General Anti-Avoidance Rule:
The Telangana High Court has ruled against a taxpayer against whom the revenue department had invoked the General Anti-avoidance Rule (GAAR).
- GAAR is an anti-tax avoidance law in India to curb tax evasion and avoid tax leaks.
- It came into effect on 1st April 2017.
- The GAAR provisions come under the Income Tax Act, 1961.
- It is a tool for checking aggressive tax planning, especially those transactions or business arrangements that are entered into with the objective of avoiding tax.
- It is specifically aimed at cutting revenue losses that happen to the government due to aggressive tax avoidance measures practiced by companies.
- It is meant to apply to transactions that are prima facie legal, but result in tax reduction.
- Broadly, tax reduction can be divided into three categories.
- Tax mitigation is a ‘positive’ term in the context of a situation where taxpayers take advantage of a fiscal incentive provided to them by tax legislation by complying with its conditions and taking cognisance of the economic consequences of their actions.
- Tax mitigation is permitted under the Act. This tax reduction is acceptable even after GAAR has come into force.
- Tax evasion is when a person or entity does not pay the taxes that are due to the government.
- This is illegal and liable to prosecution. Illegality, wilful suppression of facts, misrepresentation, and fraud—all constitute tax evasion, which is prohibited under law.
- This is also not covered by GAAR, as the existing jurisprudence is sufficient to cover tax evasion/Sham transactions.
- Tax avoidance includes actions taken by a taxpayer, none of which are illegal or forbidden by the law.
- However, although these are not prohibited by the law, they are considered undesirable and inequitable since they undermine the objective of effective collection of revenue.
- GAAR is specifically against transactions where the sole intention is to avoid tax.
- In this, the taxpayers used legal steps which resulted in tax reduction, which steps would not have been undertaken if there was no tax reduction.
- This kind of tax avoidance planning is sought to be covered by GAAR.
