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A COMPARATIVE STUDY ON THE POSITION OF INHERITANCE, WEALTH AND GIFT TAXES IN THE PRESENT TIMES BY – SWETHA R S
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A
COMPARATIVE STUDY ON THE POSITION OF INHERITANCE, WEALTH AND GIFT TAXES IN THE
PRESENT TIMES
AUTHORED BY – SWETHA R S
ABSTRACT
Taxes in general are necessary for the
smooth functioning of the government as well as the development of the country.
It is an inevitable responsibility of every taxpayer and is inherent in nature.
Among the wide range of taxes that are levied when it comes to property and
assets inheritance tax, gift tax and wealth tax play an important role.
Inheritance tax is levied on the properties and assets inherited by the legal
heirs from a deceased person. Wealth tax is levied on the net worth of assets
owned by a taxpayer. Gift tax on the other hand is levied at a specified rate
in respect of the gifts made by a person. One main purpose of these taxes is to
prevent the accumulation of wealth in the hands of few people. However to
encourage investments and boost the economy many countries have abolished these
taxes and those that levy it provide various exemptions that the revenue
generated is often negligible in comparison to those generated by other taxes.
In India inheritance and wealth taxes were repealed however gift tax is levied
under the Income Tax Act, 1961. The abolition was for a number of reasons
including inefficiencies in implementation. This is also the situation in
several other countries that exempt taxpayers from inheritance, gift and wealth
taxes.
Thus in this paper, I shall analyse
the position of inheritance tax, gift tax and wealth tax in different
jurisdictions and its importance and efficiency in the present era. I shall
also analyse if the time has come for its reintroduction and focus on its
reforms for better administration.
Keywords:
OECD- git tax- inheritance tax- wealth tax- revenue- tax administration
INTRODUCTION
Taxes play a vital role in the
advancement of a country’s economy and in the development of a country as a
whole. Generally the governments levy a number of taxes for different reasons.
Among them there are a few taxes that are controversial in nature whose
implementation is still questioned till date. Such taxes are namely inheritance
tax, wealth tax and gift tax. Inheritance, wealth and gift taxes are age old concepts
but over the years their significance drastically reduced and countries began
questioning the integrity of these taxes. This subsequently led to their
abolition in certain countries or the reduction in tax rates in such a way that
it is insignificant in comparison to other taxes. However due to globalization
the world has seen a tremendous increase in the wealth inequality notably over
recent decades and especially during the pandemic times inheritance tax, wealth
tax and gift tax has sparked a debate among countries and even at the OECD
level on its reformation and implementation. In this context these taxes could
have an important role to play in generating additional revenue for government.
In India inheritance and wealth taxes
were repealed however gift tax is levied under the Income Tax Act, 1961. The
abolition was for a number of reasons including inefficiencies in
implementation. Taking into account all the ups and downs of these taxes one
thing which could be understood is that there is a fine line between its
success rate and its downfall. Looking at the positive side, those countries
that continue to implement these taxes have been fairly successful owing to a
strong and efficient tax administration policy. In this study I’ve tried to analyse
the position of inheritance tax or estate duty, wealth tax and gift tax in
different jurisdictions with specific focus on France, UK and USA.
The jurisdictions of France, UK and
USA are compared with India as France has successfully implemented these taxes
since the beginning without abolishing them. The various reforms brought in its
tax system over the years prove the stability of administration from which the
Indian tax system can gain insights on implementing these taxes. The tax system
of UK is compared as the laws of UK and India are similar in structure and
since UK has an inheritance tax system in practice it could help create a path
for India in introducing the same. USA has an estate duty tax system in place
similar to that of the estate duty in India before its abolishment. The economy
of India is not the same as it was when these taxes were abolished. As a
rapidly growing economy and considering the pandemic and post pandemic era
India can learn from the past mistakes and the reforms introduced to ensure the
smooth administration of inheritance, wealth and gift taxes by the French, UK
and USA tax systems before implementing the same in the country.
INHERITANCE TAX, GIFT TAX AND WEALTH TAX IN DIFFERENT
JURISDICTIONS
1.
INDIA
Initially India implemented the
Estate Duty (1953- 1985), Gift Tax (1958- 1998) and the Wealth Tax (1957- 2015)
but they were subsequently abolished due to the inefficiency in administration.
On its enactment Estate Duty proved to be beneficial however eventually the drawbacks
overpowered the benefits and was finally abolished in 1985. With the aim to
reduce tax evasion and to divide the tax burden more equitably gift tax was
introduced in 1958 however owing to its failure to achieve the intended results
it was also dropped[1].
Currently gift tax is made a part of the Income Tax Act, 1961. Similarly wealth
tax was also abolished to simplify the tax structure. It is safe to say that
the progressive taxation of wealth among other measures played an important
role in reducing inequality[2]
during the course of implementation of these laws.
Commenting on the failure of these
taxes in India, tax experts state that capital taxes like wealth tax and gift
tax are important direct taxes and if they are properly devised and efficiently
administered then it would act as a check on tax evasion in India[3].
The negative impact due to the lack of these taxes is pointed out by Tarun Jain
in his work, ‘Taxability of corporate gift of shares’[4].
In a commentary on inheritance tax in India, Amarendu Nandy, Abhisek Sur and
Santanu Kundu conclude that inheritance tax fulfils the primary object of
eliminating wealth inequality across generations however it will require
massive efforts on the part of the government[5].
Further they are of the opinion that though inheritance tax has only a marginal
impact it could still be beneficial in addressing the distributional inequality
that continues to exist in India.
The rationale for including wealth
tax in the form of additional surcharge within Income tax is to simplify the
complex tax procedures that were burdensome to the tax payers. Inheritance tax
and wealth tax also increased tax evasion and non-compliance. If the government
tried to rectify these drawbacks it only creates additional burden on the authorities
to check what each tax payer has inherited and what each individual is holding
over the years[6]. This
process will only result in increased cost to trace and penalize the
defaulters. The Wealth Tax Act, 1957 was not favourable to private enterprises
which subsequently had a negative impact on the economy of India. The current
system of collecting surcharge however is more beneficial in comparison as the
tax payers don’t have to struggle with the complex regulations. There is also
no additional administrative burden on the tax department which was present in
the previous tax regime[7].
Another reason for bringing wealth tax within the purview of income tax is
mainly because the separate wealth tax imposed did not yield the desired
results. But, an additional surcharge of 2% proved advantageous as it ensured
definite revenue to the government.
Though the new system is better in
comparison to the old wealth tax regime, considering the development of the
country in the recent years and the advancement of technology in the tax
department the drawbacks of the wealth tax act, 1957 can be easily overcome.
Moreover, the Covid-19 pandemic is a lesson of how such surcharges on the
superrich have very little effect. This is because even in the pandemic the
rich continued to increase their wealth while the remaining population
struggled for their day to day living. The pandemic is one instance that shines
light on the ever widening inequality in wealth. Though the additional
surcharge was a success in comparison with the old wealth tax system it is not
successful enough to meet the demands of the present. Therefore, abolishing the
previous wealth tax and increasing the surcharge has a trifle outcome than what
was initially imagined.
In a similar manner the existing Gift
Tax Act, 1958 was abolished and incorporated into the Income Tax Act, 1961 as
Income from other sources. This decision by the government to tax gifts as
income is favourable for the reason that it reduces the complexity in
administration. Taxing gifts according to the income tax slab rates reduces the
burden of the tax department and ensures better compliance on part of the tax
payers. One shortcoming in this approach is the presence of numerous exemptions
that reduce the achievement of this reform. Certain exemptions provide an
opportunity to those tax payers who wish to avoid tax burden like that of
gifting to relatives as it does not attract tax no matter the value of the
gift. Hence, even if replacing the gift tax act with a provision within income
tax act is a more fitting move on part of the government without amending the
exemptions there will always be ways to exploit it diminishing the intended
success of the reform.
2.
U.K.
The United Kingdom has a much
different approach towards these taxes. Amongst the OECD countries that still
levies inheritance tax United Kingdom is one among very few countries that levy
taxes to the estate of the deceased donors rather than the recipients. Majority
of the countries impose tax on the individuals inheriting the wealth. Another
unique feature of the United Kingdom’s estate tax system is that it is also
among the very few countries that apply flat tax rates to its inheritance tax
instead of progressive tax rates. It has combined both estate tax and gift tax
into a single inheritance tax. This applies to transfers on the death of a
person as well as to certain gifts made by the donor in the course of his
lifetime. The U.K. inheritance tax includes 3 types of transfers namely exempt
transfers, potentially exempt transfers and chargeable transfers[8].
However, no net wealth tax is implemented in the U.K.
Under UK’s tax system when an
individual’s estate and the transfers made out of his estate are calculated and
valued for tax purposes, a period of seven years within the date of the their
death is also included. This is for inheritance purposes. On the other hand an
individual can transfer as gifts in his last seven years of life and it will
not be subject to gift tax. Also certain gifts transferred by an individual irrespective
of the size of the gifts and whether it was transferred during the person’s
lifetime or after his death through will are exempt from gift tax[9].
The leeway of transferring wealth to
others tax free is available to every individual subject to a certain limit on
the amount transferrable. This is called as the Nil Rate band and is currently
£325,000 in the UK. In case of spouses and civil partners the threshold of the
tax free amount that can be transferred is higher[10].
This amount can be transferred to be used on the death of the spouse and is
called as transferrable Nil Rate Band (transferrable NRB). Apart from this
there is also something called the residence nil rate band (residence NRB)
which is applicable when an individual leaves his home to his direct
descendants. Such property is also transferrable and is currently valued up to
£125,000. This value has eventually increased to £150,000 in April 2019 and
£175,000 in April 2020[11].
Any property transferred beyond this amount is subject to estate duty of 40%.
Even trusts have separate inheritance tax system. In case of newly formed
trusts they are taxed on periodic charges as and when the assets are received
or taken out of the trust. Such taxes are payable by the trustees.
Under UK’s gift tax system generally
gifts made to individuals within seven years before the decease of the person
who made the gift transfers are not taxable. However, inheritance taxes may be
imposed on the wealth transferred as gifts within seven years of the
individual’s demise but, the rate at which such gifts are taxed may be reduced
based on the nature of the gift. An interesting feature is that if the
individual transferring gift to another person seven years prior to his death
continues to receive some form of benefit from the property transferred before
his death then such property is treated as if it is still owned by the
individual on his death. There are also certain exemptions from gift tax if
such gifts are transferred for weddings subject to certain value, if the gifts
are worth less than £250 or if the value of the gifts transferred is less than
a sum of £3,000 a year[12].
Sometimes inheritance tax on certain lifetime gifts are immediately chargeable
at a rate of 20% of the value.
3.
U.S.A.
The United States has estate tax in
force rather than inheritance tax. With respect to gift tax, it is levied on
all tangible and intangible properties regardless of its location[13].
The Internal Revenue Service deals with the enforcement of these taxes. Like
the United Kingdom, United States has no net wealth tax. The estate duty which
is charged on the wealth transferred at the donor’s demise also includes those
transferred as gifts during the lifetime of that individual. Like the
exemptions available under the United Kingdom’s tax system here, a certain
value of the estate transferred is exempted from being taxed by the government.
The rate at which the estate duty is levied ranges from 18%-40%. The threshold
limit beyond which estate tax applies is $12.06 million[14].
Similar to UK any transfers made to the spouses are not taxed and are exempted
and any exemption that has not been used can be inherited by the surviving
spouse. With respect to other terms and conditions of taxation, like
deductions, deductions for charitable purposes and other special provisions
remain the same for inheritance and gift taxes.
Initially before making these taxes
permanent, the way in which the estates and gifts were taxed was still in
question. The Economic Growth and Tax Relief Reconciliation Act of 2001 (EGTRRA),
is one among the acts that were introduced to reduce tax. This act facilitated
the gradual reduction and elimination of the estate tax[15].
Under EGTRRA, the estate tax exemption increased from $675,000 in 2001 to $3.5
million in 2009, while the rate of tax fell from 55% to 45%. Though these
exemptions almost led to the abolition of estate tax there was a general
consensus that the wealth transferred will be subject to some form of estate
duty. President Obama’s budget outline proposal was approved and passed by the
House in December 2009 which included within its scope a tax exemption of $3.5
million and a permanent tax rate of 45%. In addition to this, in 2009, Senate
Democratic leaders also concurred to the plan to enact the 2009 rules
permanently. On the other hand the Senate Republican leadership proposed a $5
million exemption and 35% rate. This latter proposal was eventually adopted for
a two-year period, through 2012. The estates of decedents in 2010 had the
option to either opt 2010 or the 2011 rules. Spouses were allowed to inherit
unused exemptions. In short the permanent provisions retained most of the rules
adopted for 2011 and 2012, but with a higher rate of tax.
Regardless of all the above said
exemption levels that were implemented, very few estates are affected by these
taxes. Unlike UK, the United States has a highly progressive estate tax. Not
surprisingly, almost three-fourth of the estate taxes collected by the state is
from descendants belonging to the top 1% of the income distribution. There have
been numerous concerns regarding the estate and gift taxes. One such concern is
that these taxes affect the heirs more directly[16].
`Also there is ambiguity on the direct effect these taxes have on heirs because
without these taxes the accumulation and consumption of wealth is easily
feasible. However, by imposing these taxes the input of work and the level of
savings by the heirs are reduced. Putting aside these minor concerns when we
look at the overall exemptions available there is a $5 million exemption
available for estates that are subject to tax which is basically less than 0.2%
of the estate value. At the interim levels less than 0.1% of the estate value
will be imposed as tax. Therefore, even if certain concerns are raised about
the effect estate taxes can have on businesses especially small businesses, it
can be seen that only a small part of the descendants are affected while the
majority enjoy these exemptions.
4.
FRANCE
France has a long history of taxing
inheritance, gift and wealth. Inheritance tax is imposed on all transfers
regardless of its nature. That is transfer resulting from will, gift, legal
succession are all subject to tax. The respective tax rates are governed by
rules of territoriality[17].
Here the liabilities of the deceased are deducted and the tax is levied in
proportion to the wealth that each beneficiary receives. Though France has high
tax rates it also provides adequate exemptions, allowances and other benefits.
In 2018 the then French wealth tax was replaced with real estate wealth tax[18].
The French taxation of inheritance, gift and wealth taxes differs from the
United States tax system for three reasons. Unlike US in France the French laws
provide a predetermined set of rules through which the estates are apportioned among
the heirs. Secondly, France having developed a progressive inheritance tax
system has mandated that the tax rates and tax exemptions available to a
successor will be based on the portion and value of the wealth received by him
and the kin relationship that he has with the deceased. Finally, the successors
get gift benefits from preferential tax schemes and gift taxes are based on the
net assets received by each recipient.
Since 2007, spouses have been fully
exempted from taxation. The tax rates are however high ranging from 35% to 60%
with low tax exemptions[19].
Taxation of wealth in France has evolved through the years since its first
inception. Until the beginning of the 20th century, gifts and inheritance were
taxed proportionally on the basis of separate schedules. Eventually inheritance
taxation was implemented as a progressive tax in 1901 while taxation of gifts
became progressive in 1942. And so since 1942, taxation of gifts and
inheritances are subject to a unified schedule. In addition to this an estate
tax exemption was also created in 1952. This exemption applied to the entire
estate in general and varied depending on the number of inheritors to the
estate. These exemptions further evolved and since 1960, tax exemptions were
individualized and subject to numerous changes over the course of its
implementation.
One main feature of the French
inheritance tax system is such taxes are due and apply to all transfers at the
time of the death of the donor regardless of whether such transfers were the result
of a legal succession, a will or a gift. The jurisdiction where such taxes are
to be paid is determined by territoriality rules. As per the territoriality
rule these taxes must be paid in France if the deceased was a French resident,
if the heirs are French residents or if the assets are located in France[20].
The rule of law which is applied to determine the taxable estate is the French
civil law rules. Under this system any mortgage or debts of the descendants are
deducted from the estate assets that are transferred.
French law imposes the impôt sur la
fortune (ISF) on the French residents. It is a wealth tax which is implemented
on a worldwide basis subject to certain exemptions on the French residents and
on non-residents owning French property. As per this scheme the individuals
subject to tax are obligated to disclose the net value of the assets they own
and are only taxed on the value of those assets declared. The threshold of
value of assets for taxation is equal to or more than €1.3 million. The current
wealth tax which is in force in France imposes a tax rate ranging from 0.5% to
1.5%. It is important to note that the French wealth tax cannot be deducted
against taxes imposed in US for its residents or nationals. This means that US
individuals who are non-residents in France, who own property in France, are
obligated to pay the French ISF tax as per the French laws for the French
property that they own[21].
However, such tax is applicable only if the net value of the properties is over
€1.3 million. While determining what the net value of properties are, debts and
mortgage are also taken into account.
|
COUNTRIES
TYPES
OF TAX
|
FRANCE
|
INDIA
|
UNITED KINGDOM
|
UNITED STATES OF AMERICA
|
|
INHERITANCE TAX / ESTATE DUTY
|
0% - 60%
|
NA
|
40%
|
18% - 40%
|
|
WEALTH TAX
|
0% - 1.5% on net value above € 1.3 million.
|
Additional surcharge of 2% when the
annual taxable income exceeds Rs.1 crore.
|
NA
|
NA
|
|
GIFT TAX
|
0% - 60%
|
Gifts exceeding Rs.50,000 are
subject to income tax.
|
40%
|
18% - 40%
|
CONCLUSION
The
taxation of intergenerational transfers that includes, inheritance and gift
taxes is a much-debated topic in the public sphere. A major issue that is
argued against the imposition of inheritance tax or any tax on the wealth
accumulated is the claim that such wealth belongs to the family and that it has
been accumulated over the years through the family’s own efforts. The general
notion is that the wealth generated by a family through generations is the sole
wealth of that family alone and so the authorities or the government has no
right to intervene and impose taxes.
Though this argument holds true to a certain extent, it can be easily
rebutted as the basic principles of taxation suggests that individuals should
be taxed according to their ability to pay[22].
Therefore applying this principle, individuals who accumulated wealth by
utilizing the public resources should contribute in a larger extent for the
welfare of the public. It is their basic duty. In addition, intergenerational
transfers of wealth only boost inequality within the society and tip the scale
of opportunity towards the rich depriving the others of the same. This holds
true as people with more resources have more opportunities as compared to those
who don’t.
In a real world filled
with competition, obstacles and uncertainties it may take a number of taxes to
meet social goals of equality and equal opportunity. To achieve this feat
estate taxes may have a meagre but critical part in the government’s tax
treatments. Estate tax also has the potential to add to progressivity in a
manner that income tax or other taxes cannot easily do. Taxing the wealth of
the deceased is much easier and efficient than taxing the living as the wealth
is only taxed once after the individual’s demise. The supposedly negative
aftermath of the estate duty such as its effects on saving, compliance costs,
and small businesses lack substantial evidence supporting such claims and are
more often grossly overstated[23].
This is because such difficulties arise in all forms of taxation and a good tax
system and effective tax administration can overcome such meagre difficulties.
Thus, an
inheritance taxation rate system designed to increase compliance and efficiency
should not only focus on the wealthier individual’s higher ability to pay but
must also have sufficient consideration to provide preferential treatment to
family members. By taking into account both sides of the argument in
implementing a developed taxation system, an inheritance tax regime with the
necessary reforms is justifiable[24].
In other words, a tax system that includes on one hand, the advancement of tax
rates on the basis of affinity to the donor, and on the other hand, high
progressivity depending on the value of inherited wealth, may have the aspects
of being an appropriate solution to tackle the problem of wealth inequality.
This is because it fulfils the essential requirements. Adequate and efficient
exemptions can also boost the necessity of inheritance tax, gift tax and wealth
tax. However, the amount of exemptions should be limited in order to alleviate
the adverse effects on tax revenues.
[1] Ajay Agashe, Mokshada Todurkar,
‘OECD Report on Inheritance Tax & Indian Experience’ (taxsutra, 2 July
2021)
[2] Rishabh Kumar, ‘Top Indian Wealth
Shares and Inheritances 1966-1985’ (July 2018) Research Gate
[3] Manoj Pandey, ‘Direct Tax Reforms
In India- Policy Initiatives and Directions’ (Master Thesis, University of
LJUBLJANA 2006)
[4] Tarun Jain, ‘Taxability of
Corporate Gift of Shares’ (January 2012) International Fiscal Association India
Chapter Conference 2012
[5] Amarendu Nandy, Abhisek Sur,
Santanu Kundu, ‘The Case For Introducing Inheritance Taxin India’ (2018) 4(1)
Journal of Tax Administration
[6] Rajalakshmi Nirmal, ‘Why Jaitley
decided to scrap wealth tax’ (BL, 24 January 2018)
[7] Anonymous, ‘Wealth Tax in India’
(bankbazaar)
[8]Anonymous, ‘Worldwide Estate and
Inheritance Tax Guide 2021’ (EY 14 June 2021)
[9] Antony Seely, ‘Inheritance Tax’
(House of Commons Library, o8 April 2021)
[10]Emma Agyemang, ‘The Future of UK
inheritance tax- lessons from other countries’ (Financial Times, 28 May 2021)
[11] Office of Tax Simplification, Inheritance Tax Review- first report:
Overview of the tax and dealing with administration (November 2018) <https://assets.publishing.service.gov.uk/government/uploads/system/uploads/attachment_data/file/758367/Final_Inheritance_Tax_Report_-_web_copy.pdf>
[12] Ibid.
[13] Anonymous, ‘Worldwide Estate and
Inheritance Tax Guide 2021’ (EY 14 June 2021)
[14] Internal Revenue Service
[15] Congressional Research Service, Recent Changes in the Estate and Gift Tax
Provisions, (19 October 2021)
[16] Leonard E. Burman, Robert McClelland, Chenxi Lu, ‘The
Effects Of Estate And Inheritance Taxes On Entrepreneurship’ Tax Policy Center
(05 March 2018)
[17]Anonymous, ‘Worldwide Estate and
Inheritance Tax Guide 2021’ (EY 14 June 2021)
[18] Ibid.
[19] Bertrand Garbinti, Jonathan Goupille-Lebret, ‘The
Impact of Inheritance and Transfer Taxation on Economic Behaviours and
Inequality: A Literature Review for France’ ifo DICE Report (2018)
[20] Leigh-Alexandra Basha, Jean-Marc
Tirard, ‘Buying a Piece of France’
[21] Ibid.
[22] Stefan Jestl, ‘Inheritance Tax
Regimes: A Comparison’ (2020) 45(3) Public Sector Economics
[23] Joel Slemrod and William G. Gale,
‘Rethinking the Estate and Gift Tax’ (Brookings March 21 2001)
[24] Stefan Jestl, ‘Inheritance Tax
Regimes: A Comparison’ (2020) 45(3) Public Sector Economics
Article Information
A COMPARATIVE STUDY ON THE POSITION OF INHERITANCE, WEALTH AND GIFT TAXES IN THE PRESENT TIMES BY – SWETHA R S
Authors: SWETHA R S
- Journal IJLRA
- ISSN 2582-6433
- Published 2024/03/27
- Issue 7
About Journal
International Journal for Legal Research and Analysis
- Abbreviation IJLRA
- ISSN 2582-6433
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