Escalating an ongoing war of words between the Congress and Bharatiya Janata Party in India over the Congress election manifesto that talks about redistribution of wealth, Sam Pitroda, head of the Overseas Congress Party, on Wednesday said that the inheritance tax that exists in the US is fair.
Explaining the inheritance tax in the US, Pitroda said in an interview; “If one has $100 million worth of wealth and when he dies, he can only transfer probably 45% to his children, 55% is grabbed by the government, that’s an interesting law."
"...it says you, in your generation made wealth, and you are leaving now, you must leave your wealth for public, not all of it, half of it, which to me sounds fair.” Pitroda said in the interview.
However, the above statement of Pitroda has stirred the hornet’s nest, and given additional ammunition to the BJP to go to town with the charge of Congress if voted to power would confiscate properties considered to be excessive in the hands of individuals and distribute them among the minorities.
But let us leave the polemics aside and examine the case for inheritance tax or its variant estate duty dispassionately. It is not as if the concept is alien or unknown to India. It was in vogue till 1985 when it was put in a suspended animation by the then Rajiv Gandhi government.
Tax rates should not be confiscatory. At the height of Indira Gandhi’s socialistic zeal, the maximum marginal rate of income tax was 98%. People said they would rather not earn given the grim prospect of losing 98% of it to the exchequer. Not for them was the wooly notion that such heavy-handed taxation was meant to bankroll welfare schemes. At the same time, a bouquet of direct taxes is required to target the rich and help the poor. So much so, even an avowedly capitalistic country like the USA has at least six states imposing heavy inheritance tax which is a perfect fit with the American belief system that one should earn his keep and not be an inheritor. Be that as it may.
The Netherlands, another avowedly capitalistic country, imposes a fairly heavy estate duty. We need a slew of direct taxes whereas we have only income tax to show. A reasonable estate duty on estates worth more than say ₹20 crore would not hurt and the annual wealth tax of say 2% on net wealth in excess of say ₹ 5 crore would not hurt either. Ditto for gift tax on donors. As it is, the optics are not good. Income tax evasion is quite widespread. GST on the other hand is begetting much greater compliance thanks to its indirect tax status which hurts the poor more being a regressive tax. Coupled with it, fuel taxation (50% of the petrol bunk price) sends out the wrong message that the government is turning Robinhood taxation — tax the rich to serve the poor—on its head.
Wealth tax under the 1992 law was crafted on the lines suggested by the Raja Chelliah Committee which targeted just six assets whereas it ought to target all assets secularly. It left out bank balances and shares while targeting even a small car. Small wonder, the collection was abysmally low. Tilt towards direct taxes is a marker of development.
Sam Pitroda might have spoken at the wrong time but in a country characterised by Pareto’s law — 80% of the population gets to own only 20% of the national wealth and vice versa — with a greater skew, there is a case for the exchequer using all the four types of direct taxes to garner more revenue for the government while at the same time correcting the skew in income and wealth distribution. One of the canons of taxation is tax according to ability to pay. This touchstone too has been turned on its head with poor willy-nilly bearing the brunt with a backbreaking GST and fuel tax.
The BJP itself wasn’t averse to the idea of inheritance tax staging a comeback with its Minister of State for Finance, Jayant Sinha waxing eloquent about its potential. Inheritance tax or estate duty is not the same as confiscation or denuding one of his property rights.
Explaining the inheritance tax in the US, Pitroda said in an interview; “If one has $100 million worth of wealth and when he dies, he can only transfer probably 45% to his children, 55% is grabbed by the government, that’s an interesting law."
"...it says you, in your generation made wealth, and you are leaving now, you must leave your wealth for public, not all of it, half of it, which to me sounds fair.” Pitroda said in the interview.
However, the above statement of Pitroda has stirred the hornet’s nest, and given additional ammunition to the BJP to go to town with the charge of Congress if voted to power would confiscate properties considered to be excessive in the hands of individuals and distribute them among the minorities.
But let us leave the polemics aside and examine the case for inheritance tax or its variant estate duty dispassionately. It is not as if the concept is alien or unknown to India. It was in vogue till 1985 when it was put in a suspended animation by the then Rajiv Gandhi government.
Today, in the arsenal of direct taxes, the Indian government has only one weapon — income tax. Gift tax was tried as both donor and donee based only to be set aside completely. Wealth tax was abolished in 2015 by Arun Jaitley, the then Finance Minister on the facile ground that the revenue therefrom of the order of around ₹2800 crore or so was more than eaten away by the administrative and recovery expenses. He forgot that while revenue considerations are important, direct taxes seek to correct horizontal inequity in income and wealth distribution.
Tax rates should not be confiscatory. At the height of Indira Gandhi’s socialistic zeal, the maximum marginal rate of income tax was 98%. People said they would rather not earn given the grim prospect of losing 98% of it to the exchequer. Not for them was the wooly notion that such heavy-handed taxation was meant to bankroll welfare schemes. At the same time, a bouquet of direct taxes is required to target the rich and help the poor. So much so, even an avowedly capitalistic country like the USA has at least six states imposing heavy inheritance tax which is a perfect fit with the American belief system that one should earn his keep and not be an inheritor. Be that as it may.
The Netherlands, another avowedly capitalistic country, imposes a fairly heavy estate duty. We need a slew of direct taxes whereas we have only income tax to show. A reasonable estate duty on estates worth more than say ₹20 crore would not hurt and the annual wealth tax of say 2% on net wealth in excess of say ₹ 5 crore would not hurt either. Ditto for gift tax on donors. As it is, the optics are not good. Income tax evasion is quite widespread. GST on the other hand is begetting much greater compliance thanks to its indirect tax status which hurts the poor more being a regressive tax. Coupled with it, fuel taxation (50% of the petrol bunk price) sends out the wrong message that the government is turning Robinhood taxation — tax the rich to serve the poor—on its head.
Wealth tax under the 1992 law was crafted on the lines suggested by the Raja Chelliah Committee which targeted just six assets whereas it ought to target all assets secularly. It left out bank balances and shares while targeting even a small car. Small wonder, the collection was abysmally low. Tilt towards direct taxes is a marker of development.
Sam Pitroda might have spoken at the wrong time but in a country characterised by Pareto’s law — 80% of the population gets to own only 20% of the national wealth and vice versa — with a greater skew, there is a case for the exchequer using all the four types of direct taxes to garner more revenue for the government while at the same time correcting the skew in income and wealth distribution. One of the canons of taxation is tax according to ability to pay. This touchstone too has been turned on its head with poor willy-nilly bearing the brunt with a backbreaking GST and fuel tax.
The BJP itself wasn’t averse to the idea of inheritance tax staging a comeback with its Minister of State for Finance, Jayant Sinha waxing eloquent about its potential. Inheritance tax or estate duty is not the same as confiscation or denuding one of his property rights.
First Published: Apr 24, 2024 10:04 PM IST
Check out our in-depth Market Coverage, Business News & get real-time Stock Market Updates on CNBC-TV18. Also, Watch our channels CNBC-TV18, CNBC Awaaz and CNBC Bajar Live on-the-go!
