SYLLABUS SECTION: GS III (ECONOMY)

WHY IN THE NEWS?

Recently, the Department of Revenue launched investigations under GAAR PROBE into companies and entities that may have used creative methods to avoid paying taxes.

General Anti-avoidance Rule (GAAR)

• It is an anti-tax avoidance law in India but to curb tax evasion and avoid tax leaks. Basically, it is an anti-tax avoidance law.
• It’s meaning to be put to the transactions that are prima facie legal but result in tax-cutting. Broadly tax reduction can be of the following three categories:

1. Tax Evasion: Illegality, willful suppression of facts, misrepresentation, and fraud—all constitute tax evasion, which is an interdict under law.

• This is also not cover by GAAR as the existing jurisprudence is sufficient to cover tax evasion/Sham transactions.

 

2. Tax Avoidance: Tax avoidance includes actions taken by a taxpayer, none of which are illegal or forbidden by the law. Although these are not prohibit by the law, they were considering undesirable and inequitable, since they undermine the objective of effective collection of revenue.

• This kind of tax avoidance planning is sought to be covering by GAAR PROBE.

 

3. Tax Mitigation: Tax mitigation is a ‘positive’ term in the context of a situation where taxpayers take advantage of a a fiscal incentive provided to them by a tax legislation by complying with its conditions and taking cognisance of the economic consequences of their actions. Tax mitigation was permitting under the Act.

• This tax reduction is acceptable even after GAAR has come into force.

Many mature economies use this law.

1. Prominent among them are- the US, the UK, France, Germany, the Netherlands, Canada, New Zealand, China, Poland and Australia.
2. In India, this was introducing in 2012 but it was considering controversial.
3. Under Income Tax Act, 1961 it came into effect on 1st April, 2017 and its effective implementation started this year.
4. Panel for its implementation were constituting this year to ensure that GAAR provisions were invoking fairly and not subjectively.
5. It is a provision of last resort and used to strike down those lawful practices which undermine intention of tax laws, i.e. misuse or abuse of law
6. Before introduction of GAAR in India, such transactions were dealt with by the implementation of judicial decisions and Specific Anti-Avoidance Rules (SAAR),.
7. Any decision by a company to set up an office in another country or undertake a merger or acquisition merely as part of tax planning could attract GAAR.

Benefits:

• It strengthens tax system by plugging loopholes for tax evasion; avoiding revenue losses.
• It is an important tool for governments to prevent impermissible tax avoidance arrangements

 Concerns:

• It creates tax uncertainty in terms of tax implications; creates a negative environment for domestic and foreign investment
• Unreliability and irrelevancy about data is also major constraint.

Read more: UPSC CURRENT AFFAIRS

Source: Indian Express