The Hindu Business Line : Lay bare the gift wrap

WAY back in 1990, the then Finance Minister, Mr. Madhu Dandavate, sought to bring a small but paradigm shift in the scheme of gift tax — shifting the burden of tax on the donee rather than on the donor as hitherto. But with the fall of the government he was a part of, the Amendment Bill in which the sagacious proposal was contained also fell by the wayside.

A few years later the Gift Tax Act itself was given the quietus, thus leaving both the donor and the donee severely alone. A brave attempt to tax gift as income came unstuck in 1998 when a proposal to that effect mooted in the Finance Bill vanished as dramatically as it had appeared without so much as an explanation for the sudden capitulation. Now that there is a Communist-backed government in the Centre, one hopes gifts would be taxed. Successive governments have been bemoaning the fact that the tax-GDP ratio is abysmally low in our country. It did not occur to them that they should, among other things, stare at the gift horse. For, a huge amount of income evades tax often in the guise of gift. Here are a few samples.

A politician is itching to convert his black money into white. The way out is laughably simple. Receive your own booty as a gift from a fawning village pradhan at a mammoth public rally. Courts have said such gifts are not income because they are given by public as testimonials — in appreciation of personal qualities.

A cricketer gets a huge sum from the proceeds of a `charity' match held for his benefit. He thumbs his nose at the taxman. Courts, once again, have held such handouts to be testimonials in appreciation of personal qualities which cannot be treated as income.

A celebrity is caught with his pants down — a huge sum of cash is unearthed during a raid. Without batting an eyelid, he shrugs it off as gift from his fan club on the occasion of his 60th birthday. The tax authorities can do precious little except fret and fume.

Small wonder, gifts have come handy for both tax evasion and laundering. Of course, the tax authorities do examine the genuineness of gifts with a fine-tooth comb when receipts are sought to be explained away as such. But the daredevil tax-evader does his homework nicely. For good measure, he ensures that the mysterious donor is in a distant foreign country where the proverbial and much-vaunted long arm of law is loath to reach.

With gift being so indulged, it is party time for the moneybags! Rustomji and Parkinson's witty primer on tax planning refers to, among other things, party-a-day existence of the filthy rich — throw a party a day in honour of your near and dear ones and slowly but steadily convert your black money into white by giving it the colour of gift received by them from the doting guests. Of course, the entire party serial is a charade played out with chutzpah. Alas, there was a tax on gift! Their game would be up.

There is no reason why gift, in kind or cash, should not be treated as income in the hands of its recipient and taxed in the normal course. Exemption from tax of course can be provided for gifts on the occasion of marriage, birthdays, and so on, up to a specified limit. And the list of occasions and the specified limit should not be too liberal lest the party-a-day charade goes on unabated. Exemption should also be provided for gifts that are already addressed by the clubbing provisions of the income-tax law.

As it is, income from gifts to spouse and daughters-in-law are added to the income of the donor. The income of the minor child is invariably added to the income of its parent whether it emanates from gift or otherwise, except in a few specified cases. There is no need to disturb this regime. In the event, the donees under this regime — spouse, minor children — should not be called upon to include the value of gifts thus received in their income lest a receipt is taxed twice over.

(The author is a Delhi-based chartered accountant.)