Inherited property tax, also known as estate tax or inheritance tax, is a levy imposed on the assets transferred from deceased individuals to their heirs. This type of tax is common in many countries, where governments see it as a way to reduce wealth inequality and generate revenue. In India, there is currently no inheritance tax, but discussions have arisen regarding whether the country should introduce such a tax to promote fairness and boost state income.

What is Inherited Property Tax?

Inherited property tax applies to the transfer of property (which can include land, houses, stocks, and other financial assets) from a deceased person to their heirs. In most cases, the value of the estate is assessed, and if it crosses a certain threshold, a tax is levied on the assets. The tax rate can vary based on the value of the estate and the country’s tax policies.

For instance, in the United States, the estate tax applies to estates worth over $12.92 million as of 2023, while in the UK, the inheritance tax threshold is £325,000. These taxes are generally progressive, meaning the larger the inheritance, the higher the percentage taxed.

Pros and Cons of Inherited Property Tax

Pros:

1. Wealth Redistribution: Inheritance taxes can help reduce wealth concentration in the hands of a few by redistributing it through government programs or services.
2. Additional Revenue: A well-designed inheritance tax can be an important source of revenue for governments to fund public welfare schemes.
3. Economic Equality: By limiting the ability to pass vast wealth across generations, the tax helps promote equal opportunity, reducing the divide between the rich and poor.

Cons:

1. Double Taxation: Many critics argue that inheritance tax amounts to double taxation because the deceased’s wealth was likely already taxed when it was earned or invested.
2. Family Businesses: Inherited property taxes could burden family-run businesses, especially if they involve land or other high-value assets, forcing them to sell off part of their operations to pay the tax.
3. Administrative Complexity: Implementing and enforcing an inheritance tax can involve administrative difficulties and create opportunities for tax avoidance or evasion.

Should India Adopt an Inherited Property Tax?

India abolished its estate duty in 1985 due to administrative challenges and a lack of significant revenue generation. Since then, the issue has remained off the table, but economic inequality in India has grown, making the question of reintroducing an inherited property tax relevant.

Arguments for Adoption:

1. Addressing Inequality: India is facing growing wealth inequality, with a large concentration of wealth in the hands of a few. Introducing an inheritance tax could be a way to ensure that wealth is redistributed and that the gap between rich and poor is narrowed.
2. Boosting Government Revenue: India needs to fund various public welfare schemes and infrastructure projects. A tax on inherited property could provide much-needed revenue to support these initiatives, without overburdening the middle class.
3. Promoting Meritocracy: Encouraging a culture of merit-based success rather than inherited wealth can push the next generation to contribute more actively to the economy, reducing reliance on family fortunes.

Arguments Against Adoption:

1. Economic Complexity: India’s complex land ownership patterns and inheritance laws could make enforcing this tax difficult. The tax could also increase legal disputes over property valuation and distribution.
2. Impact on Family-Owned Businesses: Many family-owned businesses and farms in India could suffer if subjected to a high inheritance tax, which could force their sale or break them up to pay the tax burden.
3. Risk of Capital Flight: Wealthy individuals might try to move their assets offshore or use loopholes to avoid the tax, which would decrease the effectiveness of the policy.

Conclusion: A Balanced Approach

While an inherited property tax could play a role in reducing wealth inequality and generating revenue, careful consideration is needed before India adopts such a tax. It should be designed with exemptions for smaller estates and family-run businesses to prevent undue hardship. Additionally, a strong enforcement mechanism is required to avoid tax evasion. If done right, India could strike a balance between promoting economic equality and preserving entrepreneurial and family-owned assets.

India’s policymakers would need to examine the experiences of countries with inheritance taxes, adapt those learnings to India’s unique context, and structure the tax in a way that it benefits the country without becoming a burden.