance on a suitable approach for India.
3.6 Historically, the imposition of inheritance tax in the US has largely been a response to the revenue needs of the country to finance various wars. In 1797, amidst difficult relations with France, stamp tax on legacies was imposed in US. However, this stamp duty was repealed in 1802. The need to raise additional revenue increased in US during civil war. As a result, a new law was enacted in 1862 introducing inheritance tax. This law was again repealed in 1870. Inheritance tax was re-introduced in 1898 again as a response to revenue needs due to Spanish-American war. Post this war, inheritance tax was abolished in 1902.
3.7 Federal Estate Tax was introduced in 1916 to meet the financial need of World War I. This law continues to apply till today. However, the formulation of the law has changed over time. Initially, when inheritance tax was introduced in 1916, there was no tax on inter-vivos gifts, that is, a gift made between two living persons. As a result, many people transferred all their property prior to their death. After much misuse of the law, Federal Gift Tax Act, ("Gift Tax Act") was enacted in 1924 to complement the estate tax.
3.8 The Gift Tax Act was shortly repealed in 1926. Instead, an estate tax provision was added wherein gratuitous transfers made within 2 (two) years of death were presumed to be in contemplation of death and made subject to estate tax. This was held as unconstitutional by the US Supreme Court in 1932. The great depression in 1932, however, forced the US Congress to re-enact gift tax. It was only in 1976, through the enactment of Tax Reform Act, that the estate and gift tax system were unified. A single progressive rate of tax applied to the cumulative of lifetime and testamentary transfers.8
3.9 Under the current framework, tax is imposed on the aggregate amount of taxable estate and adjusted taxable gifts. The maximum rate of tax is imposed when the aggregate amount is over USD 1,000,000 (United States Dollars One Million). This rate is USD 3,45,800 (United States Dollars Three Hundred Forty-Five Thousand and Eight Hundred) plus 40% (forty per cent) of the excess of such amount over USD 1,000,000 (United States Dollars One Million).
4. INDIAN POSITION AND WAY FORWARD
4.1 Some of the key reasons to introduce or levy inheritance tax are to augment government revenue, reduce wealth inequality and promote horizontal equity.
4.2 An analysis of inheritance tax in India historically also suggests that it was introduced with the goal to reduce economic inequality through redistribution of revenue. However, the system had its own demerits. The most fundamental being that it failed to reduce economic inequality in the country and generate sufficient revenue in a cost-efficient manner.
4.3 In developed jurisdictions like UK and US, where the maximum rate of inheritance tax is 40% (forty per cent), the system is still criticized for generating insufficient revenue.
4.4 As far as India is concerned, there have been attempts or rather a re-think on whether inheritance tax should be imposed. In 2018, the then Finance Minister Arun Jaitley supported the idea of having an inheritance tax in India by highlighting how hospitals and universities in developed nations benefited from substantial endowments facilitated by inheritance taxes.9
4.5 India has emerged as one of the world's fastest-growing major economies, captivating global attention with its remarkable economic journey. India is also currently the third largest ecosystem for startups globally, with third highest number of unicorns. While there has been exponential rise in wealth among Indian entrepreneurs, it will continue to need a significant private capital and talent. Any re-introduction of inheritance tax must be well calibrated without impacting the entrepreneurial spirit or talent or family offices, which may migrate to other jurisdictions to mitigate a potential levy in India.
4.6 Recently, the Modi Government 3.0 has denied the re-introduction of inheritance tax. Even in a situation where inheritance tax is introduced, it cannot be applied in a similar model as it used to be in the past. For example, an exorbitant rate of tax can be a significant factor for people to offshore their income or assets. A fine balance will be required between government's object to augment revenue and reduce inequality without severely impacting the growth of private capital in India and migration of entrepreneurs and family offices.
Footnotes
1. https://economictimes.indiatimes.com/news/india/indias-richest-1-has-highest-concentration-of-wealth-in-decades-study-shows/articleshow/108650367.cms?from=mdr
2. Blacks Law Dictionary.
3. General Budget 1954-55.
4. The definition of property is an inclusive one to include "any interest in property, movable or immovable, the proceeds of sale thereof and any money or investment for the time being representing the proceeds of sale and also includes any property converted from one species into another by any method."
5. General Budget 1983-84.
6. Budget Speech for the year 1985-86.
7. William T Thistle, 'A comparative guide of where to die: should the United Kingdom repeal its inheritance tax?' Ga. J. Int'l & Comp. L., 36, p.705.
8. ibid
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