Polity

KEY POINTS

Hindu Undivided Family (HUF)

·         An HUF is a family which consists of all persons lineally descended from a common ancestor, and also the wives and daughters of the male descendants

·         It entails a variety of joint property relations among the members.

·         It consists of the karta, who is typically the eldest person or head of the family, while other family members are coparceners.

·         Recently, the Law Commission has recommended abolishing the system of HUF citing justification of institutions on grounds of deep-rooted sentiments at the cost of country’s revenues may not be judicious.

Rationale cited by Law Commission

·         The reasons for such recommendations are that there are various lacunae, anomalies and inconsistencies in the Hindu Succession Act, 1956 as amended to grant equal rights to daughters of coparceners as to sons, and that the institution of HUF was being used for tax avoidance.

Is the decision justified?

·         If one examines the basis for the Law Commission’s views, these are reports of various committees of the 1940s to 1970s.

·         Only one report is the 174th Report of the Law Commission in 2000, on the proposed reforms in Kerala relating to property rights of women.

·         After each of these reports, there have been various amendments to the Hindu Succession Act.

·         The basis of the conclusion that HUFs are used for tax avoidance is the Direct Taxes Enquiry Committee Report, 1971.

·         After this report, the tax laws were amended to derecognise partial partitions of HUFs, which was the primary means of tax avoidance.

·         The impact of these amendments on the conclusions arrived at by those committee reports does not seem to have been considered by the Law Commission.

·         Today, as any tax practitioner will testify, HUFs are hardly ever used for tax avoidance.

·         The tax savings through an HUF is minimal, as it is only incomes up to Rs.10 lakh which give a tax benefit of only Rs. 1,95,000.

·         As against this, one has to factor in the time and effort of maintenance of separate records, accounts and of compliance. In most cases, it is just not worth the effort.

·         Also, the complexity of Hindu law after the amendments has ensured that most families prefer to steer clear of HUFs.

·         They, in fact, prefer to partition existing HUFs, particularly as the younger generation does not want the complexity and uncertainty which goes with an HUF, more so if some of the family members are non-residents.

·         Therefore, the concern about the tax revenues does not seem justified, as abolition of HUFs will hardly result in any increase in tax collection.