Proposal to abolish HUF as a taxable entity

Proposal to abolish HUF as a taxable entity

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India is a secular country which recognizes & respects all the religious of the World. However, there is no uniform civil code in the country. Hindu Undivided Family (HUF) is a term used to denote a family of Hindu with common ancestor of the lineal male offspring together with their spouses & daughters. Hindu law recognizes the concept family unit & also the prevailing old practice of pooling of efforts, skill & resources by the family members for the benefit of all the members in the family. According to the colonial interpretation, “HUF was a joint family that was held together by strong ties of kinship and entailed a variety of joint property relations among the members”. From taxation perspective, HUF is altogether separate tax entity as it is treated as a ‘person’ under section 2(31) of the Income-tax Act, 1961.

HUF is a part of Hindu Tradition & culture which was rightly recognized by Britishers almost 100 years back while implementing Income Tax Act-1922 by making HUF as a separate tax unit. Subsequently, after due consideration, its concept was well recognized & incorporated in the Income Tax Act-1961.  One needs to understand that Income Tax Act has never created a new tax entity but it has merely recognized the existing entity under the Hindu Religion. The concept of HUF finds its roots in the Hindu joint family system.

Recent consultation paper of Law commission for “Reform of Family Law” proposes to abolish the concept of Coparcenary under the Hindu Law. It has generated arguments of varied nature. The proposal to abolish Coparcenary is considered as a step to abolish the system of HUF altogether.

What would be the proposed tax treatment if the present system of HUF is abolished?

As soon as coparcenary is abolished, system of HUF would inevitably collapse. In CIT & Ors. Vs. N. Ramanatha Reddiar (HUF) & Ors., it was held that once the entity of Joint Family is being abolished by a competent legislature, the Income Tax Department had no right to look into the status of a ‘non-existing‘ entity. In short, Income of HUF will cease to be taxed as the income of the HUF.

Two probably options in such case could be as under:
i] Income of HUF could be divided amongst the family members and the family members would be made liable to pay the tax on their income after clubbing income of the HUF so divided.

ii] Income of the HUF could be clubbed with the income of Karta by incorporating suitable clubbing provision u/s 64 of the Income Tax Act-1961. Presently clubbing provision in the Income Tax Act already exists for clubbing income of minor child, income of spouse from investment of amount received from spouse without adequate consideration etc.

Obviously, the second option appears to be better as it will be easy to comply with.

In some parts of the world, there exists a concept of taxing the family rather than taxing an individual. Taxing the family unit (rather than individual) results in more equitable tax impact at micro level. If existing structure of HUF is proposed to be abolished then taxing the family unit as an alternate option can be explored. But, it will involve the total structural change in the existing system of taxation.

One of the key reasons pointed out by the Law Commission for HUF abolition is- HUF is used as a tool for tax avoidance. Another reason pointed for its abolition is the presence of anomalies & lacunas in the Law.

As far as the first objection is concerned, after the Direct Taxes Enquiry Committee Report- 1971, the tax laws were amended to de-recognize the concept of partial partitions of HUFs as it was viewed as a primary tool of tax avoidance. Whether HUF helps in tax saving or tax management? To some extent, yes but not to a great degree considering the cost & other implications involved. Further, the younger generation does not prefer to use it as a tool of tax planning due to certain complexity & ambiguities. The numbers of HUF’s are much lower as compared to the number of Individual taxpayers.  Taxation policy should not merely be based upon socio- economic objective; it can well be used to promote the genuine, authentic, well established culture & trend.  Abolition of HUF may not result in increase in the sizeable revenue for the country but it is surely going to nail down the established culture of HUF.

As far as second objection is concerned, anomalies & lacunas could be removed by carrying out the required amendment, proper drafting, and visions of the law maker.

In short, the reasons pointed out by Law Commission for abolition of well established & accepted HUF culture appears to be improper. Some feels that continuity of HUF is necessary to protect the cultural & social fabric of the country. The decision to abolish the HUF should not be taken in isolation on monetary aspects but should be based upon other aspects and impacts over the country. There appears to be no argument for disrupting with the concept of HUF.  Already there exists a concept of community of property for all those who are governed by the Portuguese Civil Code whereby half of the income is taxed in the hands of each spouse. Even if the abolition is proposed, it would be better if the same is done only at the time of implementing uniform civil code in the country.

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