HUF misgivings in the UCC debate

The Uniform Civil Code (UCC) is again in the news. It is opposed and supported for various reasons. Some support the UCC seemingly for political reasons, and some oppose it for that very reason. Some support it for sound social reasons and some oppose it for other social reasons, perhaps equally sound. 

What remains unclear is what exactly does the UCC means and what does it cover? Does it seek to make uniform all religious and cultural beliefs and practices? Or does it, which I think is the better view, seek only to make uniform and equitable a narrow range of personal laws? These too predominantly those relating to succession, adoption, marriage, and divorce? Part of this confusion also arises because the Union government has not released a draft Bill or even a white paper on the UCC, which could have been the basis for an informed debate.

The HUF debate

The result is that everything even remotely connected to religion, culture, and tradition is talked about, and there is uncertainty on how each would be treated. A good example of this is the debate over the provisions regarding Hindu Undivided Families (HUFs). It is argued that this is a tool for tax avoidance, and it can be used by followers of only one broad group of religion, and not by Abrahamic religions such as Islam, Christianity, Judaism, or even Parsis. The fair point then is that this concept too should be made uniform. Considering it cannot be easily assimilated in or used by other religions, uniformity would mean abolishing it or derecognising it in law. Or at the very least, remove the tax benefits of it.

The counter argument is that it should not be dealt with at all by a UCC. This is something difficult to agree with. The HUF is a system whereby a family not just owns and succeeds assets and liabilities successively over generations, even businesses are carried out as HUFs. A UCC, of whatever scope it can be conceived of, would need to address this system.

Misunderstood, exaggerated 

The primary objection is that HUFs can be used to save, avoid, or even evade huge amount of taxes. This is a largely misunderstood, and even exaggerated perception. But let us first understand how the tax savings arise. 

HUF is recognised under some laws as a separate unit/person just like, say, a partnership, a company, etc. Since tax arises only after a particular minimum income is reached, tax is saved to that extent if the income is earned by an HUF. Further, since tax rates progressively increase over higher slabs of incomes, even more tax could be saved. To take a simple example, if ‘A’ were to earn income of Rs 50 lakh as an individual, they would pay far more tax than if the income was divided into two entities — ‘A’ and the HUF. The benefits could be even more as one makes more complex uses of this provision. If one community can gain such ‘benefits’ while others cannot, it goes against the spirit of the UCC, being uniformity of personal laws.

That said, there are several misunderstood and exaggerated aspects of HUF. As can be seen, the savings are limited to the extent of initial cut off slabs of income which are now quite low in India. Further, beyond a point, the tax rates become uniform. Over the years, HUF in tax law has seen a series of ‘surgical strikes’ and several of the benefits have been cut down. After all, no fiscally conscious Finance Minister would tolerate leakage of taxes on this account beyond a point.

Tax rates have lowered significantly over the years. At a time when tax rates were 60 per cent or more (even 90 per cent), making and managing separate entities did result in significant tax savings. In recent times, tax rates in India are quite low, and hence there is the question of cost-benefit of tax savings verses the hassle and costs of ‘forming’ and maintaining a separate entity. 

Coming to the hassle and costs, this is another aspect that is not appreciated. In principle, HUFs are not ‘formed’. They exist. Conceptually, in terms of assets, HUF is concerned with ancestral property owned, and grown, over generations. It is another thing that most tax advisers would be able to help ‘form’ an HUF and take tax benefits. 

Worth the cost?

Then comes a bigger issue. HUF, by its very definition, talks of an ‘undivided’ family, meaning an extended and joint family. Today, even in rural areas, the concept of nuclear families have gained ground. In urban areas, nuclear families are more prevalent. Even brothers and sisters, parents and children, and husband and wife increasingly maintain their assets separately, often unknown to the other person. Individuals also want full control over their income and assets, and how they can dispose and even bequeath them. Assets owned by HUF then become practically difficult and unacceptable mode of holding assets; the meagre tax benefits may not justify these significant intangible costs.

Then, though relatively smaller, there are also the costs of maintaining the HUF as a separate legal entity — separate bank accounts, separate tax returns, separate registrations, and so on. 

Succession is complex

Succession in HUF can also be complex. Also, the way succession takes place may not necessarily be acceptable to family members. We all have heard of endless squabbles in joint families over who contributed how much effort, brains, and skills to developing the family business — and, therefore, how should the assets be enjoyed/divided. Just for this reason, families would rather separate rather than be ‘undivided’.

Nonetheless, derecognition, even for tax purposes, may result in a transition period during which businesses and even families may face issues. But this is the interim cost of social reform that may have to be considered and borne.

In all this din, however, the core question of the merits (or otherwise) of a UCC is lost. What is also lost are the myriad aspects of personal laws, customs, practices, etc. which makes formulating a broad Uniform Civil Code a formidable task, if not impossible. An overly broad UCC may not be just overambitious, it may simply be unachievable. 

However, a UCC which focusses on a few major areas such as gender equality is overdue, and achievable. It would also give far greater benefits to individuals and communities than an all-or-nothing UCC.

(Jayant Thakur is a chartered accountant.)

Disclaimer: The views expressed above are the author's own. They do not necessarily reflect the views of DH.