Background: Gift Tax Act, 1958

 Great question. Here's a detailed explanation of why the Gift Tax Act, 1958 was abolished in 1998, and why gift taxation was reintroduced under the Income-tax Act, 1961:

 Background: Gift Tax Act, 1958

·         The Gift Tax Act, 1958 was introduced to tax the donor on gifts made to others, especially high-value transfers without consideration.

·         Under this Act:

o    Donor was liable to pay tax on the value of gifts.

o    Certain exemptions and thresholds were allowed.

 Why It Was Abolished?

·         Abolished w.e.f. 1st October 1998 by the Finance Act, 1998.

·         Reason:

o    The Act had limited effectiveness.

o    Low revenue collection.

o    Administrative difficulty in tracking and valuing gifts.

o    People easily evaded gift tax through benami transfers, fake valuations, or splitting gifts.

 Therefore, the government decided to abolish the Gift Tax Act.

 After 1998: No Gift Tax → Misuse Began

·         After its abolition, gifts became completely tax-free, whether in cash or kind, for both donor and recipient.

·         This loophole was misused:

o    People evaded tax by giving/receiving gifts under false names.

o    Gifts were used to hide black money.

o    Individuals used this to distribute unexplained wealth to friends or relatives tax-free.

 Reintroduction of Gift Tax – Under Income-tax Act, 1961

 Reintroduced in Stages:

1.      Finance Act, 2004:

o    Introduced Section 56(2)(v): Taxed cash gifts exceeding ₹25,000 received by an individual or HUF from non-relatives.

2.      Finance Act, 2006:

o    Revised threshold to ₹50,000 under Section 56(2)(vi).

3.      Finance Act, 2010:

o    Expanded scope to include certain movable properties (like shares, jewellery, etc.) under Section 56(2)(vii).

4.      Finance Act, 2017:

o    Introduced Section 56(2)(x), replacing earlier sections.

o    Applies to all persons (not just individuals or HUFs).

o    Covers gifts of:

§  Cash

§  Movable property

§  Immovable property

o    Threshold: ₹50,000, with several conditions and exemptions.

 Key Differences: Old Gift Tax Act vs. Section 56(2)(x)

Aspect

Gift Tax Act, 1958

Section 56(2)(x), Income-tax Act, 1961

Taxed person

Donor

Recipient

When abolished

1998

—

Reintroduced

❌ (Not reintroduced as a separate Act)

✅ Under Income-tax Act as anti-abuse provision

Types of gifts covered

All, but difficult to track

Cash, property (movable/immovable)

Tax rate

Flat gift tax

Taxed as income from other sources

Exemptions

Some

Detailed exemptions (relatives, marriage, will, etc.)

 Conclusion

·         The Gift Tax Act was abolished in 1998 due to low effectiveness and high evasion.

·         However, to curb misuse and bring back high-value, non-genuine gifts into the tax net, gift taxation was reintroduced under the Income-tax Act via Section 56(2)(x), but now:

o    Recipient is taxed, not the donor.

o    More effective, with clear exemptions and better enforcement.

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