The Law Commission of India issued a consultative paper "Reform of family law" on August 31, 2018. Under the chapter on "Succession and Inheritance" it has suggested abolition of the Hindu Undivided Family (HUF) as a tax entity. This has stirred a hornet's nest in the country. Let us understand the exact proposal in detail and look at the consequences if the suggestion is accepted.
Historical perspective In the good old days HUF represented a joint family that stayed together under one roof and had joint property relationship among the members. It has also been run and recognised as a business unit 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. This 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 80 C, 80 D, 80 DDB, 112A etc.
What the Law Commission has suggested and why The Law Commission has observed that the status of HUF as a separate tax entity is being used for tax evasion. Its 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.
What should you do now The document, under which the proposal to remove the HUF as a tax unit, has been mooted by the Law Commission is through a "Consultation Paper". As the name itself suggests, it is a consultation paper for discussion among various groups and stakeholders. Based on the feedback received, the Law Commission may make the ultimate recommendations to the Ministry of Law and Justice with a draft of the law. The ministry will again weigh the proposal and may decide the law to be placed before the Parliament. The Parliament will discuss and may even refer the bill to a 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. It could take years for this recommendation to become law, even if it is ultimately decided to implement this suggestion.
Likelihood of the proposal being implemented The concept of HUF applies to people of all religions except Parsis, Muslims, Christians and Jews. The number of people covered under the broad definition of Hindu, constitute a significant proportion of the population. As everyone who understands the Indian politics and democracy knows it well that all political parties take their decisions on the basis of vote bank politics and no political party worth its salt can antagonise large sections of the vote bank.
Implications if the proposal is implemented What will happen to the existing HUFs in case the proposal of removal of HUF as a tax unit is implemented? I evaluated provisions of Kerala Joint Hindu Family System (Abolition) Act, 1975, which became effective in the Kerala from 1976. The legislation provided for de-recognition of the institution of HUF within the state of Kerala.
Typically in an HUF, members have rights over the property, but there is no fixed share. The share fluctuates as new members join the HUF. The law of Kerala provides that all 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. This means that all members of the erstwhile HUF will have defined and fixed share in the property after the date of its deemed division. They will become individual owners of their share of the property.
Taxpayers who have HUF as tax unit need not do anything now and may continue to enjoy tax benefits available to HUF as tax unit.