Rumours are rife that the government may table the Uniform Civil Code (UCC) in the upcoming monsoon session of Parliament. Currently, rules around succession, inheritance, marriage, divorce, alimony, etc. are governed by the respective personal laws and religion of the citizens. The UCC aims to enforce a uniform legal framework in respect of all such facets, for all Indian citizens, irrespective of their religion. The implementation of UCC can have some unexpected but intriguing tax implications too.
Currently, when a person dies without a will, the appropriate succession laws come into effect for the transfer of a deceased’s assets to the legal heirs. For instance, according to the Hindu succession law, if a man leaves behind property, it is primarily passed on to his class I heirs (the widow, children and mother) in equal share. In their absence, class II heirs (father, grandchildren, great grandchildren, brother, sister and other relatives) can claim the property. If the owner is a Hindu woman, assets get passed on to her husband and children in equal proportion. If none of them are present, the property will go to the heirs of her husband. Failing that, it will go to her parents.
According to Muslim law, the heirs are the successors of the deceased who are legally recognized by the Sharī‘ah to inherit his estate, given that they are not impeded from inheritance. The heirs succeed to the estate as tenants-in-common in specified shares. There is no joint tenancy in Muslim law and the heirs are only tenants-in-common.
The Indian Succession Act of 1925 gives Christian mothers no right in the property of their deceased children. All such property is to be inherited by the father. The interstate inheritance of Sikhs, Jains and Buddhists is also governed by the Indian Succession Act of 1925.
As per the Income Tax Act, the ancestral property acquired by way of a will or through inheritance is not considered as a ‘transfer’ and is not taxable as capital gain or as income from other sources. Also, on the death of a person, the income tax liability of the deceased is to be discharged by the legal heirs.
Similarly, in the Central Goods & Service Tax (CGST) Act, in case of the death of a sole proprietor, the business can either be cancelled or transferred to the legal heirs or a new owner. The transfer of business includes obtaining legal succession certificates, transferring assets and liabilities, and applying for the transfer of input tax credit (ITC).
From taxation perspective, personal laws address some critical questions—whether the person claiming the acquisition of an ancestral property as non-taxable by virtue of his inheritance or claiming ITC in the capacity of his legal heir, is actually the lawful legal heir or not; who is to be considered as the lawful legal representative/heir of the deceased, to discharge the income tax or GST liability (if any) of the deceased.
The coming into effect of the UCC will alter these established propositions of inheritance and succession governed by the personal laws, and will require an appropriate revisit in the IT Act as well as in the CGST Act. Another taxing implication will be in respect of the Hindu undivided family (HUF). The IT Act gives a separate legal ‘person’ status to an HUF. Like an individual, an HUF is entitled to benefits of the basic exemption threshold limit, slab rates of personal taxation, tax deductions and exemptions (section 80C of up to ₹1.5 lakh, home loan, deduction on mediclaim premium paid for its members, reinvesting capital gains in prescribed avenues to get exemption, etc). An HUF can run its own business to generate income and claim all applicable exemptions and deductions that an individual is entitled to.
If the UCC is implemented, the separate ‘person’ status of an HUF may no longer continue. It will affect lakhs of HUFs currently filing their returns of income in India, and availing the benefits of various tax deductions and exemptions. Parliament will be required to make relevant amendments in numerous sections of the Income Tax Act, in respect of the legal person status and taxability of HUFs. It will also create some administrative difficulties for the tax administration authorities concerning the rolling back of PAN numbers of existing HUFs.
Thus, the UCC is going to have its fair share of tax implications too, which need to be addressed carefully by policymakers.
Mayank Mohanka is the founder of TaxAaram India and a partner at S M Mohanka & Associates.
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Updated: 11 Jul 2023, 11:15 PM IST