The inheritance tax, which was earlier known as estate duty in India, was abolished in 1985. Whether or not to revive the tax remains a contentious policy debate today. This paper examines the motivation behind its abolition, gauges the economic and legal implications that may arise due to its revival, and argues that the current economic and social scenario calls for reassessment of this policy on taxation.

Historical Background and Justifications for Abolition

The inheritance tax in India was constituted in 1953 with the Estate Duty Act. Its primary purpose was to reduce the concentration of wealth and promote the fair division of resources. However, it was repealed in 1985 for various justifications:

• Administrative Inefficiencies: The inheritance tax framework in India faced many administrative issues. Valuation of assets, especially land, proved to be one of the major challenges. No technological advancement existed at that time for performing these processes as well.
  
  Tax evasion was widespread, as affluent individuals exploited legal loopholes, utilized irrevocable trusts to transfer assets, or implemented gifting strategies to avoid financial obligations. This situation rendered enforcement both complicated and ineffectual.
  
  Consequently, the income received from the inheritance tax was rather small in comparison with the costs of its management and collection.
   
• Economic Growth Concerns: The inheritance tax critics argue that it discourages people from amassing wealth. The disincentive is seen to act as a potential investment discourager in a couple of industries and businesses.
  
  Family-owned businesses, which form the very fabric of Indian business, were adversely impacted the most. Successors were often burdened with a large tax liability, making such businesses unviable. The policymakers feared that such an eventuality could create an economic stagnation scenario.
   
• Political and Public Resistance: The inheritance tax was felt to be punitive and, especially by the affluent sections, felt that it was a class tax. The powerful sections of society lobbied against the tax.

Public opinion was against the tax primarily because of the lack of appreciation for the importance the tax played in reducing inequalities. This eventually led the government to repeal it when they needed a more business-friendly environment.

Current Situation: Why India Requires an Inheritance Tax

1. Growing Wealth Inequality
• The Oxfam Inequality Report of 2023 highlights that wealth in India is concentrated, with the top 1% holding over 40%, while the bottom 50% possesses less than 3%. These extreme levels of inequality prevent social mobility and intensify disparities in education, health facilities, and opportunities.
• Economic Implications:
• Wealth concentration limits aggregate demand due to low purchasing power among the majority.
• Inter-generational wealth transfer perpetuates inequality, undermining the principles of a merit-based society.
• Legal Frameworks to Check Inequality:
• Article 39(b) and (c) of the Indian Constitution directs the state to promote equitable resource distribution and prevent wealth concentration. Inheritance tax can serve as a fiscal tool to achieve these constitutional goals.
   
2. Fiscal Deficits and Tax Needs
• India's persistent fiscal deficits exceed the limits set by the FRBM Act of 2003. With rising welfare expenditures in healthcare, education, and infrastructure, finding additional revenue sources has become increasingly crucial.
• Inheritance Tax as a Source of Revenue:
• An inheritance tax on large estates can generate a steady flow of revenue with relatively low administrative costs.
• International Practices:
• OECD countries like the UK and Japan impose significant inheritance taxes (e.g., 40% in the UK on estates over £325,000 and up to 55% in Japan) that contribute to public revenues, funding social welfare schemes.
   
3. Fostering Social Equity
• An inheritance tax is a redistributive tool, promoting equity by taxing unearned income passed through generations.
• Impact on Public Services:
• Revenue generated could be used for education, healthcare, affordable housing, and poverty alleviation, benefiting vulnerable sections of society.
• In Union of India v. Azadi Bachao Andolan (2003), the Supreme Court emphasized the role of progressive taxation in reducing economic disparities. Reintroducing an inheritance tax aligns with this principle.
   
4. Encouraging Misuse of Wealth
• Inherited wealth often remains unutilized, leading to luxury possessions or inactive deposits. Imposing inheritance taxes encourages productive investments, such as startups or enterprises yielding social benefits.
• Economic Benefits:
• Wealth reallocation from static holdings to dynamic investments can drive economic growth and job creation.
• Legislative Amendments:
• Revise the Income Tax Act of 1961 with specific provisions for taxing large inheritances.
• Implement anti-avoidance strategies akin to GAAR to prevent misuse through tax-exempt instruments.

Obstacles in Execution

1. Valuation and enforcement issues:
   • Accurate valuation of the immovable properties and shares constitutes the backbone for a good implementation of inheritance tax. It is, however, marred with the volatility of market times, lack of uniform methods of valuation, and some taxpayers' resistance to comply. Independent valuation bodies should be established, much like in the UK setup with the Inheritance Tax Act, 1984, with more reliance on technology to incorporate artificial intelligence and blockchain property registries for complete transparency and minimal disputes.
      
2. Avoidance and Evasion:
   • The high net-worth individuals would go to any extent to avoid taxes by making complex schemes like opening offshore trusts, underreporting the value of assets, or even fraudulent transactions. The enforcement under the Benami Transactions (Prohibition) Act, 1988, which prohibits undisclosed ownership of assets, needs to be further strengthened. Furthermore, an improvement in the Prevention of Money Laundering Act, 2002, in tracing and recovery of offshore wealth will deter the offenders. Strengthened collaboration among global tax agencies through initiatives such as the Common Reporting Standard, CRS, also reduces cross-border tax evasion.
      
3. Political Commitment:
   • There is always a resistance from major interest groups to introduce inheritance tax. For its success, it has to make an effort through propagations of making the people aware of its significance in curtailing the disparity of the wealth distribution and revenue for much-needed public services. Its presentation as social elevation measure rather than penalization could change the situation. Visible spending of the collected revenue, along with periodic assessment of impact, would strengthen the public trust over the policy.

Case Studies from Other Jurisdictions:

• United States:
  • The United States imposes an estate tax on individual assets exceeding $12.92 million (2023 threshold), and this tax is levied at a flat rate of 40%. While it is often criticized for its impact on the transfer of wealth, this tax serves several purposes:
  • Redistribution of wealth: It reduces income inequality because it taxes a large inheritance.
  • The generated revenues are channeled into public services such as education, infrastructure, and social welfare.
  • Economic Impacts: Detractors argue it will discourage savings and investment, but supporters claim that since it applies only to the wealthiest estates, its economic disruption cannot be very wide-ranging.
     
• United Kingdom:
  • The UK charges a 40% inheritance tax on estates exceeding £325,000, although significant exemptions apply:
  • Charitable Donations: Estates that give at least 10% to charity have a reduced tax rate of 36%.
  • Spousal Exemption: The exemption of spousal transfers is used to preserve family wealth.
  • Lessons for India: Britain's system of taxation gets the balance right between tax revenues and social incentives that would promote charitable giving while controlling wealth concentration.
     
• Japan:
  • Japan possesses one of the most elevated inheritance tax rates globally, with marginal rates ascending to as much as 55%. Notable characteristics encompass:
  • Strict Taxation: It touches both the domestic and world resources of the people of Japan.
  • Allocated money or funds are channeled towards public welfare programs mainly health, pension, infrastructure, etc.
  • Social Consequences: In discouraging wealth holding, Japan supports higher intergenerational equity as another form of the social gains achieved with significant taxation.
     
• Takeaways for India:
  • These global methodologies highlight several approaches to the implementation of inheritance and estate taxation:
  • Redistribution Aims: The United States and Japan utilize estate taxes to help redress economic inequality, a matter of importance to India's wealth gap.
  • Philanthropic Incentives: The UK tax system demonstrates how exemptions can be used to encourage philanthropy.
  • Public Welfare Impact: Spending tax revenues on welfare projects, like in Japan, can help win public favour while satisfying the needs of society.
  • India can take parts of the existing systems and design an equitable and efficient inheritance tax system that meets its priorities for socioeconomic development.

Conclusion
Reintroduction of inheritance tax in India is a step towards wealth disparities, the generation of fiscal revenue, and promotion of social equity. Examining international best practices and confronting possible hurdles of implementation can allow India to evolve a sound framework that could bring about economic advancement alongside principles of social justice. The tax should be structured progressively, with transparency, and supported by anti-evasion strategies to make it accomplish its goals without straining legitimate generators of wealth too much.