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Making the gift regime fool-proof
December, 02nd 2006
There was absolutely no reason why marriage gifts should be protected from tax completely.

While introducing clause (v) to sub-section (2) of Section 56 of the Income-tax Act vide the Finance (No 2) Act, 2004, the Finance Minister took note of the widespread abuse of gifts to hoodwink the Revenue, especially in the follow-up money-laundering operations so crucial in making the ill-gotten wealth legit. Party-a-day existence, which is an old hat to convert huge pile of idle cash into a productive bank account and a practice common in many rich households in India, was one of the targeted practices.

But unless intentions get translated accurately, the law would remain at best feeble if not impotent. In this article, some of the infirmities the new regime is beset with are dissected.

The first bloomer is to be found in the first sentence of the regime itself, which reads as follows: "Where any sum of money exceeding twenty-five thousand rupees is received without consideration by an individual or a Hindu undivided family from any person on or after the 1st day of September, 2004, the whole of such sum... ."

Let us say Seth Gaindamal used to invite (on paper) 50 persons to each of his numerous parties to convert Rs 15 lakh of his black money at a time into a tidy bank account in favour of his doting granddaughter.

All that he has to do now is to rope in 60 persons (on paper) so that none of them is required to gift (on paper) more than Rs 25,000, the danger mark for the little one, nay for her parent, given the fact that a minor's income gets taxed in the hands of its parent.

What is more, if let us say one person out of these committed the indiscretion of donating Rs 26,000, all that would be treated as income is Rs 26,000. Surely, this wasn't the intention. What was clearly intended was aggregation of all gifts big and small received during the previous year and exempting them completely if the aggregate did not exceed Rs 25,000.

Mockery of the law

Maybe, the draftsman has once again let the Finance Minister down. Whatever the reason, he has kept the sluice gates of tax evasion wide open. That the farce can continue with the cooption in this dubious game of greater number of persons is disgusting to say the least because drafting mistake or any other, the bottomline is mockery of the law with some heightened efforts which enlistment of more persons normally entails.

Targeting cash gifts alone was not sufficient, though bulk of the illegitimate wealth in this country arguably is held in the form of cash. An all-round frontal attack on all kinds of gifts, including those in kind, should have been made.

The hands-off policy towards gifts from relatives should at least be tempered by a stern requirement of furnishing in the return of income the name and address of the munificent relatives with a view to seeking explanation from them as to the source of funds for their magnanimous act.

It has been found that tax-evaders shake in their boots when faced with the prospect of their names coming on the records of the Department.

Frustrating exemption

The Gift Tax Act, 1958 that was given the quietus long ago was bedevilled and considerably neutralised by exemption given to gifts received on the occasion of the marriage of the individual. Now it is the turn of the income-tax authorities to be tormented and frustrated by the same exemption. There was absolutely no reason why marriage gifts should be protected from tax completely.

The Finance Minister could have at the most upped the exemption limit from Rs 25,000 in the normal years to, say, a generous Rs 2 lakh in the year of marriage with a rider that this heightened exemption is on only once in one's lifetime a la the exemption for Voluntary Retirement Compensation though admittedly there is no guarantee that Lotharios would care to report their subsequent marriages to the tax authorities of all the people.

S. Murlidharan
(The author is a Delhi-based chartered accountant.)

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