In a redux of his infamous ‘Hua to hua’ remark, the Chairman of the Indian Overseas Congress and Rahul Gandhi’s advisor Sam Pitroda stroked a political firestorm after he suggested a US-like inheritance tax in India as a way to redistribute wealth. As per the Congress leader, under this tax regime, more than half of the Wealth of a citizen will be grabbed by the government once a person dies leaving only the remaining portion with their bereaved family.
Hitting back at the controversial suggestion, PM Modi charged Congress with over-burdening Indians with taxes and rampant loot. He added that Congress’ motto is – Congress ki loot, Zindagi ke sath bhi, Zindagi ke bad bhi. Consequently, the widespread criticism and condemnation of the Inheritance tax plan forced Congress and Pitroda to distance themselves from the controversial idea.
However, while Congress and its leaders have claimed that they have no such plan to impose an Inheritance tax, it becomes pertinent to note that previous Congress governments had imposed the Inheritance tax, called estate duty in India, for over three decades. Additionally, apart from Sam Pitroda who pitched the idea today, only to distance himself from it hours later, the UPA government was reportedly planning to re-introduce the failed policy measure nearly two-and-a-half decade after it was scrapped for ‘not achieving its intended goal’. Further, its senior leader P Chidambaram had also suggested imposing it through his articles as recently as March 2023.
History of Inheritance Tax
Previously in India, there was a tax called Estate duty (colloquially called the Inheritance tax) which was imposed on assets or property that was transferred to legal heirs after the death of the property owner, irrespective of whether they were children or grandchildren of the deceased person. However, since 1985 when it was scrapped, Indians don’t have to pay any inheritance tax.
Before it was scrapped, the tax system required executors of the deceased’s estate to pay a strikingly high “estate duty,” which could be as high as 85% of the value of inherited property in the highest slab, as per the Estate Duty Act of 1953.
The Congress government enacted the Estate Duty Act in 1953 claiming that it wanted to address economic inequality by introducing the estate duty tax. This tax system was progressive in nature meaning that the rate of tax imposed would get higher as the slab of the property value rose. However, the tax rates increased drastically and realtors were charged up to 85 percent for estates valued over Rs 20 lakh. It applied to both immovable and movable properties, regardless of their location, that were inherited by successors upon an individual’s death.
While the assets passed on to legal heirs could be seen as gifts since they were received without any payment, no gift tax was applied. This was because the Income-tax Act of 1961 excluded inherited assets or those received through a will from the definition of gifts.
To prevent tax avoidance, the law included measures against actions like giving gifts just before death or within two years prior. The estate duty law faced widespread criticism as it was too complicated, and led to more lawsuits and administrative costs.
Furthermore, there were concerns about double taxation as assets were subject to taxation twice: first, through wealth tax during the property owner’s lifetime (which was abolished by the Modi government in FY 2016 and onwards), and then through estate duty upon their demise. Additionally, estate duty collections were drastically less than the Congress government expected due to issues such as asset concealment and ownership of benami properties.
However, in 1985, the Rajiv Gandhi govt abolished it as it was believed that the tax had not achieved its intended goal of creating a more equitable society and reducing wealth disparity.
Act repealed just before the transfer of Indira Gandhi’s estate
Notably, the law was repealed just before the execution of Indira Gandhi’s will, transferring her estate to her grandchildren Rahul Gandhi, Priyanka Gandhi and Varun Gandhi. The former prime minister had left her entire estate, valued at about $175,000, to her three grandchildren. In the will signed in 1981, Indira Gandhi had appointed her son Rajiv Gandhi and his wife Sonia Gandhi as executors of the will. The will was published after Rajiv Gandhi presented it at a court to certify it.
The will was published on 2 May 1985 and then executed after Rajiv Gandhi govt abolished the Estate Duty Act in his first budget, with effect from 1 April 1985. A report from 2 May 1985 said, “Under a finance bill that took effect April 1, all death duties in India have been abolished and no inheritance tax will be assessed on the Gandhi estate.”
Interestingly, the report used the term ‘death duty’, signifying that inheritance tax is basically a death tax, where people have to pay tax for dying.
UPA government had mulled about re-introducing the failed policy measure for years
As per media reports from mid-2011, the then Home Minister P Chidambaram had pitched for higher taxes on luxury products and “imposing inheritance tax”. According to media reports, Chidambaram had expressed these views at the full Planning Commission meeting headed by the then PM Manmohan Singh, alluding to the fact that the UPA government was mulling re-introducing this contentious tax system. During the UPA era, the Planning Commission headed by PM Singh was responsible for deciding the policies for the country.
The then HM Chidambaram was quoted saying, “We are really underestimating our capacity to raise resources, especially tax resources. Since non-plan expenditure is difficult to contain, the tax-GDP ratio must be raised, especially by taxing conspicuous consumption and imposing inheritance tax”. Media reports back then had reported that his remarks might pave the path for the (re-)introduction of inheritance tax in India in the future.
However, this was not a one-off incident where the UPA government strongly mulled about imposing an Inheritance Tax again. Evidently, in November 2012, the media reported that then FM P Chidambaram had called for a debate on the need for an inheritance tax in India.
In February 2013, an official statement said that during pre-budget consultations, the then Finance Minister P. Chidambaram held discussions with ‘some economists’ who recommended the implementation of a death tax, also known as an inheritance tax.
Post-2014, senior Congress leader and Former UPA Minister, Chidambaram had written extensively on multiple occasions suggesting that an Inheritance tax should be imposed on Indians.
Notably, in April 2022, he wrote an article in the Indian Express (Archived link). In the article, he criticised the Modi government for lowering Corporate tax, abolishing Wealth tax, and not contemplating the Inheritance tax. He lamented, “Wealth tax had been abolished and an inheritance tax was not even contemplated.”
Similarly, in his article in the Indian Express in March 2023 (Archived Link), while talking about ‘Redistribution of Wealth’, he lamented that the government has kept agricultural income outside the tax net and didn’t impose an inheritance tax.
He expressed disappointment stating, “There is, in practical terms, no wealth tax. There is no inheritance tax. Agricultural income is outside the tax net. Gifts to relatives are not taxable. Consequently, wealthy individuals find it easy to redistribute their wealth and income among close family members.”
