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Home Opinion Sam Pitroda’s inheritance tax idea: The rich will not pay and middle class will suffer

Sam Pitroda’s inheritance tax idea: The rich will not pay and middle class will suffer

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The concept of inheritance tax has recently sparked significant debate in our country. This policy involves taxing the assets and properties that individuals inherit from their deceased ancestors. Congress leader Sam Pitroda’s suggestion to discuss and debate the implementation of the inheritance tax has brought this tool back into the spotlight. Pitroda cited a US example where the government takes 55 per cent of the deceased’s wealth as Inheritance Tax, while the remaining 45 per cent is distributed among the legal heirs or children.

The Congress party has distanced itself from Pitroda’s views, stating that they are his own and do not represent those of the party. But timing is crucial in politics. It is important not to dismiss Pitroda’s opinion as merely personal, as he is a respected mentor to Congress and has long been associated with the party.

Why a US model does not work for India

Inheritance tax, which is also known as “estate tax” and sometimes referred to as “death tax” or duty is present in several forms across multiple countries such as South Africa, Brazil, and the US. A few emerging economies like India and China don’t have the provision for such a duty. Let us examine what such a tax would mean in these countries.

A look at the share of wealth with the top 10 per cent of the population is instructive: It is at 85.6 per cent in South Africa, 79.7 per cent in Brazil, 70.7 per cent in the US, 68.8 per cent in China and 65 per cent in India. The above data clearly shows that an inheritance tax can’t be used for equitable wealth distribution.

The top 10 per cent of the population’s share of the total national wealth is higher for South Africa, Brazil, and the US than India and China. Inheritance tax can be easily avoided by the wealthiest individuals, either by utilising assets exempt from the tax — such as business, agricultural property, and pension funds — or by transferring their wealth above the taxable threshold well before their death. Ultimately, this tax will be collected from every aspiring middle-class household.

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A threat to middle-class aspirations

Implementing an inheritance tax will hamper economic growth and middle-class aspirations, young Indians’ dreams, and wealth creation efforts due to the following reasons.

First, inheritance taxes create disincentives for wealth accumulation and investment, potentially hindering entrepreneurship and capital formation, leading to reduced savings and investment, ultimately slowing down economic growth.

Second, an inheritance tax may force beneficiaries to sell assets like family businesses or real estate to pay taxes, resulting in inefficient asset allocation and the disruption of family enterprises.

Third, inheritance tax can provoke significant resistance due to its visibility and perceived burden. Taxpayers may focus only on the apparent burden, disregarding the broader context of lifetime tax liabilities, leading to distorted perceptions of fiscal policy.

Fourth, the inheritance tax creates significant administrative burdens, especially for widows and non-resident Indians. Tax regulations and procedures can exacerbate emotional and financial stress, emphasising the need for simplified and accessible tax frameworks.

Fifth, although the purpose of inheritance tax is to redistribute wealth, its ability to achieve equal outcomes is disputed. Wealthy individuals frequently use sophisticated estate planning techniques to reduce tax liabilities, which lessens the effect of the tax in reducing wealth inequality. This leaves the middle class more susceptible to taxation.

Finally, India lacks robust social security systems, and people rely heavily on family support. Introducing an inheritance tax during economic strain may worsen investment and wealth generation, incentivise capital flight, and drive young talent abroad. Enforcement challenges and tax avoidance may limit revenue generation.

It’s India’s time to shine

The global economic scenario suggests that the next 50 years will be India’s years. The country’s capital market is hitting new records every day. Prime Minister Narendra Modi has set a goal of making India the third-largest economy during his third term and achieving the vision of a “Developed India” by 2047. However, the chief opposition party’s mentors’ recent proposal to discuss implementing an inheritance tax seems a step backwards. It gives the impression that the Opposition lacks innovative ideas to take India ahead.

Discussing such policies only encourages capital and talent flight abroad and penalises the aspiring middle-class wealth generation efforts more. This is detrimental to the nation’s growth and is equal to killing the dreams of India’s youth.

In the long run, wealth and income equality can be achieved only by including the middle and bottom of the pyramid society as part of the wealth creation effort of our country, not by negatively affecting their aspirations and dreams.

The writer is professor of finance, Xavier School of Management, Jamshedpur. He is a member of the BJP

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