Under the Indian Income Tax Act, 1961 also, HUF has been identified distinctly from the family members as a ‘person’ and its income is taxed as a separate legal entity.
India is a country known for its roots imbedded in the culture of its society. Thus, the Indian law had established and recognised the concept of Hindu Undivided Family (HUF) wherein the skills, effort and resources are pooled in by family members for common benefit. Under the Indian Income Tax Act, 1961 also, HUF has been identified distinctly from the family members as a ‘person’ and its income is taxed as a separate legal entity.
HUF has its own PAN, files a separate tax return, treated as a separate entity for the purpose of assessment. Establishment of HUF The concept of HUF was established to simplify taxation process on families running the joint business. However, over the period of time, HUF has become a tax planning tool which is used by taxpayers to split their tax liability. The creation of HUF helps taxpayers to save substantial taxes by offering independent slab benefit of Rs 2,50,000. In addition to slab benefit, tax savings accrues to HUF on account of the various tax exemptions and deductions which have been provided in the Act.
The HUF is even entitled to avail deductions like those under Sections 80C, 80D, etc., as that of an individual tax payer. HUF can claim deduction for salary paid to its members if they are contributing to its functioning and work of the joint Hindu family business. It provides that the aforesaid exemptions and deductions would be separately available to the HUF. Anomalies and lacunas With the evolving economy and consequential amendments, many anomalies and lacunas have been identified in the law which makes its application difficult.
Considering the aforesaid challenges, recently, the law commission in a consultation paper proposed the abolition of the concept of coparcenary under Hindu Law which forms the basis of HUF. Further, the commission highlights the tax loss to the government on account of creation of the HUF. It 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. Proposed abolition of HUF The abolition of the concept of HUF law would make the taxation of existing HUFs complex. In case HUFs are abolished, the incomes of HUFs would then be taxed in the hands of individual members.
The income of the HUF could be divided amongst the members and clubbed in their individual income for discharging the tax liability. The other option to tax such income could be to club the income of HUF in the income of the Karta. This would result in increased collection of the revenue in income tax department’s kitty. The persons who may be paying tax under the slab rate of 20%, may get taxed at the rate of 30%.
In certain jurisdictions outside India, there exists the concept of family tax wherein tax is imposed on the income of the family than an individual member. The income is offered to tax after providing suitable deduction at a special slab rate. Taxing the income in aforesaid manner may help reduce complexities in clubbing the income and provide equity in tax structure. However, implementation of such concept would require significant changes in the current taxation system.
The writer is partner, Nangia Advisors LLP. Inputs from Radhika Arora