Gift tax leaks like a sieve

The donor-based gift tax regime in operation since 1956 was jettisoned in 1998 with gifts made on or after October 1, 1998 freed from the gift tax liability. For close to seven years, there had been no replacement to this impost so much so that estate planning became a fairly simple affair in the meanwhile, with there being neither gift tax nor any form of death tax to worry about.

A seemingly cynical or uncharitable explanation to the fascination among the rich and the famous with philanthropy in the US is the looming threat of heavy inheritance tax or estate duty, with some of the States extracting more 50 per cent as the marginal rate of tax. Small wonder, they would rather give away a substantial part of their wealth during their lifetime than face the prospect of squirming their graves!

Back home, gift became a convenient alibi for tax evasion and explanation for considerable wealth found in adversarial proceedings. Grand children and great grand children came handy in this grand deceit. Politicians explained away their wealth as munificence from their followers. Entertainers explained away, without batting an eyelid, their wealth ferreted out in raids as gifts by their doting fans.

The government of the day tried to put an end to this farce with effect from April 1, 2005 by seeking to tax gifts in the form of money received in excess of Rs 25,000 as income from other sources which limit has since been hiked to Rs 50,000 with two additional categories also being carved out — gifts of immovable properties in excess of Rs 50,000 being taxable in the hands of the recipients, besides specified properties in excess of Rs 50,000 also coming in for tax. The innate weakness in this regime should be apparent — a wily donor can protect his proteges from taxation by spreading his munificence over several years so in each year they do not get more than Rs 50,000 from each one of the categories of assets. Intuitively, this regime must be leaking like a sieve. All that an intrepid donor has to do is to find a couple of pliable pretenders with each one playing ball with him for a couple of years till his ill-gotten wealth is laundered. Arranging for several pliable recipients is not difficult which is why the move to make the gift tax regime a donee-based one was doomed to failthe moment it was ushered in. A donor-based tax lends itself to easy enforcement — buttonhole the donor and extract the tax out of him. Chasing the beneficiaries of his munificence is a tall order, especially given the long berth given to them by the law.

And there are exemptions galore to further dilute the writ of the law. Leading the pack is marriage-eve gifts. Lotharios would latch on to this alibi with alacrity just to beget tax exemption. There ought to be some limit on marriage gifts with excess being brought to book and tax. And one should be allowed to invoke the alibi of marriage, but once in his/her lifetime. The list of relatives, gifts from whom is exempt from tax, is unduly long. While there may some justification for bailing out gifts from the clutches of income tax if they are received from brothers and sisters, pray what justifies the exemption to gifts received from brothers-in-law and sisters-in-law and sundry uncles and aunts? The list of assets that are taxable also lends considerable wiggle-room.

Gifts of immovable properties valued by stamp duty authorities in excess of Rs 50,000 are taxable but what about under-valuation of immovable properties that is de rigueur in this country. One wonders why the government last year deleted the clause which caught within its pincer cases of undervaluation. Furthermore, why give leg room for manoeuvre by specifying the assets that alone are taxable. In the third category fall shares and securities, jewellery and bullion, archaeological collections, drawings, paintings and sculptures. But these together with cash and immovable properties do not exhaust the list of assets. What about motor cars, especially the pricey ones? What about expensive garments and sarees? The point is a law should be elastic enough to rope in all sort of assets lest it is bypassed with impunity and immunity.

One hopes in the Budget 2011 the distortions in the gift tax regime are set right ideally by harking and reverting back to the donor-based regime, and by not picking and choosing. And as the editorial in this newspaper of February 15, 2011 canvasses, there is a need for bringing back concomitantly the estate duty regime, given the fact that gift tax and estate duty operate best in tandem. The twin taxes may or may not set the government's cash registers ringing happily, but they would send the right message across that the government is serious about taxing the rich.

And while paying its attention to this aspect, it would also do well to bring back the tax on capital gains earned from the bourses. The extant securities transactions tax may fetch considerable revenue for the government, but it is not an ideal substitute for capital gains tax from horizontal equity point of view —salaried class pays taxes through nose whereas moneybags thumb their noses. The draft DTC sought to do this precisely but the DTC Bill, 2010 has restored status quo inexplicably.

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