Uniform Civil Code: Why it can impact Hindu Undivided Family’s tax benefits

Subject : Polity

Section: Constitution

Context:

The LAW Commission of India has initiated fresh deliberation on a Uniform Civil Code (UCC), which has triggered discussion on the institution of Hindu Undivided Family (HUF) and its separate treatment under tax laws.

Genesis and structure:

The existence of HUF as a legal entity is based on an acknowledgment of customs by the BritishRaj in India.
It was seen as an institution that operated on a strong sense of blood ties and kinship to jointly exercise control over property in Hindu families, and led to business arrangements based on Hindu personal laws rather than contractual arrangements.
As a legal entity, HUF portrayed a dual identity of a family-backed institution and an income-generating entity solely for the maintenance of the family.
For income tax purposes, an HUF consists of all persons lineally descended from a common ancestor, and includes their wives and unmarried daughters.
An HUF has its own Permanent Account Number (PAN) and files tax returns independent of its members.
An HUF has a karta who is typically the eldest male person in the family, and manages its day-to-day affairs. Other members are coparceners; children are coparceners of their father’s HUE.

The historical view:

The Indian Income Tax Act of 1886 recognised HUF under the term “person”.
In an effort to shore up finances for World War I, the British introduced the Super Tax Act, 1917, which recognised HUF as a separate entity for tax purposes for the first time. Super tax was levied in addition to income tax.
The idea of HUF as a distinct category of taxpayer was incorporated in the Income Tax Act, 1922, which formed the basis of the post-independence Income Tax Act, 1961.
The law currently in force recognizes HUF as a person under Section 2(31 )(ii).

Revenue loss:

The Income Tax Enquiry Report of 1936 flagged the substantial revenue loss owing to the special exemptions for HUFs.
The Taxation Enquiry Commission of 1953-54 acknowledged the anomalies created by the preferential tax treatment for HUFs.
But since the treatment of HUF under tax law was tied to the legal position of HUF under Hindu personal law, and owing to the pendency of the Hindu Code Bill during that period, the Commission decided not to change the tax position of HUF.
The Justice Wanchoo Committee Report of 1971 explicitly stated that the institution of HUF was being used to avoid tax.
In 2018, a Law Commission consultation paper declared that “it is high time that it is understood that justifying this institution on the ground of deep-rooted sentiments at the cost of the country’s revenues may not be judicious”.

Not available to all

The concept of HUF is closely tied to the concepts of joint family & coparcenary.
This is unique to Hindu personal law (deemed to include Jains, Buddhists & Sikhs).
Kerala abolished the joint family system in 1975 through the Kerala Hindu Joint Family (Abolition) Act, 1975. The Supreme Court adjudicated on the interplay of this abolition with the Income Tax Act in CIT vs. N. Ramanatha Reddiar (HUF) (1996) by holding that once the entity of joint family and HUF has been abolished by a competent legislature, the Tax Department can no longer make an assessment on an HUF assessee.
As a corollary, the individual taxpayer also can’t avail of tax benefits by creation of an HUF.
However, this benefit of statutory tax planning is not available to a taxpayer of other religions, such as Muslims, Christians, Parsis, etc., which raises concerns over the lack of uniform application of tax laws.

About the Uniform Civil Code (UCC):

The Uniform Civil Code is mentioned in Article 44 of the Indian Constitution, which is part of the Directive Principles of State Policy.
These principles are not legally enforceable but are meant to guide the state in making policies.
It has been supported by some as a way to promote national integration and gender justice, but opposed by others as a threat to religious freedom and diversity.
The only state in India that has a UCC is Goa, which retained its common family law known as the Goa Civil Code after it was liberated from Portuguese rule in 1961.
The rest of India follows different personal laws based on their religious or community identity.