What if Nepotism Tax exists today? How Inheritance Tax Works?

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It is often said, that if you're born into a rich family, if you have rich parents, then your life is 'set.'

But just think,

isn't it a little unfair for the others? That you won't have to do anything to inherit your parents' wealth.

You can use their connections and influence. Such Nepotism can be seen in almost all fields.

Whether it is politics, business, or Bollywood. But 


How can it be eradicated or stopped ?

As a solution, some people suggest

an Inheritance Tax.

When you inherit your parents' wealth,

it should be taxed.

This tax used to be levied in India once.

But it is no more.


What can be its pros and cons?

And in the other countries of the world,

how is this inheritance tax levied?

In today's post, let's understand this topic in depth.

"The topic of Inheritance Tax has raised its ugly head."

"IT, Inheritance Tax, does that scare the daylights out of you?"

"In India, we work so that our children and grandchildren,

it's for them."

"Inspired by Robin Hood,



CURRENT SITUATION TAXATION IN INDIA

the Modi government has made a policy to take money from the rich

and give to the poor.

The Inheritance Tax was much discussed before the 2019 Budget.

The media had you believe

that the Modi government would introduce the Inheritance Tax in the Budget.

But it didn't happen.

But the concept of Inheritance Tax is not new to India.



A similar tax was introduced in 1953.

According to this law,

if any person had any movable or immovable property to his name,

that would have passed on to his children after his death,

it would be subject to an Estate Duty.

A kind of a Tax.

This was a progressive tax.

Such that more value meant a higher tax rate.

Similar to income tax.

It began at 5%.

And it went up to 40%.

But there were several exemptions to this tax as well.

For example, if you have a residential house

whose value is less than ₹100,000,

then you didn't have to pay the inheritance tax, this Estate Duty.

Or if the property was for Charitable purposes,

or the money payout against insurance,

or household goods, books, or artwork,

or clothes,

these things did not attract Estate Duty.

They were in the category of exemptions.

In the next few years,

in the 1960s and 70s,

the upper limit of the tax was increased.

But in March 1985,

the Indian Government completely abolished this tax.

The Finance Minister of India at the time was V. P. Singh.

And the Prime Minister was Rajiv Gandhi.

It begs the question, "Why was this tax abolished?"

It is said that there were 3 main reasons for it.

First, the Government revenue from the inheritance tax was very low. 

Second, people found loopholes in the tax very easily.

And would hide the inherited property illegally.

People started hiding their assets.

Third, it was a complicated law.

Due to this, there used to be many court cases.

And it proved to be a heavy expense for the government

to fight the court cases

or to deal with this tax administratively.

Since the expense was high, this tax was abolished.

Apart from this, 2 other taxes are similar to inheritance tax.

That were or are levied in India.

First is the Wealth Tax.

It was a tax levied on a person's entire wealth.

If your wealth was more than ₹3 million,

then you had to pay tax at 1%.

It had a single slab rate of 1%.

This tax was introduced in 1957 by the Wealth Tax Act.

But on 1st April 2016,

the government abolished this tax.

It is important to mention this in this post

because many people believe

having Inheritance tax and Wealth Tax together,

would result in double taxation on the same event.

Suppose you own a property worth ₹10 million,

then you would have to pay Wealth Tax on it every year.

and when you pass on the property to your children,

then they would have to pay inheritance tax on it as well.

It meant double taxation.

But as of now, Wealth Tax has been abolished.

The second is the Gift Tax.

When you give an expensive gift to someone,

the tax that needs to be paid on it.

This Gift Tax was introduced in 1958.

And it is important to mention here that

people used to avoid paying inheritance tax

through the loophole in the Gift Tax.

Suppose you were told,

and you knew that you would live for 5 to 6 more years only.

Instead of awaiting your death,

you would 'gift' your property to your children.

So that they don't inherit your property after your death.

Rather you gift your property to them.

By doing this, you avoid paying inheritance tax.

But this too is a tax that used to be in force earlier.

Since 1st October 1998,

the Indian Government abolished this Gift Tax.

After that, any gift given isn't subject to any tax.

Although in 2004, a new provision had been introduced.

According to it, if you receive gifts of more than ₹50,000 in a year,

then it would be taxable.

But the difference is that,

in this new rule, family members are exempted.

So you can give gifts to your family members and relatives, without paying tax. 

The situation in India is such that

one can give gifts to family members very easily,

without worrying about taxes.

No inheritance tax exists.

And on the other hand, we see that Nepotism is very common.

Children born into rich families

are very lucky

and perhaps it is unfair to others.

So the question arises,

To know the answer to this question,

we need to look at other countries.

We need to see how inheritance tax is working out for other countries.

Is it or is it not successful?

Unsurprisingly, there are many countries in the world

where inheritance tax does exist

or some other taxes similar to the inheritance tax.

Take America for example.

There's the Unified Gift and Estate Tax in America.

In America, if a person gives a gift to another,

even if it is a family member,

has to pay a Gift Tax on it.

The exemption limit for it is $15,000 per year.

So if the value of the gift is less than $15,000 per year, then it won't be taxed.


The second, Estate Tax.

If someone inherits any property after the death of the owner,

then it is subject to tax at the rate of 40%.

40% may seem like a large rate of tax,

but the exemption limit to it is very high.

Only the richest of the rich have to worry about this tax.

Not the average people.

During the early 2000s, the rule was that

for an estate of less than $1 million, there wouldn't be any tax on it.

In 2009, this threshold was raised to $3.5 million.

After that, it was further increased to $5 million.

And in 2017, when Donald Trump became the President,

this exemption limit was raised to $11.5 million.

It means that only an estate whose value is more than $11.5 million

would be subjected to the Estate Tax.

And it is only for one individual.

For a married couple,

this exemption limit is $23 million.

Even rich people may not have to pay this tax.

only 0.001% of the super-rich people need to worry about this tax.

Due to this,

in America in 2019,

only 2,570 Taxable Estate Tax Returns were filed.

Only about 2,500 people paid this Estate Tax.

But since it is taxed at 40%,

and is levied on values about such a high threshold,

the government's revenue from this

was at $13.2 billion.

The government earned quite a hefty amount.

Since Joe Biden became the US President,

his party, the Democrats, have proposed

that the exemption limit is reduced.

That it should be brought back to $5 million.

The exemption limit during 2010.

It is estimated that if it is done,

then the government can earn $52 billion from this tax,

in the next 5 years.

$13.2 billion sounds like a large number,

but in reality, it is approximately 0.5% of the total tax revenue of the government. 

On the other hand, in the United Kingdom,

The inheritance tax is at 40% currently.

But the exemption limit of this tax is only £325,000.

This limit is quite low.


nepotism


The average people and the upper-middle-class people

would need to pay this tax.

Although, it does have another exemption,

that if a husband transfers his property to his wife,

they wouldn't have to pay this tax then.

And as for children and grandchildren,

if they are inheriting the property,

then they have a higher exemption limit at £500,000.

The revenue from the inheritance, gift, and estate taxes in the UK, 

is slightly more than that of the US,

as a percentage of total tax revenue.

But it is also around 0.6% to 0.7%.

Overall, if we look at Europe,

in most of the Western European countries

an inheritance tax or an estate tax exists.

But the exemption limit and the rate of tax differs from country to country.

But one thing that is quite common among these countries

is the percentage of the government's revenue that comes from these taxes.

The range in these countries

lies around 0.5% to 1%.

But there are some exceptional countries.

Countries like France and South Korea,

where the revenue from the inheritance tax or estate tax

is more than 1% of the total tax revenue.

The inheritance tax in France works differently.

The person that passed away,

wouldn't need to worry about how this tax would be paid by his administrators,

instead, this tax is levied on the beneficiaries. 

The person benefiting from the inheritance,

would need to pay the tax.

This is also a progressive tax.

It ranges from 5% to 60%.

Even here, inheritance between husband and wife doesn't attract the tax.

But if some property or anything is passed on to the children,

then the tax-free allowance is only at €100,000.

The exemption limit in France is very low.

Even middle-class people need to pay this tax.

They have to struggle with this tax as well.



On the other hand, there are several countries like India

that used to have this tax earlier 

but they don't have it anymore.

Like Norway, Sweden, Singapore, Mexico, Kenya, and Israel.

Let's take Israel as an example.

The economy of Israel was liberalized around the same time as India.

India and Israel got independence around the same time.

And while India abolished this tax in 1985,

Israel had done it in 1981.

The reasons for abolishing this tax were quite similar.

The economies of the two countries weren't liberalized yet.

They didn't have a significant private sector,

so there weren't many superrich people.

There were some super-rich people indeed

but they were few in numbers.

So the administrative cost was quite high for Israel similar to that in India.

The law was quite complicated.

And the revenue wasn't much.

There are also countries like Norway that have abolished the inheritance tax

but Wealth Tax does exist there.

At 0.85%.

There are several rich and famous people

who have openly supported inheritance tax.

Bill Gates, who calls himself the biggest proponent of Estate Tax.

Additionally, Warren Buffet.

When he was asked in 2017,

"Whether Estate Tax should be abolished in the USA?"

He said that it would be a huge mistake to do so.

Salesforce's co-founder Mark Benioff says

increasing these taxes would benefit the entire country.

The money that they'd generate from this,

could be used for improvement in education and healthcare.

And to fight climate change.

But perhaps the biggest argument in favor of this tax is that

the inequality generated due to Capitalism,

the 'money begets money concept 

 that I talked about in an older post,

it can be avoided to quite an extent,

and more equality can be brought into society.

Many people call this the Robin Hood Tax,

because this is the same as taking from the rich and distributing among the poor.

On the other hand, some people call it the Nepotism Tax.

Once it was also known as the Paris Hilton Tax.

Paris Hilton is the great-granddaughter of Conrad Hilton.

He was the founder of the global company Hilton Hotels.

Many people consider Paris Hilton to be a great example

of how a person can become rich without doing anything, simply be inheriting.

Can even get famous.

People claim that she doesn't have much acting talent.

Or any singing talent.

But since she inherited so much wealth,

the starting line for her was much ahead of that for an average person.

Now let's look at the argument of the other side.


What can be the adverse effects of levying inheritance tax?

Why shouldn't we do this?

Perhaps the biggest argument against it is that

the revenue generates from it is negligible.

As you saw, the range is between 0.5% to 1%.

Only this percent of tax revenue is generated from it in the countries where it is in force. 

The amount is perhaps quite low.

And the amount of work that the government would need to put in to bring it into effect,

the administrative cost to the government,

would be burdensome.

Second, many businessmen argue that

inheritance tax is a Death Tax in reality.

We need to pay so many taxes while we're alive.

Income Tax or the Capital Gains Tax,

and even in death,

when we are trying to leave this world,

even then a tax is levied on us.

"In India, we work so that our children and grandchildren... it's for them.

We don't really consume more than a very small percentage of our income.

And I think, across this room, you can go and look at families

what they spend on themselves personally is a very small fraction."

These businessmen say that while they work hard during their lives,

for whom are they doing it?

For the sake of their children.

The money that they earn,

they should be free to spend wherever they want to.

If they want their children to inherit it,

then it is their choice.

The government needn't interrupt.

If all the wealth they've accumulated over their lives is taxed,

then it would demotivate them completely.

Why would they want to earn more and more?

Why would they work hard?

"Anything that dampens the environment for entrepreneurship,

is not a good idea for India.

That is for sure."

The third argument that is brought up is that

it would bring a slowdown in the economy if people don't work with total efficiency and motivation.

But this argument doesn't fit well.

Because in all the studies regarding this,

shows that it doesn't impact economic growth.

Here, I'd like to ask you.


What do you think?

Are you in favor of this or against it?

You have heard the arguments of both sides.

Comment below.

Also, tell me about your argument in favor or against.

In my opinion, the matter is hinged upon three things.

First, the potential tax revenue that the government can get from this.

Second, the expenses the government would have to incur to implement it and for its maintenance.

And third, how easily would people be able to find loopholes in it?

If there is no gift tax,

giving gifts would be a loophole to avoid the inheritance tax.

So almost everyone would be able to avoid paying this tax.

So it wouldn't make any sense to implement it.

If this tax is brought back, Gift tax should be brought back as well.

And both of them should have separate exemption limits.

The government would then have to measure it out

would have to calculate whether the administrative costs spent on it

and the revenue from it,

is worth it?

If yes, then it should be levied.

If not, it shouldn't be.

And finally the third would be,

it would make no sense to levy it,

if its exemption limit is so low

that middle-class people would need to pay this tax.

Then the purpose of this tax ends.

The purpose of this tax is to prevent people born into wealth from taking advantage of it.

But if even the middle-class people start paying this tax,

then what purpose does it serve?

If the exemption limit is so low as it is in countries like France.


CONCLUSION:

But there are definitely some points to be considered here.

I hope you found this post informative.

Let's meet in the next post.

Thank you very much.

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