The Hindu Business Line : Gaps in the gift tax regime

The exemption in favour of gifts received on the occasion of marriage continues even under the proposed new regime. This is dangerous territory and some stringent conditions should have been imposed.

A lot of elbow room for wily tax planners.

S. Murlidharan

The Finance (No. 2) Bill, 2009 does make an honest attempt at plugging the loopholes in the regime dealing with gifts. But as it happens despite the attempt at making the code comprehensive, there still remains gaping holes which need to be plugged urgently before the Bill is passed and signed into law.

Hitherto, only gifts in cash were targeted thus leaving gifts in kind including immovable property severely alone. From October 1, 2009, gifts of all hues are sought to be taxed in the hands of the recipient if they are in excess of the prescribed limit and are not eligible for the limited exemption conferred. This is fine as far as it goes. But the draftsman once again seems to have let down the Finance Minister.

Exhaustive definition

Key terms are never exhaustively defined in a fiscal law. For example, definition of ‘income’ contained in Section 2(24) is an inclusive one so much so that nobody can say with certainty what exactly income is, though income-tax is admittedly on income.

Similarly, the definition of ‘manufacture’ given in the excise law is also inclusive. The danger of giving an exhaustive definition is that it ties down the hands of the government — no elbow room to capture receipts/activities not covered by the exhaustive definition.

An inclusive definition, on the other hand, gives the government plenty of latitude because it is illustrative in nature. Why then did the draftsman commit the cardinal sin of giving an exhaustive definition of the term ‘property’ in the new Explanation under Section 56(2)(viii)?

Tax planners’ delight

If one sees the definition carefully, while jewellery has been included, gold does not figure in the scheme of things. So what would one intent on receiving a tax-free gift call upon his benefactor to do? Yes, he would urge him to gift him raw gold maybe in the form of biscuits so that the gift is completely outside the pale of tax.

Remember, gold itself is not jewellery. Utensils made of gold and other precious metals and stones would also remain outside the pale of the definition and hence tax. Similarly, furniture does not figure in the list. Therefore, a wily donor may protect his protégé or influence peddler, as the case may be, from tax by gifting him furniture that aren’t work of art because work of art has indeed been captured into the tax net.

Expensive clothes can be gifted without attracting tax. The list that could tantalise a tax planner could be endless. Monthly provision can be supplied free of cost and this is no laughing matter given the daunting food inflation the country is facing. Motorcars are conspicuous by their absence in the list.

The jet-set could plump for a small executive plane if his benefactor has deep enough pockets and is in a mood to oblige his protégé or influence peddler as the case may be. The point is no quarter would have been given to the intrepid tax planners had the Finance Minister remembered the mool mantra of drafting — resort to inclusive definitions.

He should have defined ‘property’ by saying that it means movable as well as immovable, tangible as well as intangible and includes…Such a comprehensive definition is necessary not only to tax all genuine gifts but also to tax bribes and other allurements camouflaged as gifts.

One should remember that all ill-gotten assets are explained away blithely as gifts. A small aeroplane could be gifted by an industrial house to a powerful person with political connections to wangle a contract as things stand with the recipient none the worse for it. If amendments as suggested are made, at least he can be called upon to pay income-tax on the munificence received.

Exemption confined?

Aggregate of gifts in excess of Rs 50,000 per year was taxable. Obviously, this ought to have been continued even under the new regime. But if one reads the provisions carefully, one would find that there are three separate exemptions for Rs 50,000 each. Cash, immovable property and other assets. Gift under each one of the broad categories begets exemption of Rs 50,000.

In the event, the wily tax planner gets more elbow room. Earlier he had to stagger his cash gifts in such a way that each year he did not give more than Rs 50,000 to the beneficiary.

Now he can breach this limit with impunity — cash Rs 50,000, immovable property Rs 50,000 and other property caught by the pincer of the definition of ‘property’ another Rs 50,000 per annum. Of course, as pointed out earlier, he can give more if he gifts gold, furniture, provision, clothing etc.

Other loopholes

The exemption in favour of gifts received on the occasion of marriage continues unabated even under the proposed new regime. This is a dangerous territory and some stringent conditions should have been imposed.

Plural marriages should have been frowned upon and registration of the marriage with the registrar should have been insisted upon. Marriage should not become an excuse for making some tax-free gifts.

Therefore, how about a limit of Rs 10,000 per beneficiary? Otherwise one may conveniently pass on his entire wealth using the fig leaf of marriage as an excuse. Gifts from relatives are already exempt. A non-relative normally should not be expected to gift too generously even if the occasion is marriage. Therefore, a limit of Rs 10,000 would be generous.

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

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