India must fix inheritance tax rate between 30 to 40 per cent
Media reports suggest that the Central Government is considering to levy inheritance tax on high net worth individuals and has sought feedback, including recommendations, on the proposed re-introduction of inheritance tax.
Government’s deliberation for ‘reintroducing inheritance tax’ is a move in the right direction as the richest 1% own 58% of total wealth in India and this concentration of wealth is fuelling inequality in the country.
Prior to removal, inheritance tax in India was extremely high; upto 85 per cent for some wealth slabs. Tax rates, whether on income or estate, should never be extortionate. While re-introducing the tax, government must set a reasonable or moderate tax rate that allows inherited wealth to go back to society in two-three generations and for new wealth to be created afresh. Oxfam estimates that over the next 20 years, globally, 500 people will hand over $2.1 trillion to their heirs—a sum larger than the GDP of India, a country of 1.3 billion people. Taxing such unearned wealth does not create disincentives for working hard and growing the economy.
The proposed rate of inheritance tax at the level of 5 to 10 per cent, as reported in the media, is far too small. Japan has the highest tax rate of 55 per cent while BRICS countries Brazil, China and South Africa have some taxes which are of the nature of inheritance taxes. Drawing upon global evidence, India could set an inheritance tax rate anywhere between 30 to 40 per cent with a higher threshold limit. Along with the moderate tax rate, government must ensure strong compliance and least number of exemptions with no scope for tax avoidance.
Given India’s GDP, growing inequality, very low tax-GDP ratio, and more dependence on indirect taxes, re-introducing inheritance tax could generate funds for essential public services like health and education that could create a more equal opportunity country and reduce the intergenerational persistence of inequality.
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