GENERAL ANTI – AVOIDANCE RULES GAAR
NOTE–“THIS ARTICLE IS TO GIVE A GENERAL IDEA ABOUT GAAR ONCE IT IS INTRODUCED IN INDIA” THE LAW IS NOT YET EFFECTIVE IN INDIA
Abbreviation: General Anti – Avoidance Rules
Tax avoidance is a major area of concern across the world. Rules framed by different countries to minimize avoidance of tax, in simple terms are named as GAAR.
Methods adopted to reduce tax liability can be broadly classified into four categories:
- Tax Evasion: Illegal arrangements where tax liability is hidden or ignored. The tax payer pays less than he is legally obligated to pay by hiding income or the information from the tax authorities.
- Tax Avoidance: Avoidance of tax by legal means, which would be otherwise incurred by taking advantage of some provisions or lack of provision in the law.
- Tax Mitigation: Situation where the tax payer takes advantage of a fiscal incentive afforded to him by the legislation by actually submitting to the conditions and economic consequences that the particular tax legislation entails. A good example is the setting up of a business in a SEZ.
- Tax Planning: Arrangement of a person’s business and/ or private affairs in order to minimize tax liability.
*GAAR refers to Tax avoidance;
GAAR is a concept which empowers the revenue authorities to deny the tax benefits which do not have any commercial substance or consideration.
There were conflicts between tax payers whenever revenue authorities question on such transactions. In a nutshell, GAAR is a set of rules which are based on general principles to check the potential avoidance of tax in general.
What are Tax Havens?
Tax havens are countries which have low tax regimes which provide individuals and business opportunities of tax avoidance or tax evasion.
There are roughly 45 tax havens in the world today. In Indian context, Mauritius is considered to be the most significant tax havens or tax evading route.
The Mauritius route can be described as a channel used by individuals and MNC’s to evade paying taxes in India. The tax evasion in India through this route is estimated to be in tune with 55 billion dollar.
Implications of GAAR in India:
Implementation of GAAR provides tremendous powers to deny tax benefit to an entity if a transaction has been carried with the sole intention of tax avoidance. Due to powers in the hand of taxmen, now innocents may be harassed by them.
GAAR – Example
- 1. An undertaking set up in an under developed area by putting in substantial investment of capital, carries out manufacturing activities therein and claims a tax deduction on sale of such production/ manufacturing.
–Here there is an arrangement and one of the main purposes is a tax benefit.
This is a case of tax mitigation where the tax payer is taking advantage of a fiscal incentive offered to him by submitting to the conditions and economic consequences of the provisions in the legislation. So this would not invoke GAAR.
- 2. A business sets up a factory for manufacturing in an under developed tax exempt area. It then diverts its production from other connected manufacturing units and shows the same as manufactured in the tax exempt unit (while doing only process of packaging there).
–Here there is an arrangement and there is a tax benefit. The transaction lacks commercial substance and there is misuse of the tax provisions and thus revenue would invoke GAAR.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.
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