The concept of Hindu Undivided Family (HUF) may cease to exist if the proposals of a recently released consultation paper on Reform of Family Law by the law commission are accepted.
In 2016, the Ministry of Law and Justice made a reference to the Law Commission of India to examine matters in relation to a uniform civil code. The consultation paper, released in August of 2018, prepared by the law commission discusses the grounds for abolishing the HUF.
Why the need to abolish HUF
HUF, meant to be a tool to manage jointly held assets and properties and ease asset inheritance in joint families, is also used as a tax saving tool or a tax break.
According to the Income Tax Department website, in assessment year (AY) 2015-16, there were a total of 9,98,878 tax returns filed by HUFs representing Rs 38,615 crore of gross total income while the total tax payable was of Rs 3,064 crore. "It is evident that the total tax paid viz a viz income declared under HUF regime is less than 10%. Where HUF is abolished and such income is added to the income of the Karta or co-parceners it shall generate a significant increase in the total tax collection for the Government. In case Karta/ coparceners are subject to tax at the maximum marginal rate of 30%, it shall trigger a jump of around 20% in total tax collection for the Government from HUF held assets," " says Taranpreet Singh, Partner at TASS Advisors.
The recognition of HUF as a separate tax entity goes back to 1917, which was subsequently incorporated into the Income Tax Act, 1922. The law commission's consultation paper suggests that "The coparcenary be abolished at the Central level and the right in a property by birth be extinguished. As soon as coparcenary is abolished the institution of HUF would inevitably collapse." This proposal gets added muscle now that daughters can become members of the coparcenary by the Hindu Succession (Amendment) Act, 2005.
Besides the amendment in 2005, the consultation paper also highlights the loss in tax revenue to the government on account of the existence of HUF. This is how the law commission in the consultation paper concludes, "However, today, when it has been seventy-two years since independence, 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."
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