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With none other than the Prime Minister of our Country, Shri Narendra Modi ji, making a strong pitch for the enforcement of the Uniform Civil Code (UCC), the UCC debate is naturally going to gain traction and momentum in near times. The Government is considering tabling the UCC Bill in the upcoming monsoon session of the Parliament.

Currently, various significant facets of one’s life like the succession, inheritance, marriage, divorce, alimony, adoption etc. are governed by the respective Personal Laws and religion of the citizens of our Country.

The UCC aims to bring and enforce a uniform legal framework or code in respect of all such facets, for all Indian citizens, irrespective of their religion or governing Personal Laws. UCC is part of Part IV of the Constitution which includes the Directive Principles of State Policy (DPSP). Article 44 in DPSP states that, the State shall endeavour to secure for the citizens a uniform civil code throughout the territory of India.

While the generic debate centering around the pros of the UCC like gender equality, secularism and national integration and cons like infringement upon one’s religious freedom, will continue, but not many of us would be knowing that the UCC, if implemented, may have its fair share of some probable unexpected and unassuming but intriguing tax implications both in the Income Tax Act as well as in the Central Goods & Service Tax Act (the CGST Act) also.

The coming into effect of the UCC will impact the Laws of Inheritance and Succession. Currently when a person dies without a Will or Intestate in legal terms, the appropriate succession laws come into effect for the transfer of assets held by the person to the legal heirs.

For instance, according to the Hindu Succession Act, 1956 and its subsequent amendments, if a Hindu man leaves behind property without a Will, it is primarily passed on to Class I heirs (the widow, children and mother) in equal share. In the absence of any Class I heirs, 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 kids. All such property is to be inherited by the father.

The Intestate Inheritance of Sikhs, Jains and Buddhists is also governed by the Indian Succession Act 1925.

In the Income Tax Act, the ancestral property acquired by way of a Will is not considered as a ‘transfer’ under section 47 of the Income Tax Act and is not taxable as capital gain. Similarly, the ancestral property acquired by way of inheritance by virtue of one’s birth, is also not considered as transfer but it is transmission only. The same is also not taxable under the head income from other sources under section 56(2)(x), by virtue of clause (III) of fifth proviso to the said section.

Also, on the death of a person, the legal representatives or legal heirs are required to file the income tax return (ITR) on behalf of the deceased, for the income earned till the date of death. For this purpose, the legal heir will have to register at the income tax website.

To register as a legal heir, any of the following documents are accepted as legal heir certificates:

• The legal heir certificate issued by the court of law;

• The legal heir certificate issued by the local revenue authorities;

• The certificate of the surviving family members issued by the local revenue authorities;

• The registered will of the deceased person;

• The family pension certificate issued by the state/central government.

The most common certificate available is the certificate of surviving family members issued by the local revenue authorities (Municipality, Nagar Palika). This certificate is usually issued in regional language, so the legal heir is required to translate it into English/Hindi and get it duly notarised.

These legal heir certificates are being granted by the respective competent authorities based on the respective Personal Laws, governing the deceased person.

The legal heir is responsible for the tax payable, penalty, fine, or interest, which the deceased would have been liable had he not died. It means that the penalty proceedings for default by the deceased can also be initiated against the legal heir.

If there is any income earned after the date of death from the assets inherited from the deceased, it will be taxable in the hands of the legal heir. The legal heir should include this inherited income in his own return of income.

The section 159 of the Income Tax Act, contains enabling provisions for an assessment to be made and tax to be recovered in respect of income of a natural assessee who was alive during a previous year but died either before the assessment proceedings were initiated or were completed. It enumerates the rights and liabilities of a legal representative. However, the liability of such representative is limited only to the extent to which the estate left by the deceased is capable of meeting the tax liability subject to the contingencies mentioned in sub-sections (4) and (5) of Section 159. Subsection (4) of section 159 provides that the legal representative shall be personally liable for any tax payable by him in his capacity as legal representative if, while his liability for tax remains undischarged, he creates a charge on or disposes of or parts with any assets of the estate of the deceased, which are in, or may come into, his possession, but such liability shall be limited to the value of the asset so charged, disposed of or parted with.

Similarly, sections 160 and 161 of the Income Tax Act contain enabling legislative provisions for an assessment to be made and the income tax liability to be discharged by the trustee in the capacity of the Representative Assessee, in respect of income which a trustee appointed under a trust declared by a duly executed instrument in writing whether testamentary or otherwise [including any wakf deed which is valid under the Mussalman Wakf Validating Act, 1913 (6 of 1913),] receives or is entitled to receive on behalf or for the benefit of any person.

In the Central Goods & Service Tax Act (the CGST Act) also, 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. Transfer of business in case of death of a sole proprietor includes obtaining legal succession certificates, transferring assets and liabilities, and applying for the transfer of Input Tax Credit (ITC). This is because the legal heir will need to apply for a new GST registration in their own name and cannot continue the business in the name of the deceased sole proprietor due to the proprietor having a different PAN.

Thus, the critical questions like whether the person claiming the acquisition of an ancestral property or estate of the deceased as non-taxable by virtue of his inheritance or the person claiming the transfer of ITC of the deceased person in the capacity of his legal heir, is actually the lawful legal heir or not and also who is to be considered as the lawful legal representative/heir of the deceased, to discharge the income tax and or GST liability (if any) of the deceased, are currently addressed and answered by the respective Personal Laws governing that deceased person.

The coming into effect of the UCC will alter these established propositions of inheritance and succession governed by the Personal Laws, and as such the taxability of such inheritance and succession related financial transactions, in the hands of the eligible legal heirs as per the new uniform code in the UCC, will require an appropriate revisit in the Income Tax Act as well as in the CGST Act.

Another tax implication of the coming into effect of the UCC will be in respect of the Hindu Undivided Family (HUF) which has its origin and genesis in the Hindu Law. An HUF is a family which consists of all persons lineally descended from a common male ancestor. It consists of the Karta, who is typically the eldest person or head of the family, while other family members are coparceners. Even Jain, Buddhist, and Sikh families can have HUFs. Except for Kerala, the HUF is recognised throughout India.

The Income Tax Act gives a separate legal ‘person’ status to an HUF under section 2(31) of the Income Tax Act. Like an individual, an HUF is entitled for the benefit of the basic exemption threshold limit and slab rates of personal taxation. The HUF also qualifies for all tax benefits under relevant sections of the Income Tax Act like the Chapter VIA deductions under section 80C of upto Rs. 1.5 lakhs per annum, deduction in respect of Mediclaim premium paid for its members, under section 80D etc., in the old regime.

An HUF can run its own business to generate income and claim all applicable exemptions and deductions, which an individual is entitled to. It can also invest in shares and mutual funds, and avail available exemptions from resultant capital gains by investing in prescribed investment avenues. An HUF can acquire a residential house through a home loan and claim the principal repayment and interest as deductions, just like an individual.

Any married male individual falling in the higher tax slab can split some portion of his taxable income into a lower slab by forming an HUF, obtaining its Permanent Account Number (PAN) and filing a separate return of income of such an HUF. Thus, the creation of an HUF, has always been considered as one of the basic yet effective tool of tax planning, in our Country, in order to optimise one’s taxes, within the permissible four corners of the Income Tax Law.

If the UCC gets implemented in India, the legal existence of an HUF may no longer continue and as such the separate ‘person’ status of an HUF in the Income Tax Act, may also no longer continue, unless the same is retained or reinstated in the new UCC codes or some special enabling provisions are being inserted in the Income Tax Act.

The withdrawal of the separate ‘person’ status of an HUF in the Income Tax Act will affect the lakhs of HUFs currently filing their returns of income in India, and availing the benefits of various tax deductions and exemptions. The 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 enforcement and implementation of the Uniform Civil Code in India is going to have its fair share of tax implications both in the Income Tax Act as well as in the CGST Act, and as such will require and warrant a thorough and careful consideration by the concerned legislative authorities.

[This Article, authored by our Founder Shri Mayank Mohanka, FCA, has also been published in Taxmann with the Citation [2023] 152 taxmann.com 178 (Article)]