The Hindu Business Line : Clarity sacrificed for brevity

THE Finance Minister deserves compliments for bringing gifts from non-relatives into the income-tax net. This long-overdue amendment is being criticised in some quarters as being unwarranted.

The truth is it was very much warranted if only to deny any quarter to those resorting to the subterfuge of gifts to launder their unaccounted income. Welcome therefore as the amendment is, it seems to have sacrificed clarity at the altar of brevity.

The new provision enshrined in Section 56(2)(v) reads thus:

"Where any sum of money exceeding twenty-five thousand rupees is received without consideration by an individual or a Hindu Undivided Family from any person on or after the 1st day of September 2004, the whole of such sum... ."

The Finance Minister's intention, as gauged from his Budget speech, was to give exemption to the tune of Rs 25,000 per financial year. The language of the new provision however conveys the impression that the exemption is in respect of every single transaction. This would negate the very object and raison d'etre of the amendment.

In a country where splitting and splintering is a national pastime, people with black money would lap up this latitude with alacrity. They would assiduously ensure while laundering their black money that the amount involved is strictly below the limit of rupees twenty five thousand.

The smallness of this limit would not deter them because the farce can be enacted any number of times during the previous year. Therefore, the opening line should be recast as follows:

"Where any sum or sums of money exceeding in aggregate twenty-five thousand rupees is received during the previous year... "

The amendment has also not reckoned with the possibility of another farce — pretended consideration. The now defunct Gift Tax Act reckoned with this. While genuine loans should be saved from the clutches of tax for which a clarificatory amendment ought to be made, no quarter should be given to sham transactions.

For example, an out and out gift may be camouflaged as a loan. The tax department should be allowed to call the bluff either in the same year or in hindsight.

The Gift Tax Act targeted non-cash gifts (gifts in kind) as much as it targeted cash gifts. The new provision curiously leaves gifts in kind severely alone. And this could well be what the doctor ordered.

The never-say-die politician may hereafter launder his black money not by receiving a purse from a fawning village pradhan before a huge gathering but instead by receiving National Savings Certificates from him.

And last, the list of relatives, gifts from whom is not taxable, is unduly long. It is all right to bail out gifts from relatives who are caught by the pincer of the clubbing provisions enshrined in Section 64. On this touchstone, only spouse and parents ought to make the grade.

There is no reason why gifts from brothers and sisters or for that matter from brothers-in-law and sisters-in-law should not be taxed as income, especially when these worthies are not caught by the clubbing provisions of Section 64.

The short point is gifts which come under the purview of the clubbing provisions alone should have been bailed out lest there is double taxation. The sons-in-laws (SIL) of the world are completely outside the loop — gifts to them are neither covered by the clubbing provisions nor are they themselves liable to income-tax on such munificence in view of the exemption granted to them by the definition of relatives in the new regime.

While it is true that parents-in-law would be extremely reluctant to make them (SILs) their benamidars for the fear of having to kiss the ostensibly-gifted properties goodbye, which perhaps explains why Section 64 has not reached out to them, there is always a possibility of genuine gifts to SILs. And this ought to be taxed as their income.

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