India Had Its Own Inheritance Tax Till 1985. Why It Was Abolished

Indian Overseas Congress chief Sam Pitroda's remarks on the US's inheritance tax have sparked a political whirlpool here in India amid the ongoing Lok Sabha elections.

Mr Pitroda stirred up a massive controversy while countering the Prime Minister over his allegations that Congress plans to redistribute the nation's wealth, citing a US example of inheritance tax law.

"If a person has property worth US dollars 10 million, then after his death, 45 per cent of the property goes to his children and 55 per cent of the property goes to the government," Mr Pitroda told ANI and added that there is no such law in India.

"Such issues should be discussed. We are talking about policies that are in the interest of the people, not just the rich," he added.

What is the Inheritance Tax law in US?

Firstly, the tax is not common in the US and is only in force in six states out of the 50. The tax is imposed on the recipients who inherit assets of a person who has died. The taxation depends on the state in which the person lived or owned property. 

There's a stark difference between Estate Tax and Inheritance Tax in the US. The former is levied on the estate itself before it is distributed, while the latter is only against the beneficiaries. 

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

Key factors involved and how is it calculated

It is not a Federal tax. It is levied based on the inheritor's relationship with the person and the value of the property. It is applied only to the portion of the inheritance which exceeds the exemption limit. Above the threshold limit, the tax is usually assessed on a sliding basis and the rates vary from single digits and can go up to 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, if the property is valued at less than $25,000 (Rs 20.83 lakh) then no tax is due. In Maryland, inheritances from estates smaller than $50,000 (Rs 41.66 lakh) are also exempt.

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 current highest rate standing at 55%. The rate is determined based on how much money is received by each statutory heir. Meanwhile, South Korea boasts a 50% inheritance tax rate. In 2021, The family of deceased Samsung Electronics chairman Lee Kun-hee said it would pay more than 12 trillion won ($10.78 billion) in inheritance taxes for the estate of the late patriarch.

Did India Ever Have An Inheritance Tax?

An inheritance tax law existed in India until former Prime Minister Rajiv Gandhi scrapped it in 1985. An Estate Duty was a form of tax that was calculated at the time of a person's death, it was introduced through the Estate Duty Act, 1953. It was payable only if the total value of the inherited portion of the property exceeded the exclusion limit. In India, it was set as high as 85% on properties. Properties worth at least Rs 1.5 lakh, were taxed at a rate of 7.5%. The objective was to narrow the income disparity but was scrapped in 1985. 

"As both wealth-tax and estate duty laws apply to the property of a person, the former applying to his property before death and the latter after his death, 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 have to comply with the provisions of two different laws. Having considered the relative merits of the two taxes, I am of the view that estate duty has not achieved the twin objectives with which it was introduced, namely, to reduce the unequal distribution of wealth and assist the States in financing their development schemes,"  former Prime Minister VP Singh, who was the Finance Minister in Rajiv Gandhi's Cabinet, said in his budget speech.

"While the yield from estate duty is only about Rs. 20 crore, its cost of administration is relatively high. I, therefore, propose to abolish the levy of estate duty in respect of estates passing on deaths occurring on or after 16 March 1985. I come forward in due course with suitable legislation for this purpose," he added.

A report by the Economic Times states that India's inheritance tax was repealed in 1985 because it neither helped bring down economic inequality in society nor did it contribute significantly, In 1984-85, the total tax collected under the Estate Duty Act was Rs 20 crore, but the cost of collection was very high because the complex calculation structure spawned a lot of litigation.

For example, according to the 1980-81 regular budget, the gross tax revenue in the 1979-80 period was Rs 11,447 crore, out of which the Estate Duty contributed only Rs 12 crore which was later revised to Rs 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, Rs 13 crore.

In the 1978-79 budget, the Tax revenue in the previous budget was Rs 10.75 crore of the total revenue of Rs 9,005.46 crore. The projection for the 1978-79 budget was Rs 11 crore out of Rs 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.