Tax payers want to reduce their tax liability with what so ever means available with them. It can be through tax planning, aggressive tax planning or tax avoidance. There has always been a tussle between taxing authorities and tax payers when there is aggressive tax planning or tax avoidance. The legislature introduces several Specific Anti Avoidance Rules (SAAR) to plug known tax avoidance techniques.
However, tax payers are very efficient in planning their taxes by innovating new techniques to reduce tax liability, which are though legal, but hard to accept for the tax department because of their none valid commercial or fiscal reason or being not consistent with the purpose of the law. Thus, where SAAR fails to curb known tax avoidance techniques, GAAR would step in to tax such arrangements.
However, before understanding the GAAR, it is very much important to understand the following terms.
Tax planning is legal and allowed by the tax authorities. It is arrangement of financial transaction in a way that all incentives provided by the tax law are taken advantage of. The incentive may be in the form of exemption, deduction, allowance, rebate or reliefs etc. Tax planning gives equal consideration to legality and substance of a transaction.
For example:- Utilising all the benefits of reliefs & exemption provided by the law in order to reduce the tax liability.
Tax evasion is an illegal arrangement and has penal provision in the law. These are financial arrangements or transactions to evade tax liability by illegal ways. It is flagrant violation of the provisions of a taxing Act. It is to be noted that there is a very thin line between tax evasion and tax avoidance.
For example:- Using the illegal means to reduce the tax liability like non-disclosure of an income stream altogether to reduce the tax liability.
Tax avoidance is arrangement or transactions in such a way that it defeats the intention of law without breaching any law. Tax avoidance is perfectly legal. Even though the transaction may appear in a particular way, the document trail is also prepared to have a lower/no tax liability, But the substance of a transaction does not show its legal reality under tax law.
Through tax avoidance business finds the loophole in the tax law or exploit the tax law without the bona fide intentions.
For example: - A company is formed in tax haven or low rax region and start getting the revenue from high tax region in the name of royalty or so without any substance in the company.
To curb the tax payers who do such practise of tax avoidance or aggressive tax planning GAAR (General Anti Avoidance Rules) are introduced. Law introduce the specific provision to prevents such practices however the user or the tax payers are very high in number compared to the law makers, and are always keen to find out the loopholes so introduction of GAAR was very crucial.
Moreover, our law are drafted once considering the current situations & conditions and on the other hand side world is becoming more dynamic and changes happens very quick. So what was valid at the time of drafting the law may not be valid after few years and getting a retrospective change in law is not always possible, which may GAAR again a very important part of tax law.
