WHY A COMMUNAL TAX IS ONGOING ON HINDU FAMILIES AS HUF?

The Constitution of India requires the country to act as a secular system. Governments expect secular conduct from the common people but have not been able to remain secular themselves. A great example of this is that of the Hindu Undivided Family (HUF) which was not only included in the Hindu Succession Act but also in the Income Tax Act as a person.

HUF has been promoted as a tax-saving tool, but, if it is really a tax-saving tool, then why only on Hindu families? Why not apply to non-Hindu families also?

The reality is something else. The HUF system is not useful for Hindu business families in the low and middle income group, but discouraging to entrepreneurship even though it appears to be beneficial for the higher income groups in comparison to partnership and company.

After Independence, every possible effort has been made to discourage Hindus from cooperative/collective efforts. Hindu Undivided Family (HUF) is a clear case in example. HUF was started in 1917 under the divide and rule policy of the British government. HUF was later included in the Hindu Succession Act in 1956. This concept got impetus with its incorporation into the Indian Income Tax Act, 1961. It has been propagated overtly as an incentive measure for businesses by hindu undivided families. Its real implications are highly negative, even more than a Jizya tax on hindu families. Any business conducted by some members of a Hindu family will be taxed collectively at the first level, resulting in tax liability in a higher tax bracket.If the same business is undertaken by a non-hindu family, first the members will get a share of profits and then each member will be taxed individually, leading to no or very low tax liability in the lower slabs.

For example, let us take a simplified case. Suppose, three members of a hindu family earn a net taxable profit of ₹30 lakhs in a previous year. Tax liability as HUF will be ₹7,12,500 for the whole family and ₹2,37,500 for each member. But if the same business is run by any non-hindu family, the whole family will not be taxed as HUF. Rather, each member will get a share of the whole profit of ₹30 lakhs. If profit is equally shared as an individual share of ₹ 10 lakh there will be an individual tax liability of ₹112,500 as compared to ₹2,37,500 in HUF case. Assuming there is no other income of members in both cases, total tax liability will be ₹3,37,500 in non-HUF case as compared to ₹7,12,500 in HUF case. As a result, the tax liability of a Hindu family-owned business is more than double that of a non-Hindu family-owned business.

Is it not a great discouragement for any hindu family to have a successful business? HUF should be eliminated from the Hindu Succession Act and Income Tax Act to eliminate such Jizya like discrimination against hindus. Eight years of rule is sufficient to pay attention by the Government.

It is also disturbing to note that the HUF is taxed for business just like a business unit, but the low tax rates applicable to company businesses and corporate concessions are not available to the HUF. Is this not responsible for the utter lack of entrepreneurship in middle class Hindu families since the Nehru era?

It is not difficult to understand what kind of secularism we have been preaching so far and how low or middle class Hindu families have been discouraged from undertaking business or economic ventures! It also notable as to what extent income taxation on HUF is consistent with constitutional secularism, socialism and equality.

(Writer is a senior Professor at DDU Gorakhpur University)