Inheritance Tax: Rich, Middle Class, Poor, Who Pays Most Taxes? Rising Case Of Personal And, Indirect Tax

As the election in India continues at full-scale, debates have escalated related to an inheritance tax. Before understanding what is an inheritance tax or if it is even used in India as a tax structure, there is a growing need to understand who pays the most taxes in the country. Direct tax collections in India are at all-time high, but the baffling case is the rising personal tax and indirect tax collections. Is it concerning? Its for you to decide!

How did we get here, to the point inheritance tax, a notion used in the western countries such as the United States, is the talk of our town?

Both the ruling BJP party and the long-term rival Congress party are in a riff-off since last week. PM Narendra Modi has recently reportedly alleged that the Congress party is planning to introduce inheritance tax rates as high as 55% to take away properties left by the people for their children. At the opposition, Congress has denied that they're planning any such tax and instead expressed concerns over the rising wealth inequality in the country.

PM Modi's remarks come after the chairman of the Indian Overseas Congress, Sam Pitroda who was also a former advisor to former-PM Manmohan Singh, who put out the idea of an inheritance tax. Inheritance tax is neither mentioned in Congress' manifesto and is neither in effect in India.

So what is the structure of income tax in India? Who pays the most tax rates?

Income tax is an obligatory duty that every Indian citizens must fulfil every year to the revenue bucket of the country's government which is further as funds for economic and welfare of the people.

There are two types of tax structure aka direct and indirect tax.

Direct tax are further segregated into two categories. These are directly imposed on individuals such as salaried or working class, and secondly on corporates. Here, it is customary to pay a certain tax rate which varies depending upon the income generated every fiscal year. Here, individuals and corporates directly pay taxes to the imposing authority which would be the CBDT and Income Tax Department.

The indirect is levied on every citizen on their purchase and sale of goods and services. Consumers pay a certain taxes on their goods and services to intermediaries who then pay the tax collected from these buying and selling to the government. Hence, an indirect way of paying tax.

In simple words, you cannot shift your tax to another person when it comes to direct tax.

Amidst the debate on inheritance tax, there has been a growing concern related to the gap stretching between personal tax and corporate tax, alongside huge surge in indirect tax.

As of February 2024, data revealed that the gap between personal and corporate tax surged to a new peak of the gross tax to the tune of 28%. What has happened is that salaried individuals are paying more taxes than the companies! Yes, you have read it right!

Data from Finance Ministry showed that the net tax collections for FY24 reached to Rs 19.58 lakh crore, compared to Rs. 16.64 lakh crore in the preceding Financial Year i.e. FY 2022-23, representing an increase of 17.70%. This has surpassed the budgeted estimates of 18.23 lakh crore for FY24, which was later revised to Rs 19.45 lakh crore. The provisional Direct Tax collections (net of the refunds) have exceeded the BE by 7.40% and RE by 0.67%.

Further, the data showed that gross direct tax collection stood at Rs 23.37 lakh crore showing a growth of 18.48% over the gross collection of Rs. 19.72 lakh crore in FY 2022-23.

Who paid more taxes in FY24? Personal gross tax collection stood at Rs 12.01 lakh crore for FY24, while the net amount stood at Rs 10.44 crore. Tax collected from salaried individuals rose by 24.26% in gross, and 25.23% in net for FY24.

In the case of corporate tax, gross collection was at Rs 11.32 lakh crore with growth of 13.06%, and net collection at Rs 9.11 lakh crore with growth of 10.26% for FY24.

The gap between personal and corporate tax collection for FY24 alone is of Rs 1.33 lakh crore.

As per reports, there has been steep decline in corporate tax collection due to income tax rate cuts introduced in September 2019 by BJP party.

Then there is the case of rising indirect taxes, while direct tax collections have shown more or less sea-saw like patterns over the past decade.

As per the Revenue Department data, the indirect tax collections have been rising drastically since 2017-18 where it stood at Rs 9,11,653 crore. By end of FY23, the indirect tax collection was at Rs 13,81,934 crore. This will be the third consecutive time indirect tax has stayed above Rs 10 lakh crore mark.

Coming to FY24, GST collection alone has marked a milestone in FY24. Finance Ministry last month said, FY 2023-24 marks a milestone with total gross GST collection of Rs. 20.18 lakh crore exceeding Rs 20 lakh crore, a 11.7% increase compared to the previous year. The average monthly collection for this fiscal year stands at Rs 1.68 lakh crore, surpassing the previous year's average of Rs 1.5 lakh crore. GST revenue net of refunds as of March 2024 for the current fiscal year is Rs 18.01 lakh crore which is a growth of 13.4% over same period last year.

Meanwhile, the number of taxpayers have surged to 93.7 million in FY23, compared to 52.6 million that was in FY14. As per a report by The Hindu, it is revealed that the bulk of those who file personal income tax earn an annual income of Rs 1 lakh-Rs 5 lakh. Richer individuals who earn more than Rs 50 lakh are few and far between.

Does India have inheritance tax?

India has seen the days of inheritance tax, however, it was widely unpopular so had to be removed in the mid-1980s. It was Rajiv Gandhi government that abolished the inheritance tax regime in 1985.

As per LiveLaw report,Inheritance tax, often dubbed the "death tax," has resurfaced as a topic of debate in India following recent comments by Indian Overseas Congress chairman, Sam Pitroda. It was levied as per Estate Duty Act of 1953, but was subsequently repealed because of not achieving its objective of "curbing the social inequality". While many academics are opposed to the inheritance.

So what is inheritance tax?

Just as the name suggests, an inheritance tax is imposed by some states on the individual who has inherited assets. In contrast to an estate tax or wealth tax, an inheritance tax is paid by the recipient because they have bequest assets rather than the estate of the deceased.

Typically, estate tax are imposed on the person's right to transfer his or her assets after their death. Meanwhile, wealth tax is something that is levied on net wealth owned by a person on the valuation date.

Its not commonly used in US either, however, about six states do have inheritance tax by end of 2023.

As per Investopedia, whether an inheritance will be taxed, and at what rate, depends on its value, the relationship of the beneficiary to the person who passed away, and the prevailing rules where the decedent (the person with the estate) lived. That is, inheritance taxes may be assessed by the state or states where the decedent lived or owned property if those states impose an inheritance tax. As a beneficiary, your state's inheritance tax rule, if any, doesn't apply.