The law commission of India has issued a consultative paper “Reform of family law” on 31st August 2018. Under the chapter on “Succession and Inheritance” it has suggested for abolition of the Hindu Undivided Family (HUF) as a tax entity. This has stirred a hornet’s nest in the country. Let us discuss in detail what is the exact proposal and what are the consequences if the suggestion finds place in the law book.
In good old days HUF represented as a joint family which stayed together under one roof and had joint property relationship amongst themselves. It has also been run and recognised as a business units for quite some long time. Since the income of the HUF was supposed to belong to the family members and was meant to be used for maintenance of its members, the Britishers recognised HUF as a separate tax unit almost 100 years back under Income Tax Act, 1922 which was replaced by the present Income Tax Act, 1961. Since then HUF has continued to be recognised as a separate tax entity. HUF is entitled to have various tax benefits like a separate basic tax exemption limit as well as benefit of tax benefits under various sections like Section 80C,Section 80D, Section 80DDB, Section 112A etc.
The Law commission has observed that the status of HUF as a separate tax entity has been used for tax evasion. It’s observations are based on recommendations of the Direct Taxes Enquiry Committee Report 1971, popularly known as Wanchoo Committee. The Law Commission has come to a conclusion that continuation of the institution of HUF on the ground of deep-rooted sentiments at the cost of the country’s revenues is not justified and therefore has recommended that HUF as separate tax entity should be removed.
Most of us are not aware about the exact process which is followed to make laws in our country. The document under which the proposal, to remove the HUF as a tax units, mooted by the law commission is through a “Consultation Paper”. As the name itself suggests it is just a consultation paper for discussion among various groups and stakeholder. The proposals contained in the document will be discussed among various groups and suggestions/comments about pros and cons as well as feasibility of implementation will be made to the Law Commission. Based on the feedback received, the Law Commission may or may not make the ultimate recommendations to the Ministry of Law and Justice with a draft of the law. The ministry then will again weigh the proposal and may or may not decide the law to be placed before the parliament. The parliament will discuss and may even refer the bill to select committee for further discussion. After the bill is passed by both the houses of parliament, it is sent to the president for his assent and then only it becomes law of the land. So there is much proverbial gap between the cup and lip.
It may take years altogether to get this recommendation in the form of law of the land even if it is ultimately decided to implement this suggestion.
The concept of HUF applies to all the people except those following the religion of Parsi, Muslim, Christian and Jews, thus the number of people covered under the board definition of Hindu for the purpose of definition of HUF constitute a significant proportion of the population. As everyone who understands the Indian democracy knows it well that every political party takes its decision on the basis of vote bank politics and no political party worth its salt can antagonise large section the vote bank.
What will happen to the existing HUFs in case the proposal of removal of HUF as a tax unit eventually takes the form of law? To find out the answer, I examined the provisions of Kerala Joint Hindu Family System (Abolition) Act, 1975 which became effective in the entire state of Kerala from 1976. The legislation provided for de-recognition of the institution of HUF within the state of Kerala. Section 3 of the Act provides that after passing of this legislation no Hindu will be entitled to claim any interest in the property of an ancestor during his or her life-time just because he is born in the family of the ancestors. Moreover the law of Kerala provides that all the assets of any existing HUF as on the date of passing of the law shall be deemed to have been fully divided amongst all its members and they shall hold any immovable property as tenant in common as full fledged owners from the date of enactment of the law.
The law as and when implemented for de recognising the HUF as a tax unit may provide for rules on the similar lines deeming that a full fledged partition of the HUF has taken place in metes and bounds amongst all its members. So the income arising to his/her share in the HUF asset/properties shall be included in the income of such members in respect of the assets which can not be divided/distributed amounts the members.
So from the above discussion it becomes clear that the taxpayers who have HUF as tax unit need not do anything for now and may continue to enjoy the tax benefits available to HUF as tax unit as the proposal may not eventually find the light of the day in the form of law or even if becomes a law, it will be years and years after from today and nothing needs to be done by you not even to worry about the proposal.
Balwant Jain is a tax and investment expert and can be reached on [email protected], @jainbalwant on twitter.