GENERAL ANTI-AVOIDANCE RULE (Syllabus: GS Paper 3 – Economy)

Context: The Telangana High Court has ruled against a taxpayer against whom the revenue department had invoked General Anti-avoidance Rule (GAAR).

 General Anti-avoidance Rule (GAAR)

• About: GAAR is an anti-tax avoidance law in India designed to prevent tax evasion and minimize revenue losses.
• Effective from: 1st April 2017, GAAR operates within the framework of the Income Tax Act, 1961.
• Scope: The provisions of GAAR target aggressive tax planning strategies, particularly transactions aimed at circumventing tax liabilities.

oIt applies to transactions that, while legally permissible, result in significant tax reduction.

• Objectives: To curb revenue losses caused by companies engaging in aggressive tax avoidance practices.

oIt seeks to ensure that tax incentives provided by law are used in line with their intended purpose and economic consequences.

• Legal Distinctions: 

oTax mitigation, where taxpayers use legal means to reduce tax liability, remains permissible under the Income Tax Act, unaffected by GAAR.

oTax evasion, however, constitutes illegal non-payment of taxes and is distinct from tax avoidance targeted by GAAR.

• Impact and Enforcement: GAAR broadens the scope of tax scrutiny to include all transactions with significant tax implications, regardless of their legality.