Why Was Inheritance Tax Abolished In India? A Look At Wealth Redistribution After Sam Pitroda's Comments

A political controversy has erupted over the issue of wealth redistribution in India, triggered by Sam Pitroda, chairman of the Indian Overseas Congress, advocating for an inheritance tax system similar to the one in the U.S.

Pitroda has proposed a 50 percent inheritance tax, wherein half of a person's wealth would be taxed upon their death, leaving their heirs with the remaining 50 percent. In an interview with ANI, Pitroda highlighted the U.S. inheritance tax system, where the government can claim up to 55 percent of a deceased individual's wealth above $100 million, leaving the rest for their children.

Prime Minister Narendra Modi has seized upon Pitroda's statements, accusing the Congress party of planning to tax inheritance from parents to their children. In response, the Grand Old party has clarified that Pitroda's views do not represent its official stance.

Inheritance Tax in the India

This debate brings the concept of inheritance tax back into focus, 39 years after the estate duty was was scrapped by the then Prime Minister Rajiv Gandhi in March 1985, citing the need to simplify the tax system and promote investment and savings. Also known as estate duty, the tax was introduced in India in 1953.

The then Finance Minister, Vishwanath Pratap Singh, had stated in his 1985 Budget speech that the estate duty failed to achieve its objectives of reducing wealth inequality and helping states finance development schemes. He noted that the yield from the estate duty was only about ₹20 crore, while the cost of administration was relatively high.

In India, an inheritance tax was levied for over 30 years on assets acquired through inheritance, with the maximum marginal rate being 40 percent on property exceeding the value of ₹50 lakh.

The Wealth (Inheritance) Duty Bill, 1989, aimed to reintroduce the taxation and resolve implementation issues from the previous legislation, but it did not materialise due to the dissolution of Parliament that year.

Proponents of inheritance tax argue that it helps address disparities caused by inherited wealth, which is often blamed for economic inequality.

Inheritance Tax in the U.S.

In the United States, an inheritance tax is a state tax levied on the money or property received from a deceased person's estate. As of 2021, only six states impose an inheritance tax, with rates varying by state and exemptions for certain classes of heirs or lower rates for transfers to close family members.

Inheritance tax rates can vary, ranging from under 1% to as high as 20% of the value of inherited property and cash. However, this tax is calculated on the amount of the asset that exceeds a specific threshold. For example, if a person inherits assets worth $3 million and the threshold is $1 million, the tax will be levied only on the remaining $2 million.