What is General Anti-Avoidance Rule (GAAR)?

About 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.
• GAAR 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 results 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.
• With GAAR, there is no difference between tax avoidance and tax evasion. All transactions which have the implication of avoiding tax can come under the scanner of GAAR.

Q1: What is Base erosion and profit shifting (BEPS)?

BEPS indicate tax avoidance strategies which Multinational Corporations (MNCs) employ for reducing their tax bases. Typically, a company needs to pay tax for the incomes or profits they earn. In recent times, MNCs are developing sophisticated and refined tax planning practices to avoid tax by shifting their incomes/profits to other countries, especially to tax havens. Such practices eroded the tax base.

Source: Telangana High Court’s landmark decision: GAAR ruling impacts taxpayers