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General Anti-Avoidance Rule

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.