General Anti-Avoidance Rules
What is GAAR?
GAAR refers to General Anti-Avoidance Rules. These rules target any transaction or business arrangement that is entered into with the objective of avoiding tax. The objective is to check aggressive tax planning.
What is meaning of Tax Avoidance?
Avoidance means an attempt to reduce tax liability through legal means, i.e. to regulate your affairs in such a way that you pay the minimum tax imposed by the Act as opposed to the maximum. For example, Suresh makes a company XYZ to sell some product. The company XYZ pays 25% tax, but if Suresh himself sold the products he would pay 30%. Suresh has formed the company only to save 5% tax.
Difference between Tax Avoidance and Tax Evasion?
Tax Evasion and Tax avoidance are two different things. While Avoidance is legal management to avoid tax, evasion is illegal means to reduce tax liabilities, i.e. falsification of books, suppression of income, overstatement of deductions, etc.
Tax planning, as opposed to tax evasion which is illegal, is an accepted practice whereby the tax-payer uses provisions of the law or loopholes to minimise his tax liability.
Some countries, in addition to GAAR, have Specific Anti-Avoidance Rules (SAAR) to plug particular loopholes in the law or prevent some types of transactions that result in loss to Revenue. GAAR has been a part of the tax code of Canada since 1988, Australia since 1981, South Africa from 2006 and China from 2008. Australia and China also have SAAR in place to check abuse of tax treaties and transfer pricing.
Implication of GAAR implementation
• The implication of GAAR is that the Income-tax department will have powers to deny tax benefit if a transaction was carried out exclusively for the purpose of avoiding tax.
• For example, if an entity is set up in Mauritius with the sole intention of claiming exemption from capital gains tax, the tax authorities have the right to deny the claim for exemption provided under the India-Mauritius tax treaty.
GAAR refers to General Anti-Avoidance Rules. These rules target any transaction or business arrangement that is entered into with the objective of avoiding tax. The objective is to check aggressive tax planning.
What is meaning of Tax Avoidance?
Avoidance means an attempt to reduce tax liability through legal means, i.e. to regulate your affairs in such a way that you pay the minimum tax imposed by the Act as opposed to the maximum. For example, Suresh makes a company XYZ to sell some product. The company XYZ pays 25% tax, but if Suresh himself sold the products he would pay 30%. Suresh has formed the company only to save 5% tax.
Difference between Tax Avoidance and Tax Evasion?
Tax Evasion and Tax avoidance are two different things. While Avoidance is legal management to avoid tax, evasion is illegal means to reduce tax liabilities, i.e. falsification of books, suppression of income, overstatement of deductions, etc.
Tax planning, as opposed to tax evasion which is illegal, is an accepted practice whereby the tax-payer uses provisions of the law or loopholes to minimise his tax liability.
Some countries, in addition to GAAR, have Specific Anti-Avoidance Rules (SAAR) to plug particular loopholes in the law or prevent some types of transactions that result in loss to Revenue. GAAR has been a part of the tax code of Canada since 1988, Australia since 1981, South Africa from 2006 and China from 2008. Australia and China also have SAAR in place to check abuse of tax treaties and transfer pricing.
Implication of GAAR implementation
• The implication of GAAR is that the Income-tax department will have powers to deny tax benefit if a transaction was carried out exclusively for the purpose of avoiding tax.
• For example, if an entity is set up in Mauritius with the sole intention of claiming exemption from capital gains tax, the tax authorities have the right to deny the claim for exemption provided under the India-Mauritius tax treaty.